New challenges in retail banking

I was having a conversation on CIBIL and how it has changed the lending process at most institutions in India when someone asked me this - " A large segment of the population has become CIBIL -ve due to various reasons incl the slowdown. Will these guys ever get credit in future once the economy revives?"

The question is interesting coz when the banks want to grow their loan books again, they would have to become less credit-risk averse or increase their reach.

a)Assuming that the distribution cannot ramp up fast enough (due to branch license issues etc)it would mean more aggression in looking at borderline cases (in terms of credit profile). Banks would have to find innovative ways to lower the credit cut off. Am told its already started happening -- reduction in the CIBIL cut-off for cards sourcing and some are looking at a lower CIBIL score (if the track history on own products is fine).
But the risk attached to this approach is pretty obvious. You are looking down another cycle soon with probably a bigger exposure this time.


b)what will be more exciting is how banks & other lending institutions innovate on their distribution channels. Now we all know that the fast ramp up in loan books happened thru the DSA channel- which amongst other things was costlier but easy scaleable. The cost element meant that this channel was suited for only cases with significant ticket size, so that the DSA covered his costs and made exciting enough profits.
As I look at it, the next wave of credit growth will come from channel innovation- Looking at identifying, building and scaling channels which will make sourcing profitable- even for smaller ticket sizes.
Once this happens, the whole dynamics of lending side profitability will change.
Coz account management (of already sourced customers) is mostly automated and hence costs do not vary with ticket size - infact the more accounts the cheaper it is to manage them due to cost amortizaton. Its sourcing which has significant variable costs and needs to be efficient to handle not only small tickets but find CIBIL OK profiles upfront.

Agree? or you think it would be back to DSA days with larger marketing spends across channels?

Rural telecom users price insensitive?

Read an interesting report in the ET today, based on some survey conducted by Credit Suisse. They survey found that the rural consumers are more quality consicous and less price sensitive. Hardly any of the polled users had switched operators basis call-rates.
This is very interesting coz most of us (self included) had believed that this is a market where ARPUs would be low and constant reacquiring would mean that the telco's hardly make any money.
Also the report says that the rural consumers would constitute almost 40% of the total users by 2012.

This two findings have some serious ramifications:
- Infrastructure needs to be first priority when moving into a new market. Typically we had seen that most telco's went to these markets with a promise of "cheaper" service
- The first mover will have advantage over others, everything else being same. This is evident from the lower switch rate seen in rural consumers.
- The marketing spends & promos highlighting reduced rates etc will now have to be substituted with better distribution/session-experience.

But the most interesting this is that the rural consumers remain price sensitive inspite of having a clear priority for better service. This would make them a tough market for telco's- providing high quality services at competitive price where ARPUs are anyways lower :-)

Will TATA's Nano command a premium

The much hyped release of Nano was a welcome change in these recession hit times. For once both the consumers and the manufacturers were speaking in highly positive tones.

It prompted a strange discussion at my house. My dad feels the euphoria around Nano is so much that its booking & delivery process would command a premium. Something which has largely been unheard since Maruti days.
He tells me that the kind of excitement is similar to when Maruti had entered the Indian market - once a domain of only Fiat & Ambassador. A friend also tells me that they had booked two Maruti cars in those days and sold the 2nd one at a almost 100% premium. Phew!

My dad insists that in this age of communication, the dream of NANO has already been sold to millions and not just in metros but in smaller towns also. Point taken. So, he says, this means that the # of people who would book will far exceed the manufacturing capacity (atleast in the first few months) and this would lead to a substantial waiting period- the trigger for market assigning a premium on Nano.

I had my doubts given the economic slowdown and lack of credit etc etc. But yday I went to drop some one at the station and during the time it took me to get my car out from the messy parking lot I could hear a group of auto-drivers talking excitedly about Nano- how they would use the Nano as their "taxi"- something I thought as a distant reality.

I have started to believe that Nano might end up commanding a premium in the market. But I am more interested to know what u think?

Organic farming - tough road ahead

I went on a trip to Sikkim, with a pal who works for organic farming certification in that state. And while I was doing my sightseeing, managed to enquire a bit about how organic farming is structured and marketed in the country.

Quite an interesting case study it is.

Organic farming involves complete dependency on natural products during the agricultural cycle, which means organic seeds, no fertilisers, no pesticides, no weedicides- all these chemicals replaced by organic/natural stuff. It is claimed that organic farming restores the "natural" composition of the soil and keeps it productive for a sustained period- unlike fertilizers which will give higher productivity in the short term but spoil the soil so that eventually it would be unfit for agriculture.

While I have no doubts on the benefits of organic farming (better health, soil conservation etc) I developed some really serious doubts about its adoption in a country like ours. Here's why:

- The financial motivation to the farmer is not very strong. This is primarily because the end consumer demand for organic products is low, which means there is not a big enough market for the farmers to go to where they might get a handsome premium.

- Organic farming is a slow process- as in takes almost 2 years for the soil to come back to its same productive levels that you would have seen with moderate use of chemicals and its only in the 3/4th year that you see substantial incremental benefits of refraining from using chemicals. Most Indian farmers would not have enough security to afford a cut in production/revenues for 2-3 years. And I guess thats why some of the govt entities are trying out ways to subsidise this.

- The true local effects of organic farming can be seen only if its a community level initiative. One of the ways Organic farming is "sold" to farmers is by telling them that the chemicals are not only spoiling the soil but also contaminating the ground water that your children and family consume. Now even if I have some financial security to take in a cut in production- how will the ground water be un polluted if the farmer next door doesnt adopt Organic farming techniques. So i guess in a way its like starting a revolution- creating an awareness in villages so that people start using it simulatenously.

- Complex implementation process- Now comes the tricky adoption bit. It seems for your farm's produce to sell under organic umbrella, you need a certification. Sounds acceptable. But in order to get the certification one needs to practise it for 6 years and maintain a log-book which carries all the relevant details of what has been added to the farm on which date in what quantities. This overhead means that the farms cannot be too widespread or remote. Logic is thus- the co. which will deploy a dedicated resource to maintain this field book would be able to recover costs only if the resource is shared between enough number of plots. So organic farming will flourish only in big enough villages till some tech smarts are implemented.

- Access to markets. From what I understand perishables are most in demand when it comes to organic produce BUT given the complex logistics its tough to guarantee profitability unless the farm is close to the market itself. In most cases where it isnt, its the staple crops like pulses, grains etc that are cultivated the organic way- where in the inherent demand is not too high..

The way I would have attacked this is:
- Extensive lobbying with state governments for subsidies where demand for organic products already exists. I would assume metros and centres with cosmopolitan lifestyles.
- Start doing branded stuff in small niche areas and use technology in demand estimation. That way atleast the spoilage losses would be minimised and one would be able to mature the logistics as the demand picks up.
- Since awareness for organic products & its benefits is low- create a forum of stakeholders who collectively manage PR around this. Look at high profile evangelists who can easily make this an in thing :-)
- Make certification move towards self-assesment with regular checks. This would bring the cost of certification down.
- Build data models which can plug in local factors to come up with estimates of harvest for each plot under organic farming-> aggregate the same and find buyers well before the stock moves out of the fields.

Will anyone buy Satyam ?

Its been a not so great start to 2009 for India & world over. The economic crisis just keeps getting worse.
I had last written about how the slowdown could be the right time for cherrypicking. But the Satyam story has made me wonder if the same really applies to competitive industries in the service sector also.

Take the Satyam example:
- There are way too many options available to Satyam clients. They would get similar (if not better) standards of deliverables at better costs probably (given the slowdown and IT industry's need to get more paying clients)
- Most big IT clients already have multiple vendors. So they would not have to start afresh but look at re-distributing business amongst the others
- Most clients will not be rewarded (enough) back home for the risk involved in continuing with Satyam- given that it has already earned the title of India's Enron. So even with the new board and GoI pitching in, my sense is that most of them would want to make a quiet and slow exit.
- Satyam was not into cutting edge IPR generating work- which means that they are replacable with the highly documented processes etc.
- Service sectors like IT do not have much "assets" beyond people & IPRs. With the scale of fraud being discovered at Satyam, this asset(people) will be highly undervalued by any suitor. Even if one ignores the Sr Mgmt and looks at the Project Mgr level- the indian job market is full of qualified and experienced techies looking for better avenues.

So why would any one want to pick up Satyam - a Co. without much assests, with huge and increasing liabilities?

I tend to agree with Phaneesh that window of opportunity to invest in Satyam is now gone- with each passing day it would be tougher to revive an organisation which is losing more than its gaining (since the scam discovery).

Global slowdown- right time for cherrypicking?

Its known to the kid next door (a keen stamp collector) that its a good deal if a stamp which was worth five triangular stamps (in the network) is now available for just 2 ! In business language, its called- "timing your buy" when the price is lower than the target or true value.

So why is it that the cash rich investors (retail & corporate likewise) are not doing this when corporate valuations have been eroded to half their values.
Surely there must be cash rich investors, who would have been scanning companies before the global meltdown. Why are they not picking up these targets with potential to deliver, at "dirt-cheap-rates"?
I usually get two answers:
a. That the usual investors are no longer playing in the market as they have cash commitments to fulfill- meaning the BIG multinational investors who have seen the worst of this crash
b.Sentiment- And I have a tough time understanding this (as I have never been an active investor). My friend tells me that most investors are scared with the bloodbath and think its safe to assume that the bourse fall will continue for some more time to come.

But look at it from my point of view- if i was sitting on cash & had been tracking the market really well before the crash- i would have a definite point of view about some stocks. I would have definitely invested in some companies for a medium term investment. And looks like at least Malvinder Singh is doing just that with his financial services venture- Religare.
If i was someone holding money in US $ i would have been happier, coz with the depreciated rupee and eroded valuations my Indian target co. - would have cost me almost zilch.

So I wonder what the few cash rich investors are thinking/doing? Is it that they:
- Always relied on the now failed investment banks to handle their portfolios- and are just not too sure right now.
- Want to have a huge war chest to bail themselves out- if the recession hits them also
- Have their targets in sight and are hoping (backed with some insights) that the valuations of the targets would fall further.

What do u think?

And Honda does it Again !

Honda has always been like the Intel of the automobile market. It has had a steady stream of products coming out of its shop which has meant that one time Honda owners stayed with them while looking for an upgrade or a replacement. The City platform has seen a steady stream of variants and so have the Accord & CRV.

But by slashing the price of its Hybrid Civic by Rs 8 Lacs- they had not only grabbed the attention but managed to make sales in this stagnant market. Only a day before the major auto players (incl 2 wheelers like Bajaj) had cribbed at a forum as to how even their Diwali inventories were lying idle.

Am sure the Civic hybrid still makes money at the Rs 13L tag, but the fact remains they have been able to sell 95 cars in one day and many more would follow. Which means that they have created a much bigger market at lower margins. A great strategy to keep yourself alive - to ensure that your factories keep working, that there are no idle inventories lying in the chain. And all of this achieved while saving on the marketing spends. Without a single ad, Honda Civic Hybrid's price tag is now known to most metro residents.

I think others should take a cue and come up with such steps to milk the market and fuel the demand for their products/services.

DTH Games begin- Elephants will win

The arrival of the telecom giant Airtel has made the DTH arena crowded and fun to watch. Not only was the Airtel's teaser used by BIG TV, the offers from early entrants like Tata Sky & Dish TV have seen a never before decibel levels.

At stake is the current 6 million household market which is expected to reach 37 million by 2010- assuming a monthly billing of 7 USD, the market (from subscriptions) would be 3.2 Bn USD- and this is only a conservative estimate !

DTH industry has some very peculiar characteristics:
- The installation costs and hardware costs are significant- almost equal to 5-6 months of subscription revenue.
- The "running cost" for an incremental customer is negligible and hence one would assume that early scale is what these players will target.
- However the acquisition costs (largely due to distribution set-up and sales team management) increase with increasing sales targets.
- The current pricing is already at levels where none of the players make money. Also it is expected that barring a few offers,all the 4 players will have similar pricing- so pricing is not expected to be a differentiator.
- All the players merely "distribute" content- hence there is not much content-based differentiation amongst players.
- Few weeks ago, ET carried a detailed article on how pay-per-view(PPV) content could become the key differentiator in this DTH war. It focused on movie as the key PPV trigger, where it is expected that users would pay upto Rs 50-75/-(1 to 1.5 USD)for a movie.

Given the above, what strategy do you think these Big 4 must be working upon?

Well, here's my take on it:

1. Target Scale at pace
Since the pricing is not expected to go up, scale is the only way the DTH players can recover their fixed costs and start making money.MicroEconomics 101 taught that if MVC was negligible and MR was more than MC, produce more units.

2. Attack the geographic long tail early on
The 2 early entrants are not present in smaller towns , the BIG TV & Airtel TV should look at attacking these set of customers early on. Since here the customers would have little choice, one can assume higher conversions and low turnover. Meaning sustained revenue streams.

3. Low cost distribution
BIG & Airtel have an enviable distribution network that touches the remotest of places in India- thanks to their Telecom ventures. Dish & TATA SKY will not have this advantage and they should look at tie-ups to leap-frog this dis-advantage. A tie-up with Vodafone(telecom),forwarding agents of FMCG co's could help increase their footprint whithout large scale investments

4. Pricing innovation
While the pricing bands will remain common across players, one could look at coming up with innovative packages e.g. Hindi only channels for the cow-belt, or Malyalam + English for the Mallus in Gods own country etc. But the problem here is that since content is not "owned" by the DTH players, any success in innovative pricing/bundling will be replicated in the industry

5. Focus on category conversion
I remember the King Khan ad on "Dont be santusht!"- and I feel thats the right path to take in terms of the communication & positioning. Instead of fighting over a share of current DTH subscribers, why not be the leader who is synonymous with conversion from cable TV to DTH. (you suddenly can speak to 80 million cable TV viewing households).
Such a move will help the competition also (as some would convert from cable to the competing brand), but if one can manage to get the biggest mind share of these converting customers, the rate of customer acquisition would be highest.

6. Feature differentiation
True that content is not owned by the DTH players, but they can still do a lot more to woo the customers e.g.
a. Make the box into a poor man's PlayStation.There is only so much TV that a person watches. And if the quality of audio/video doesnt impress him, make his box a high-end gaming console (if he could "request" games - download and play) he might buy the DTH connection as the Diwali gift for his 10 yr old son.
b. eLearning: This is already being done, but the few users who I know have experienced it have complained about the lack of quality content.
c. True PPV/COD- The current options of PPV are only disguised content-on-demand (COD) coz the user is not choosing from the universe of titles the specific movie she wants to pay for. She gets a calendar of movies being broadcast during specific time slots and has to pay for that. If you ask me, its like paying for watching a movie on the flight in the big screen in front of you- I would never be happy paying for it- coz i can never understand why I should be charged specifically for a broadcast content. So why not give the set-top box the ability to "download" content on demand and give user the true power.

7. Implement offers which dont impact marginal cost
E.g. two connections in a household for the cost of one (for 6 months). Is pretty clear that not many customers see value in switching to DTH at the current price points. Hence the challenge is to increase the percieved value of benefits at the same price/cost.


While these 4 compete to sit on the idiot-box, the only thing I am sure of is that winner will take it all- The elephant will do the victory dance !

In the business of breaking (the) news...

I dont spend too much time infront of the idiot box, but I have been a witness to the news blitzkrieg that Indian consumers are forced to live with. With so many news channels, i usually end up pressing the "Up channel" button almost 20 times before I get out of the "breaking news" zone.

I have never ceased to admire these guys coz I guess it takes a lot of practise to present most of these Breaking News with a straight face. Tell me how can you not laugh when you are on Live TV telling the world that there are aliens living under the sea- when you are talking about the Bermuda Triangle. The other commendable feature they have is "creativity". One would expect, creativity to limited to departments like editing, presentation etc while referring to News- but I guess these truly creative folks have taken it to the "content" part of news- the only holy grail of this business.

They are no longer in the Business of "breaking news", they are in the Business of "Breaking the news".

All this used to be funny and I also indulged in the humor. But now the desperation of these channels to get new content has started affecting the common man.
The TRPs of most of the Breaking News channels has only been rising and its hard to
explain why this is happening.

Maybe the answer lies in the fact that most of the viewers are ill-informed and highly gullible. Why else would someone believe that the world was coming to an end with the CERN experiment and commit suicide in India?

The I&B ministry needs to take this outright ridiculing of journalism, little more seriously....

Why Google launched Chrome ?

Google launched its very own Internet Browser- Chrome- and die hard fans apart, early experimenters also say- that its cool !

While the industry pundits discuss the features and the strategy behind launching of Chrome- i came up with my very own answer- as to why Google launched Chrome?





And the answer lies in the above image....

It was done coz the guys in the Google analytics team wanted to see their name in the reports .... :-)

I can understand, if you disagree with me...