Message from the Convenor

Heartiest congratulations to all of you. With the release of the 7th edition of the magazine we are getting bigger and better and it gives me immense pleasure and satisfaction to be the convenor of $treet. In-Fin-NITIE has given me an opportunity to work with students and advance forth with the common goal of learning and practicing finance. As always, In-Fin-NITIE brings you something new this time around too. After a series of issues with identified themes and articles related to those themes, the current issue gave students a chance to just write about finance. Themes and matching articles aside, this issue has a plethora of written words by students about whatever caught their eye in the field of finance. I applaud the effort of team $treet for their unstinting efforts. I hope they strive to take the magazine to greater heights, and also hope that this issue will entertain you and keep you engrossed about the recent happenings in the world of finance. We look forward to your comments and wish to bring out more interesting issues in the future. Dr. M Venkateswarlu Asst. Professor of Finance NITIE, Mumbai

From the Editor
Patron Dr. Amitabh De Convenor Prof. M. Venkateswarlu Editorial Board Ameeth Devadas Anil Kumar Singh Karthik Mahadevan Keerthi P Nimit Varshney Saurabh Bansal Siddharth Jairath
Against the milieu of rapid urbanization and a changing socio-economic scenario, the demand for housing has grown explosively leading to tremendous growth in the Housing Finance Industry that has clocked a CAGR of about 40% in the last decade. In this edition of In-Fin-NITIE, our authors present an Industry Analysis Map of the Indian Housing Finance Market. Any news about Europe has been making heads turn recently. This edition analyses the dilemma that Poland is currently faced with – whether or not to join the Eurozone. In this edition we also present a look into the Securitization Market in India. In-Fin-NITIE has always strived to distinguish itself and as part of our efforts to take our publication to the next level, the House of In-Fin-NITIE presents articles from eminent personalities of the Financial Industry. This edition features Quant for a Career: Realm of Opportunities by Prasenjeet Bhattacharya, AVP, ING Investment Management India and Market Perspective by Ravi Nathani, NSE Today. We would like to express our sincere gratitude to everyone who has helped us in putting this issue together. The In-Fin-NITIE Team values your comments and suggestions. Bouquets and brickbats are welcome at street.nitie@ Editors In-Fin-NITIE
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In-Fin-NITIE Vol 3 3

March, 2012


Housing Finance Market In India


Should Poland Adopt Euro.?


Securitization Market In India


Marginal Standing Facility By RBI

The Increasing disposable Income has further boosted the wedding Planning Industry



Scope and Career Opportunities in Quants.

Insights By Alum





Technical Analysis of Equity Markets.

Nifty, Commodities And Currency updates.

Quiz on Finance And Banking

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Should Poland Adopt The Euro.?
Economies are like the game of snakes and ladders in which a good economic decision can take you up through the ladder of success while poor ones pull you down. Poland is at crossroads where their decision to adopt euro can boost the economy take them up the ladder in the game, however if the decision turns out to be a bane for the country, it would result in the economy becoming a victim of the big, venomous snake called recession. The theme of this article revolves around the same snakes and ladders game; I renamed it as “Euro game”. Since 2004, when they became a part of the Euro Union, the debate on this question has been going on. There have been two groups, first the modern and forward looking one which favours the adoption of euro as they believe it would result in the growth and development of the economy and the standard of living, and the second the orthodox and reserved ones believe that it would take away their rights and control on their economy and would turn out to be a disaster. These groups have been mainly formed on political grounds. The two parties of their political system, Kaczyński brothers’ the Law and Justice (PIS) party, which was the previously ruling party was sceptical about rushing into joining and it still believes in taking it slow and weighing the pros and cons, and wanted to go through a referendum on the situation. Whereas, the party currently ruling the nation, Prime Minister Donald Tusk’s Civic Platform (PO), has been intent on adopting it sooner. A similar conflict is seen between the people. The support for the euro has been higher in the larger cities while lower in the relatively rural areas. The Governor of the National Bank is of the opinion believes that haste could be harmful to the country’s economy but still suggests that Poland should join in. And so is the belief of Saryusz-Wolski, who in line with German Chancellor Angela Merkel’s aims affirmed the necessity to change the EU treaty regarding the size of loans that member states can take among themselves, so that “no one goes into debt at the expense of somebody else.” Poland will have to postpone this convergence which they were hoping to happen in 2012, owing to the recession

By Harishma Mittal Vikas Kumar IMI, New Delhi

SUMMARY Poland has been facing the dilemma of joining the euro zone or not from the time they became member of the European Union. Some backward looking nationalists say that it exposes the country to a very large risk and losing the control over its currency, while the forward looking ones say it’s going to aid the country’s growth to a very large extent. Every coin has two sides to it, so does this decision. Agreed the benefits are significant and alluring but at the same time the danger that it poses to the country are manifold. Introduction of the euro increases the trade in the economy and also remove the exchange rate risk which is posed on many households and the corporate who have taken huge loans in euro. Flip side to this is the crisis the country can face by losing the control on its monetary policy which can help it to fight any recession considering the fact it has substantial interest rates to control the currency and inflation. Plus in euro zone they develop a common a monetary policy which again does not add to their advantage. With the above long term effects there are short effects on the interest rates due to the expectations of joining the euro zone and also instant changes in the prices on joining them.Adopting the euro is a big decision that Poland has to take but they need to judge the consequences and also assess the unexpected. They need to figure out whether the negatives are outweighed by the positives.
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which has hit the economy resulting in failure in meeting the conditions set by the European Monetary Union. To join the game of Euro, Poland will have to qualify first. The first of two main barriers (conditions)are the requirements of the Maastricht Treaty and secondly they have to take part in the European exchange rate mechanism (ERM II) under the European Monetary System (EMS) for a period of two consecutive years, which means that exchange rate of Poland cannot fluctuate more than 15% against the euro during that time. After swimming through these oceans, other small canals have the criteria to include an inflation rate of no more than 1.5 % points above that of the 3 members of the European Union showing lowest inflation. The deficit to GDP ratio (i.e. Ratio of the annual government deficit to gross domestic product) must not exceed 3 percent (or at least be at a level close to 3%) at the end of the fiscal year before joining, which currently is 7.9% for the country. Government debt ratio to GDP should be less than 60% at the end of the fiscal year before joining, or should be approaching this figure at a ‘satisfactory rate’; this condition is being satisfied by achieving a 51% ratio. Finally, nominal long-term interest rates should be less than two percentage points above the 3 members of the European Union showing lowest inflation.

of monetary integration with the rest of Europe. Different costs related to zloty / euro exchange rate connections would be eliminated along with the exchange rate risk in the trade with countries of Euro zone. The exchange rate risk elimination is expected to not only have a positive and direct effect on business, but is also been anticipated to remove this type of risk for Poles who normally borrow in foreign currencies to fund large ticket items such as infrastructure needs like houses and apartments. Since the Euro zone crisis began, the Polish zloty experienced a decline while losing approximately 1/3rdof its value in relation to Europe’s more stable currencies and to the dollar. This had a particularly adverse affect on the many Polls who took out mortgage loans in currencies like Swiss francs to buy homes and who, as a result ended up paying many thousands zloty more for their new purchases in real terms. The main drawback of the adoption of euro in Poland is that it would be required to give up its control on its monetary policy to the ECB (European Central Bank) which monitors and controls the situation of all of the countries in the euro zone. At a point of time the economic cycles for different countries can be different, thus requiring different policy which is not possible with the single monetary policy issued by ECB for all. For example, Poland is still expected to growth in the near future as predicted by many economists. Therefore, they would do better with a stringent monetary policy with higher interest rates if they want to have lower levels of inflation. Whereas, countries with high unemployment rates, it is advised to have loose monetary policy with lower interest rates. It is difficult to strike a balance between the two, and the monetary policy would often not be the best for the economy of the country.


Membership criteria Government Finances annual Gross government Longgovernment Inflation rate term interest deficit to GDP ERM II debt to GDP member-ship rate Min. Values required to become a member of the Euro Zone Poland

max 1.5% 4.8%

max 3% 7.9%

max 60% 51%

min 2 years Not a member

max 6.0% 4.5%

These targets are very difficult to achieve especially in the prevailing economy conditions, few countries already members of the Euro zone are finding it difficult to achieve them. European Central Bank even though asked by IMF to relax its regulations, does not want to do so as after the euro crisis all the member countries have become very particular about the countries being added as they do not want to pay the loans of any other non-performing country. Every financial decision has two sides to it, the country has to weigh both the sides and decide whether the prospect’s advantages surpass its disadvantages or not. Adopting euro comes with its fair share of pros and cons and both having long-term and short-term effects. First, let’s have a look at the bigger picture, the long term positives and negatives. Proponents for the adoption of the euro would be the potential benefits that a common currency will bring, especially the increase forecasted in country’s trade and growth resultant
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From the above graph we can clearly see that there is a significant in the GDP growth rate of Poland and that of the euro zone. Thus, the policies in the euro zone would be chartered by taking into consideration all the countries and would not prove beneficial for Poland which is growing at a higher rate than the members of the zone. Once you become a part of the zone you can’t appreciate or depreciate your currency because it’s a common currency which is not under your control.

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This is one of the major reasons for the devastation of many countries in the zone today such as Greece. Once you’re a part of it, leaving the zone is not an option for the countries like Poland as that can result in currency depreciation to the extent that households and corporate would go bankrupt and the banks insolvent, in short a total breakdown of the economy of the nation. Another front where joining the euro zone would be an area of concern would be increased prices of small ticket items purchased on a mass scale named as the “cappuccino effect”. Even after the disasters faced by some countries in the euro zone, most experts are in favour of joining the euro zone, with the resultant growth of GDP (especially in the long term) would far outweigh the criticisms noted above. The introduction would also have some short term effects which also should be taken into account before reaching any conclusion. The short term effects take into account inflation owing to the conversion rate. The prices in Poland are already rising due to convergence process and also the standard of living. In addition to this, the countries which had joined the euro zone the past had suffered from disproportionate price hikes which were not because of actual inflation, but due to the disproportionate rise in household goods of small spending which led people to extrapolate other prices as well. But healthy competition and wage discipline brings everything under control. There is a lot of excitement amongst the public regarding the euro. The decisions for its adoption are yet to be taken and it has already started affecting the interest rates and currency at which households take loans, and corporate and the government issue bonds. The lowering of the interest rates to meet the conditions set has already resulted in an increase in investments. But this comes with its own bit of risks. This lowering of interest would have taken the country to the euro zone desired interest levels had the economic boom continued. But the reverse happened resulting in higher interest rates and a drying-up of foreign financing. This anticipation behaviour of euro adoption is leading to one more problem, people have started taking loans other currencies than their own. This would lead to domestic monetary policy gradually losing its ability to influence the economy. Also, borrowing in foreign currency exposes them to the risk of exchange rate depreciation. Euro adoption would eliminate such currency mismatches and thus relieve both borrowers and investors from the risk that the exchange rate will move against them. It is thus a win-win situation for both sides. Before entering the euro zone, they should protect themselves by taking measures against the misdoings of the members of the euro zone such as Greece, Portugal, etc who suffered during the crisis.

First, creating a flexible economy is the key. Wages, prices and the budget must be able to adjust quickly if economic circumstances change. Otherwise, with exchange rate devaluations and interest rate cuts no longer possible, there can be painful swings in output and employment. Poland still has some work to do in these structural areas. The budget leaves little room to make discretionary changes; product market flexibility and the business environment are weak compared to other euro candidates; and the labour market requires particular attention, as confirmed by many studies. Secondly, fiscal policy must avoid a pattern of high spending in good times and low spending at bad times, especially in the run-up to euro adoption. The windfall of lower debt servicing cost (as borrowing spreads fall) and revenue buoyancy (as the tax base temporarily surges) is put to better use by reducing public debt rather than increasing spending—even if this entails somewhat less growth in the short term. Portugal did the opposite, running a highly procyclical policy around the time it joined the euro zone. Its boom soon turned into a bust and the country has been recording some of the lowest growth rates in the EU. Portugal’s experience suggests that the “structural” fiscal deficit—the deficit corrected for the economic cycle—should be well below the 3 percent Maastricht limit, especially for countries like Poland where the level of public debt is still high. This would allow the government to deal with economic shocks—such as the loss of competitiveness experienced by Italy’s and Portugal’s textile industry—without ending up in the EU’s excessive deficit procedure and experiencing a rise in public debt. Becoming a part of the world’s second largest economy does bring large economic payoffs, but this does not mean that they reduce their fiscal deficit to 3% and joining the exchange rate mechanism, the two Maastricht criteria that are not met currently. Giving up monetary policy requires sharpening the remaining tools at the policy maker’s disposal--a fiscal policy characterized by small deficits, low debt and flexible spending, as well as creating a nimble, business-friendly environment. Now it’s for Poland to decide whether they see Euro as a ladder which would take them further or a snake waiting to bite them. And only time can unfold the secrets of the game, I call it “Euro game”. References: 1) 2) 3),will_poland_ adopt_the_euro_by_2012,3882.html 4) pdf


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In-Fin-NITIE Vol 3 7

Housing Finance Market In India

Stuti Dalmia NMIMS-Mumbai

By Ankit Goel IIM -Bangalore
Housing Finance - What is it? The term housing finance has not been defined by any financial authority or Act. Therefore, when we try to understand what is meant by housing finance, it is very much essential to look at the context in which we are talking i.e. developed or developing countries. Traditional Meaning • Provision of funds to purchase homes • Providing investors a parking avenue for their investments Modern Meaning • Mechanism allowing funds for production and consumption of housing • Includes money needed to pay for usage vis. rents, mortgage loans, repayments, developer finance, rental finance or microfinance Types of Housing Finance For the purpose of this paper, I have considered all three types of housing finance under my purview. However, the distinction between the 3 needs to be made clear. Housing Microfinance refers to the provision of loans to households which typically do not have a very credible track record or adequate collaterals. Loans are granted not on the basis of security but on the basis of careful analysis of future expected cash flows and character. Housing Finance is more general as described above and is typically granted to credit-worthy individuals with stable income. Micro-Mortgage lies in middle of the above two. It is a form of low-monthly repayment mortgage lending served by specific institutions formed for this purpose or via traditional mortgage-lenders. Need for Housing Finance Most countries today have positive growth in population. This naturally gives rise to an increased demand for housing. To ensure stability in prices of housing (and consequently, all other goods), a city needs to increase its supply of Housing which can happen in 2 ways: • Supply of new housing infrastructure • Expansion in existing housing supply Also, particularly important in this context is the need to repair or replace of housing which grows too old or too deteriorated over time. Housing problems, more particularly, in developing and overpopulated countries are very severe. Most urban households cannot afford a decent living space in a relatively well-connected location. Consequently the results are:

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Table 1: Consumer Finance Products

• • •

Squeezing of households in highly dense areas leading to security and hygiene issues Living far away from main cities (suburbs) leading to wastage of economic resources to travel to cities for jobs Renting space in slums or squatter settlements


This is where the economic role of housing finance comes in. Provision of well-structured finance schemes for the masses to enable affordability and deep penetration is thus the major objective of Housing finance. Allied Objectives • Backward linked products: Housing finance market is a very important contributor to the production activity in any country because its demand directly influences the demand for its backward-linked products i.e. raw materials (derived demand) like land building materials, tools and labor. • Forward -linked products: are the financial markets. Often through securitization, mortgage debts are offloaded in the secondary market in the form of securities, thereby increasing the efficiency of domestic and international financial markets. As proved in the recession of 2008, housing markets are also a great leading macroeconomic indicator of the financial markets. • Developmental Impact the developmental impact includes provision of social stability and promotion of economic development which is directly affected by level of maturity in housing finance markets Housing Finance Market Assessment for developing countries – especially India: From the micro point of view, fluctuations in the housing finance market affects the entire household since housing, in most cases, is by value, the largest investment most people make in their lifetime. From the macro viewpoint too, housing has a major impact on the economy as was proved in the recent world economic crisis. Also, it is a significant contributor to GDP in the form of employment generation (direct and indirect) and industrialization. Strengths: Growing Economy A lot has been written about India’s growing strength as an emerging nation. I would however, still like to highlight the following points which have been particularly conducive to the growth of housing finance in India: • GDP growth rate averaging over 8% from 2003-2010 • Rapid Urbanization, Rising middle Class • Increasing political stability with re-election of last government • Forex Reserves over $250bn • 2nd Largest employment generated in housing sector (after agriculture) • Fosters development of ancillary industries via strong vertical linkages (forward & backward) • US $110 bn market size Although Housing finance in India, particularly, is in a very nascent stage to be able to comment on specific strengths driving its growth, I have enumerated above some of the broad factors responsible for the upcoming interest.

Table 2: Types of Housing Finance

Figure 1: Sources of housing finance needs

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Opportunity: Demand & Supply of Housing With the growing GDP of most nations and particularly India, the demand-supply gap of housing has reached alltime highs. In most markets, the only available financing resources to the poor and middle-income groups are: a) Minor Savings b) Sale of assets c) Borrowing from relatives or employers d) Inheritances e) Loans and savings from money lenders f) Microfinance Loans Analyst Research has shown that around 10 to 20 percent of all microfinance loans taken for business, education, agriculture and emergencies are actually being diverted for housing purposes. In some cases the figure is as high as 80 percent. This is infact a major evidence in support of the growing demand for housing finance. Currently, the only options available to the poor for financing are microcredits which, unfortunately are inappropriate for housing purposes since they are very short term in nature and interest rates for this purpose are sky-rocketing. Apart from this, the poor are also in need of allied professional services like budgeting, building and monitoring since they inevitably end up either overspending or with much lower quality houses. Some housing finance products have currently hit the market in India, however, since the market is in its nascent stage, many are missing achievement of the right balance between providing an adequate long term for repayment and installments to be paid. Volumes, which we believe is a key to success in the housing finance market (since the default risk is fairly spread), will not be attainable till the products incorporate the suggestions in this paper, mainly the long term maturity needs. Now, let us enumerate as to what can be the requirements of a good housing finance market.

has been decreasing over time. The recent figures in this respect are worse. Estimated Housing Shortage in India (2007)

Rural Urban

14.1 mn units 10.6 mn units

Moreover the growth rate in urban areas is clearly above that in rural areas signifying the urbanization phase India is currently undergoing with more and more people migrating from the rural to urban areas. Thus, there is a huge demand-supply disconnect here.

Figure 3 : Mortgage to GDP ratio 2007 (Source: European Mortgage Federation & Asian Development Bank)
We see that whereas a huge demand for housing finance exists in India, the mortgage/GDP ratio, which is a key indicator of Housing finance penetration, is one of the lowest in the world. This naturally is a great opportunity waiting to be tapped. Opportunity: Appropriate Segmentation & Targeting In order to achieve success in the housing finance market at the initial stage, the first requirement is to have a properly structured product. Since, products in housing finance are customer driven; the most important analysis thus becomes the proper segmentation of the housing market. In case of India, I recommend the following segmentation built on the lines of Australian model.

Table 3: Requisites for an attractive housing finance market

Thus, in my opinion, the South-East Asian, and particularly the Indian and Chinese market, there is a set base for the development and flourishment of housing finance business. The market though is still in its nascent stage, is still quite large, and is only expected to head in upwards direction in the future. Indian Market: The major problem plaguing the Indian housing industry is the consistent demand-supply mismatch in housing as pointed out earlier. The shortage was 23.3 million units in 1981, 22.90million in 1991, ~20 mn in 2001 and so on. Although a clear downward trend has been visible the fact is that the rate of closure of this gap
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Figure 2: Segmentation & Targeting of Housing Finance Market

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Housing finance should be aimed at the lower middle class and the higher levels of poor in the income pyramid. The category I have mentioned has been circled in the above diagram. A further subdivision in the form of different colors has been given i.e. the people having formal employment and a legal title to land should be the prime target with most of the long-term housing finance products targeted at them. Weaknesses My analysis and the information I collected through my talk with the managers of HDFC and Axis Bank has revealed 4 levels of challenges faced by these companies:

b) Policy Constraints: i. Forex Risk : Most HFC’s turn to foreign loans in order to refinance the loan burden extended by them. This exposes them to foreign currency risk ii. Default Risk: In most cases, farmers and other lower income group people fail to provide any sort of adequate security. Also, in case of farmers we notice that agricultural land can hardly be mortgaged since in most rural areas clear demarcation of land does not exist. Even if land was distinctly demarcated, land transfer charges are a big hindrance in acceptance of land as security. Threats : Competition in Housing Finance Sector The following are providers of housing finance in India, in one form or another: 1. Commercial Banks: is the largest mobiliser of savings and also in respect of coverage. Their role has traditionally been limited to providing the working capital needs of business, industry and commerce and hence, they have not been very active participants in the housing finance market. Another reason for the same is that they are funded by short-term resources which cannot be profitably employed in long term lendings.Hence competition from Commercial banks is very low especially because of their inability and lack of specialization in providing tailor-made financing needs for various households. 2. Cooperative Banks: A lot of reluctance has been noticed by these cooperative banks to provide loans for housing finance. Our analysis states the major reason for this is the high risk and illiquidity in giving housing loans from common corpus. Hence, even cooperative banks do not offer any significant competition in housing finance. 3. Regional Rural Banks: Again, they have not been very active in housing finance sector because of the large amounts and low creditworthiness involved leading to illiquidity and losses. 4. Agricultural and Rural Development Banks: The major function of these banks again is not the provision of housing finance. Consequently, there is low threat from these too. 5. Housing Finance Companies: These are companies with principal objective of lending for housing finance. However, the noticeable aspect my research has revealed is that there are only about 20 companies accounting for greater than 90% of total housing loans provided. Hence the industry is very fragmented and given the high demand for housing credit, there is very little fight for market share with these. 6. Cooperative housing finance societies: These are specialized institutions established and subsidized by NHB to cater to the housing needs of the masses. They are established at the State (Apex) Level and at the retail level. These institutions do not have adequate technical expertise to be able to design the right product for the right target. However, the state subsidy is a major factor in their favour. Thus, the housing finance market competition in India can be summarized as follows:
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Figure 4 : Risks and Challenges in Housing Finance
A. EXTERNAL FACTORS The major risks involved in case of housing businesses are a) Infrastructure Issues: Insufficient basic infrastructure like lack of uninterrupted and cheap supply of raw materials, labor and space or lack of sanitation can spell doom for the housing sector. b) Government Attitudes: If the government is favoring an indirect promotion of housing among people, in this case it will extend support to housing finance companies through credit relaxation, reserve relaxation and so on. On the other hand, if government directly participates in the housing finance market through issue of housing finance products, there can be no greater bad news for an already established housing finance player. B. INTERNAL FACTORS a) Lack of capability: Lack of capability as identified by me is multidimensional but stems from a common cause of the housing finance company not being able to judge the required parameters properly. These are as follows: i. Difficulties in matching terms of assets and liabilities : since the sources of deposits are mostly short term in nature for commercial and other banks whereas housing finance products are mostly long-term in nature ii. Tools to provide for product development and evolution: Various tools like internal MIS data of customers and their credit-worthiness, product experts, leadership etc are a prerequisite for product development in housing finance. Housing finance companies have a major problem in the sense that they might not have the required access or the capability (as we move to more and more complex housing products) to maintain such a database.

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Organizations providing Commercial Banks Cooperative Banks Regional Rural Banks Agricultural and Rural Development Banks Housing Finance Companies Cooperative housing finance societies


Threat Medium Low Low Low High High

From the above analysis, we can now draw an Industry Analysis Map of the Indian Housing Finance Market as follows: Clearly, from the above analysis we can understand that Indian housing finance market is in its nascent stage of development. Since this is a new formed market for a hitherto unaddressed product, there will be huge first mover advantages. The drawbacks stem only from the event of unfavorable policy changes or uneven competition from state. Both the drawbacks are relatively unlikely on the basis of government’s current policy trends. Hence, we conclude that the Housing Finance market in India is very attractive and forms a good case for investment.

References : 1) 2) 3) 4)Interpretation from Primary Data through interview with bank managers P.S. : There is no source of any table or figure used, all are based on my understandings and interpretations from the work I have done in this field

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By Shavi Gandhi Shashank IIM-Ahmedabad

Securitization started in India in 1990s when the market was characterized by lack of a well-defined regulatory framework and low investor activity. In 2006, RBI came up with guidelines to encourage activity in this market. Post-financial crisis, however, RBI adopted a conservative approach and proposed many modifications to the regulations. Although these changes were based on the lessons from the crisis, they affected the volumes adversely. This article studies the securitization market in India and the evolution of RBI regulations over the years. It further analyses the impact of these proposals and provides recommendations for the banks to handle the changing scenario. With the increase in globalization in post 1990 era, more and more products and services from the western world have made their way into the developing economies. Financial markets have also been affected by this phenomenon. Many financial tools, which were mainly used in the western financial markets, have come into existence in countries like India. Securitization is one such tool. It is the process of combining different financial assets into a single financial product and selling different tiers of the repackaged instrument to the clients. The process helps in creating liquidity in the market by enabling small investors to purchase parts of large asset pool. Mortgage backed securities (MBS) are one of the most popular examples of securitization products. The following diagram shows an example of securitization process.
Prod ucts
Cus t

As seen in the figure, securitization process allows the originator to package a pool of loans and transfer it to a special purpose entity which then sells securities backed by the payments from these loans to the investors(I). With the help of this process, the originator is able to: •Transfer the credit from its balance sheet •Diversify risks associated with the customer loans (like default risk, prepayment risk, credit risk) •Convert a set of illiquid assets (customer loans) on its balance sheet into liquid assets Moreover, the securities issued in securitization process are generally rated higher by rating agencies because of isolation of risk associated with receivables in a SPV and thus help the originator to reduce the cost of capital as compared to traditional methods of financing. It is these advantages which have made securitized products popular financial instruments and have resulted in the growth of the securitization industry from being non-existent in 1970s to a trillion dollar industry today. Securitization in India

Loa n Se l l Cus tome r Loa ns Pa y Cash for l oans

Se c.


Ca s h

Fig1: A typical Securitization process

In India the securitization market came into existence in 1990s starting with a modest deal of Rs. 160million(icra). In the initial days, securitization was used as a tool for bilateral acquisition of portfolios where the debt simply moved from balance sheet of the originator to the other entity and there were rarely any securities created. The securitization market started seeing significant activity only post-2000 when the Securitization and Reconstruction of Financial Assets and Enforcement of Security Ordinance came into existence. Today it has grown into a market with over Rs. 308,250million (exhibit 4) of issuance volume(icra). With almost 84% market share, retail loans form the major component of the securitization portfolio in India.
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In terms of the product class, asset backed securities are the most popular product in India (68% market share in 2011, exhibit 4& 5). This is opposite of what has been seen in developed markets where MBS are more prevalent. Although the housing finance market has been growing rapidly in India, MBS market has not seen much activity due to the long maturity periods, prepayment risk and lack of liquidity. (icra) Impediments to Growth Low liquidity in secondary market for securitized products, coupled with factors like limited investor interest in loans with longer tenures and preference of banks for loan book growth rather than investment in instruments, has hindered the growth of securitization market in India. Apart from this, the growth had also been hampered by lack of a clear regulatory framework in the initial years. It was only in 2006 that the Indian government included securitized debt within the definition of approved securities for secondary market. (SEBI) With the evolution of financial services sector, financial engineers have been devising newer techniques for packaging the assets with an aim to improve the rating of the products. This has led to an increase in complexity of the process which obfuscates the risks associated with the underlying assets and the process of transformation of these risks. It is this failure to understand and price the risks appropriately which has been cited as a major reason for the recent financial crisis. In Indian context, even though products are simple and the default rate also was very low during the financial crisis, RBI has taken a conservative approach after the financial crisis in formulation of its guidelines for the market. This has affected the market in a negative manner. RBI Regulatory Framework The legal framework for securitization in India started taking shape in the 2000s. Exhibit 1 summarizes the development of regulatory framework over the years. It began with the enactment of the “Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance” in 2002. The purpose of the act, at that time, was to promote the growth of securitization companies to take over the Non-Performing Assets (NPA) accumulated with the banks. (Mohandas) However, there were a few restrictions. The act included a limit on minimum term of securities to 6 years and a floor on the interest rate equal to 1.5% plus the prevailing market rate. These restrictions limited the nature of the securities that could be used and thus affected the market adversely(SARFAESI Act, 2002). Exhibit 2 and 3 show the trend in number of transactions and volume of trades respectively in the securitization market from FY 2001 to FY 2006. There was a sudden jump in the activity in FY 2002 after these regulations were passed.

In 2006, in order to encourage securitization in Indian markets, RBI issued new guidelines which opened the secondary market for securitized papers. This step encouraged the entry of new investors in the market. The guidelines were based on international best practices. With this, RBI expected infrastructure project receivables securitization to grow. The following provisions were added in these guidelines: True Sales Criteria: Since the cash flow to repay investors depends on the continued existence and performance of the borrower, bankruptcy of the borrower poses a huge risk to the investors. Within the true sales criteria, investors got legal right over the receivables. This reduced the risk associated with bankruptcy of the borrower, consequently making the securities quicker to market.(Kothari, True Sale) Credit Enhancements: “Credit enhancement refers to one or more initiatives taken by the issuer in a securitization structure to enhance the security, credit or the rating of the securitized instrument, e.g., by providing a cash collateral, profit retention, third party guarantee, etc.” (Kothari, Credit Enhancement). This increases the probability that the investors will receive cash flows to which they are entitled thereby reducing the cost of financing for the borrower. Prior to 2006, maintaining capital on credit enhancement was not mandatory. But the new guidelines specified that the issuer must hold 100% capital against the credit risk when a credit enhancement is provided, that is, every rupee of credit enhancement is secured by a rupee. This acted as a hindrance to incentivizing securitization in India. In addition to this, the developed world followed Basel II norms which mandated a capital requirement of 100% for first loss and, and no special requirement for subsequent 50%. Hence the second 50% held by the issuer required normal capital adequacy requirement only, i.e., 9%. The following table summarizes the capital requirement in each case(Kothari, Indian Securitization Market Scenario):
Before RBI Guidelines in 2006 9%*100 = 9 After RBI Guidelines Under Basel II in 2006 100%*100 = 100 100%*50 + 9%*50 = 54.5

Capital requirement for credit enhancement

Figure 1: Capital requirement for enhancement The capital requirement grew 11 times after 2006. It was almost double the amount required in the rest of the world. Hence, the securitization market did not grow as intended. The total volume of transactions (in Rs. Billion) declined from 308.2 in FY 2005 to 256.5 in FY 2006 (Exhibit 3).

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After the global financial crisis of 2008, RBI adopted a conservative stand and proposed several amendments to the regulations. It came up with a draft of guidelines for regulatory framework act in 2010 and modified the same in 2011. While most of the measures are reasonable and reflect the important lessons learnt from the financial crisis, some of them are considered to be harmful for the growth of the securitization market. In fact, the market fell by 29% in terms of value and 20% in terms in number of transactions in 2011. This trend is shown in exhibit 4. Also, exhibit 5 shows the trend the volume of the ABS issued from FY 2007 to FY 2011. The following sections provide details of some the changes and analyse their impact on the market: Minimum holding period and Retention requirement After securitization was introduced in the secondary market, the loans and receivables were securitized within weeks of origination. In fact, the loans were originated for the sole purpose of securitization (“Originate-to-Security” model). This raised suspicions on the due diligence done by the issuer, increasing the potential risk of default. Therefore, RBI proposed to have a minimum holding period of 9 months on a loan of maturity less than 24 months, and 12 months for a loan of maturity more than 24 months(RBI Discussion Paper). However, this restriction impacts assets like microfinance loans, gold loans etc. which have a maturity of less than 1 year and thus bring down the activity in securitization market. In addition to minimum holding period, a minimum retention of 5% of the underlying assets being securitized by the issuer was proposed(RBI Discussion Paper). This, on one hand, ensured that the quality of the securitized portfolio is up to the mark (since 5% of the securitized asset was held in the book of the originator), but on the other, affected the securitization market in India adversely. Revolving securitization Revolving securitization is a novel way of securitizing short-term assets like credit card receivables. It has been used extensively in the US recently. There are two major cash flow periods associated with the asset: 1. Revolving Period: During this period, prepayments and principal payments from borrower are not distributed to the investors. Instead, the cash flow from these payments is invested in new loans. 2. Amortization Period: After the revolving period, all the payments received from debtors are transferred to the investors. This effectively extends the maturity of the issued security when the underlying asset has a short maturity. This structure of payment has some risks associated with it: 1. As the cash is reinvested multiple times in different assets during the revolving period, the asset quality is expected to change over a period of time. 2. The “true sales” criteria might not hold for the new

assets securitized during the revolving period, hence the default risk increases unless the issuer commits to comply with the “true-sale” rule in subsequent assets. 3.In case the issuer cannot invest in new underlyings in the revolving stage, there is a chance that early amortization starts. This exposes the investor to reinvestment risk. RBI guideline issued in 2010 explicitly prohibits revolving securitization in India(RBI Discussion Paper). But, there is some ambiguity in the clause. The act specifies that revolving securitization is used for un-amortizing assets and this structure will be prohibited. However, it can also be done for amortizing assets with short maturity (like micro finance loans). A blanket ban on the revolving structure would mean that even amortizing asset class with shorter duration cannot be securitized. It also implies that revolving structure for an asset with a good credit rating (and credit enhancement) is prohibited. This will potentially cause more harm than good. If the asset is amortizing in nature, payment variability will not exist if the asset’s tenure is a short. Also, if the asset has a high credit rating, the risks are minimal. Therefore, these restrictions will unnecessarily prohibit the issuers to raise more funds and hence reduce the economic activity. Monoline Insurance Monoline insurance, in case of financial markets, refers to the practice of guaranteeing bonds. Issuers often use the services of monoline insurers to improve the credit rating of their bond issues. The rating of insured debt reflects the credit worthiness of the insurer. It is a popular financial tool employed in the developed economies. But in India this practice is not allowed by RBI. In 2009 RBI had issued guidelines which banned banks from issuing guarantee for non-convertible debentures or bonds of corporate firms(RBI Discussion Paper). When a bank guarantees the bonds of a corporate entity, it basically affects the price discovery mechanism in the market. The market price is now based on the guarantee rather than the financial strength of the issuer. This was seen as detrimental to development of capital market. Therefore, RBI enacted this restriction. Although, this regulation is good for protecting the investors from adverse effects of any financial disaster, it also means that small investors can’t take benefit of securitization. Any bond issue by small investors are generally perceived to be risky and hence the cost of raising capital for them is high even if they go for cash collateral based securitization. Recommendations The draft proposals for the regulatory framework for securitization market, issued by RBI, in past few years clearly indicate a conservative stance by the regulator. Some of the regulations are still in discussion stage while others are already in force. In the past year, negative impact has been seen on the issuance


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volume in the market after some of the regulations were announced. Given the regulatory environment, banks need to take proactive steps in order to keep up with the changes and maintain their competitiveness. They should ensure careful analysis and understanding of the guidelines and restrictions imposed by them. In 2009, in case of non-convertible debentures (NCD) issued by Tata it was seen that SBI had failed to comply with the regulations issued by RBI and that had resulted in a warning from the regulator. These incidents have a negative impact on the firm’s image. Moreover, any such violation in future may attract stricter penalty. Going forward, banks should align their operations

with the regulatory intent of avoiding risky and complex securitized products. At the same time, the regulatory framework is still in development stage and RBI in the past has shown willingness to include valid concerns in the modifications it has issued. Keeping this in mind banks can propose following changes: 1.The MRR of 5% proposed in 2010 Act should change according to the tenure of the loan. It should be higher for longer duration loans due to greater risks associated with such loans and the need for a long time investment of the issuer in servicing such securitization. 2.The restriction of MHP and MRR should not be applicable to the higher quality assets and the securities with credit enhancements because these assets are already less risky.


References : 1) icra. Update on Indian Securitisation Market. Retrieved January 2012, from Indian_Securitisation_Mkt.pdf 2) Kothari, V. Credit Enhancement. Retrieved from Kothari, V. Indian Securitization Market Scenario. Retrieved Jan 2012, from Securitisation-Regulatory%20and%20Market%20Scenario.pdf 3) Kothari, V. True Sale. Retrieved from 4) Mohandas, L. Securitisation. Retrieved 2012, from 5) RBI Discussion Paper. Retrieved from 6) SARFAESI Act, 2002. Retrieved from 7) SEBI. Developments in the Corporate Bonds and Securitization Markets. Retrieved 2012, from in/Index.jsp?contentDisp=corpstatus 8) Securitization in India. Retrieved from Reddy, Y. V. (1999). Securitization in India: Next Steps. Seminar on Government Securities Market.Chennai.



“YOU CAN’T MAKE A GOOD DEAL WITH A BAD PERSON” You simply can’t do business with bad people. If you are dealing with a bad person then there isn’t a contract that’s strong enough to protect you and your company from that person. Spend some time thinking about it. “NEVER ASK A BARBER IF YOU NEED A HAIRCUT.” There’s an old Wall Street saying that goes, “Ask a surgeon if you need an operation, the answer is ALWAYS yes. Ask a dentist if you need a cleaning and the answer is always yes again. Ask a financial advisor if you need to make changes to your portfolio and the answer is yes.” Many mergers and acquisitions are done on Wall Street because the deal takes on a life of its own. There’s a need to get deals done because that’s where Wall Street profits come from.
Warren Buffett

“Do not let anyone else run your business, unless you can supervise his performance with adequate care and comprehension or you have unusually strong reasons for placing implicit confidence in his integrity and ability. For the investor this rule should determine the conditions under which he will permit someone else to decide what is done with his money. ”
Benjamin Franklin

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MSF In RBI Arsenal
Yash Paresh Doshi MMS Finance KJ Somaiya Institute of Management

By Vaibhav Srivastava Yash Chaudhari IIFT - Delhi

‘It has been decided to permit banks to avail themselves of funds from RBI on overnight basis, under Marginal Standing Facility (MSF), against their excess SLR holdings. Additionally, they can also avail themselves of funds, on overnight basis below the stipulated SLR, up to one per cent of their respective Net Demand and Time Liabilities outstanding at the end of second preceding fortnight. In the event the banks’ SLR holdings fall below the statutory requirement, banks will not have the obligation to seek a specific waiver for default in SLR compliance arising out of use of this facility in terms of notification issued under sub section (2A) of Section 24 of the Banking Regulation Act, 1949.’ -RBI notification for Circular RBI/2010-11/515 dated May 9, 2011

To deal with liquidity and volatility concern RBI recently introduced a new provision called Marginal Standing Facility under which banks are allowed to avail themselves of funds from RBI on overnight basis against their excess SLR holdings. Additionally, they can also avail themselves of funds, on overnight basis below the stipulated SLR, up to one per cent of their respective Net Demand and Time Liabilities outstanding at the end of second preceding fortnight. In the similar development RBI also shifted windows for reverse repo and MSF to contain volatility by fixing them at crucial times during a working day so that banks do not have to go through the call money market rate for their borrowings or parking of funds. Basel III regimes has come as a major protective pill after the aftermath of recent crisis where in tier I capital and RWAs ratio are pegged at different stipulated level along with more constrained leverage ratio. In such, development like MSF has to be assessed as probable impediment or lever.

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Broadening the RBI volatility smile ‘Liquidity and Volatility’ have always been the proverbial concern for RBI and draws special affection of it when a rickety situation prevails outside. On the same pitch onset of fiscal year 2011-12 was expecting a similar package which was materialized with 3rd may announcement of introduction of new tool for monetary policy makers in the form of Marginal Standing Facility. Under this scheme, Banks will be able to borrow up to 1% of their respective Net Demand and Time Liabilities. The rate of interest on the amount accessed from this facility will be 100 basis points (i.e. 1%) above the repo rate. This scheme is likely to reduce volatility in the overnight rates and improve monetary transmission. Statutory liquidity ratio or SLR is the percentage of total deposits lenders have to keep in government bonds. As per RBI norms, the minimum requirement is 24%. Many banks, according to market participants, are currently having excess SLR at around 26-27%.Technically, a bank sitting on 27% SLR can now pledge those government securities to borrow overnight money via MSF using 4% SLR (3% + 1% below the 24% mark). Reasons for above assumption: Every bank for their per day requirement of capital adequacy depends on certain sources of capital (better money) raising techniques that in turn depends on overnight call-money rates and CBLO rates and repo and reverse repo auctions’ windows in lieu of LAF and then turn to the money market to deploy surplus funds or cover any borrowing needs, which results in unusual rise or fall in the rates in overnight call and the collateralized borrowing and lending obligations. Banks will now have two options to raise money from securitized loan markets in the form of CBLO and MSF. In anticipation this RBI measure will definitely help banks with higher SLR. Moreover, the CBLO rate is now capped at the MSF rate. To explicate the gravity of this development one fact needs to be stated that ‘Institutions have been borrowing over Rs 1.5 lakh crore daily via repo window’. So the new opening can be anticipated to be contributing in somewhat similar magnitude. Windows MovementRecent steps taken by RBI to curtail volatility August 16 onwards RBI decided to hold reverse repo auction between 4:30 and 5 pm on all working days, except Saturdays. This move was hailed with alacrity, especially after the apex bank discounted its second Liquidity Adjustment Facility (LAF) in May, as a move to curtail volatility in the overnight money market. Along with the current timing of repo and reverse repo auctions under the LAF window between 9:30 am and 10:30 am, it will help to broaden the opportunity window for the banks to raise money from the fixed cost over a market determined window of call money varying the cost of money according to demand and supply. Banks would then turn to the money market to deploy surplus funds or cover any borrowing needs, which used to result in unusual rise or fall in the rates in overnight call and the collateralized borrowing and lending
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obligations. In certain ways shifting the window from morning to evening will also help mitigate the contingencies amongst banks over their cash position by then and continuing with the same such window positioning will ensure that ‘the call rate will not trade above the repo rate in the morning and will not fall below the reverse repo rate in the evening’. Amidst such a volatile period any sort of bracketing can be of immense help to decision makers at helm in the consuming banks. In the similar development the Marginal Standing Facility (MSF) window is planned to change from current 3.304.30 pm to 4:30-5:00 PM. Implication and intention is obvious as banks supposedly approach the MSF window after exhausting all other sources, so till 4:30 banks can use all other windows and can get a fair idea of their standing to finally think of MSF. Not too implicit is the motto of RBI to substantiate the stand of Clearing Corporation of India (CCIL) in lieu of putting a cap in interest rates in CBLO market that at certain level of implementation includes an obligation for the borrower (consuming bank in concerned context) to repay the debt at a specific future date and an expectation of the lender to receive the money on that future date and a charge on security that is held by the CCIL, [4] by demarcating lenders’ demand rate within MSF limits. As normally banks and mutual funds follow the borrower and lender behaviors respectively in the market, clearly proposition of the whole move will shift the balance of power from latterto-former direction. Data showing containment of call money rate as Reverse Repo and MSF window opens, as on any specific date: Dec 26 (Reuters), Call Money 1700 IST TIME (IST) Market range OPEN 09.80-09.85 0910 09.75-09.85 0920 09.80-09.85 0930 09.85-09.90 0945 09.80-09.90 1030 09.40-09.45 1130 09.30-09.40 1230 09.30-09.35 1330 09.30-09.35 1430 08.25-08.30 1530 1630 1700 08.20-08.25 08.45-08.55 08.40-08.50
Adjustment of Call Money Market Rate according to MSF Window


Adjustment of Call Money Market Rate according to Reverse Repo Window

OPEN : 09.80-09.85 HIGH : 09.90 LOW : 08.20 CLOSE : 08.40-08.50 PVS CLOSE: 09.70-09.80 Source:

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MSF in BASEL III regime ‘The MSF window serves as an early warning indicator of stress in liquidity and the central bank watches it very closely’. - Subir Gokarn, RBI deputy governor ‘The stance of monetary policy is, among other things, to manage liquidity to ensure that it remains broadly in balance, with neither a large surplus diluting monetary transmission nor a large deficit choking off fund flows.’ - Declaration in the policy statement of RBI Every economic downturn accentuates some substantial lacunae in the system and subsequently alludes for rectifications. Be it Glass-Steagall act of 1933 establishing Federal Deposit Insurance Corporation (FDIC) at the off-set of the Great-Depression or subsequent Basel I and Basel-II reforms, a major change is an inevitable outcome of crises. No aberration this time again, along with Dodd-Frank Act, which besides the headline regulatory changes covering capital investment by banks and insurance companies introduces new regulation of hedge funds, alters the definition of accredited investors, requires reporting by all public companies on CEO to median employee pay ratios and other compensation data, enforces equitable access to credit for consumers, and provides incentives to promote banking among low- and medium-income residents[5], Basel-III is all set to be launched and get adopted by all major economies. Utmost important consideration before delving deep in Basel III requirementThough substantial features in Basel III hovers around Tier I capital, that prominently comprises equity and disclosed reserves, debt-sources like MSF, CBLO play a vital role determining cost of debt-as a determinant of cost of equity- inversely, if we abide by Net Income Approach or up to certain extent by Traditional Approach and positively, if we abide by Modi Gilliani II Proposition or Net Operating Income Approach. Moreover, liquidity concern is one aspect that finds prominent place under both the categories like the deputy governor and the declaration of

RBI said MSF can be used as an indicator to impending liquidity concerns. The major highlights of the draft guidelines are Minimum Capital Requirements 1. Common Equity Tier 1 (CET1) capital must be at least 5.5% of risk-weighted assets (RWAs); 2. Tier 1 capital must be at least 7% of RWAs; 3. The capital conservation buffer in the form of Common Equity of 2.5% of RWAs. Enhancing Risk Coverage 4. For OTC derivatives, in addition to the capital charge for counterparty default risk under Current Exposure Method, banks will be required to compute an additional Credit Value Adjustments (CVA) risk capital charge. Leverage Ratio 5. Banks would be expected to strive to operate at a minimum Tier 1 leverage ratio of 5%. Going by this requirement for Basel III and MSF target of creating excess SLR reserves of 3-4% will help banks make enough reserves and with their access reserves they can earn substantial return by parking them with lending window of reverse repo that can contribute in appreciating the reserves whether disclosed or undisclosed. Equipping the system with tools like MSF will help in bringing down the cost of debt considerably for the banks. This ease of pressure will help them provide a space to think and manage their equity section better to comply the Basel III norm for Minimum Capital Requirement. Moving further with Enhancing Risk Coverage for OTC derivatives, banks dealing with securities with counter-party default risk will seemingly remain unfazed by any such window or tool like MSF but at far or rather at way back, of course while choosing derivative that too like OTC, decision making at investment level can be influenced considerably against the like securities. Finally coming to the leverage ratio part, containing the cost of debt, an indispensible component of leverage, will affect the ratio in some way or other. Now which theory to believe and to follow is not a matter of discretion but of time. But having argued that much in both the regards it is very much evident that one way or other both the happenings going to affect each other.


References : 1) 2) 3) 4) 5) 6) 7) Sources:

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Indian Wedding
- Rajesh Kumar, IIM Lucknow

Planning Industry
As wedding industry shoots with burgeoning demand for lavish events, wedding planning industry gets a boost for demand of organized and structured planning services. Wedding planning industry in India is estimated to be growing at 20% per annum. This industry is also driven by increasing affluence and rising aspirations among consumers to make their wedding unique and memorable. Time constraints among consumers towards planning and organizing weddings have been largely responsible for the growth in planners. Wedding planners are more often seen to indulge in special theme based marriages to give it an edge so that it may stand out from the rest Wedding Planning Process Management Plannning • Involves an elaborate description of wedding in terms of paper work • Entire event to be organized is recorded on a medium • Attention is given to minutest detail • Creativity and innovation drives this section wherein planners show their mettle in showcasing unique themes and event management Co-ordination • This involves discussing the draft of the plan with the client at length • Enables clients to have a feel of the final event • Also allows feedbacks and suggestions from client implying room for changes and improvements • Mutual understanding between planner and client gets processed here wherein feedbacks and suggestions are shared Implementation • All plans are executed to the fullest • This means every part of the planning is given attention to so that all arrangements match the level of expectation • It is here that the execution of the entire project

The Indian wedding industry is on a high growth trajectory and this makes the event management in this area a very lucrative business. Importance given to marriage in one’s life and the desire to make it a memorable event encourage people to spend extravagantly. The big-fat Indian wedding is famous across the globe but it requires tremendous amount of planning and execution to make it a grand successful event. Paucity of time and resources compel the families to go for professional assistance for organizing the event. Increasing disposable income has further boosted the wedding planning industry. Overview of Wedding Industry India is considered to be one of the most sought-after wedding destinations around the world. Weddings in India are fast gaining popularity among global citizens who flock to the country to solemnize their wedding vows. It is growing at a CAGR of 25% owing to lavish spending. Currently, cost of a wedding may range from INR 0.5 mn to INR 50 mn. With India becoming a wedding destination, foreigners are aggressively contributing to a growing market. Increasing disposable income is expected to double the strength of the market in the next 15 years. Theme based weddings and destination weddings are some of the major trends that the market has observed. Characterized by social features, wedding industry manages to be resilient even to vagaries of inflation and recession.

Jewellery Attire Invitation Card Venue Décor Hotels and related items Mehendi Others

4% 4% 8% 8% 8%


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Primary Cost Components


Euro Debt Crisis

A wedding planner has to look at several primary expenses to be incurred during a wedding. However, expenses would vary across different weddings depending on the arrangements with the venue being a major cost factor. Some of these expenses have been given below:

Abroad •Most popular destinations abroad range from Bali, Malaysia, Mauritius to Thailand •Chief reasons for their popularity stems from the advantage of ‘cost effectiveness’ •Air tickets to these places are affordable, added to this is the availability of Indian cuisine Time constraint and convenience Weddings have become a grand affair which calls for detailing to intricate aspects to make it a successful event. Present day lifestyle does not permit people with busy work schedules to devote as much time as required. Wedding preparations require attention to minute details which requires professional assistance. The various facets of a wedding are as follows: -Wedding venue and caterer -Invitation card printing and distribution -Decor and ambience -Bridal make-up and care -Shopping for wedding jewellery and clothing -Entertainment requirements (singer, actors, orchestra, bands etc.) -Honeymoon related travel ticket procurement and hotel reservation Impediments/Challenges Government regulations Government regulations imposed on this sector have acted as an impediment to the growth of this sector. Various impositions have acted as deterrents for this sector to grow with latest being Government planning to restrict lavish food spreads in weddings in face of food inflation. Registration Issues
• • Government of India has passed orders that to get married in India, foreigners need to stay in the country for at least a month This generally acts as a challenge for those people who have time limitations as well as other commitments prior to their weddings

Growth Drivers Increase in Disposable Income The most primary enabler for this sector remains rising disposable income of the growing upper middle class group. Lifestyles fuelled by better salaries have led to increased spending on weddings. Indian weddings are ostentatious affairs with people showcasing their wealth and economic affluence. It also marks tendency towards upsurge of newer methods like destination weddings, theme based weddings. Earlier such ways remained within the domain of the elite, but with increasing disposable income even the middle class can now afford such luxurious spending. Even for those who do not have enough resource to fund their extravagant wedding, many financial institutions like GE Money India have come up with “auspicious” personal loan exclusively for weddings. Destination Wedding Driven by an appetite for ‘something unique’, destination wedding is fast becoming a fad. Increasing numbers of Indians are planning on getting married at exotic locations abroad, such as Istanbul, Florence, Bangkok and Monte Carlo. Resorts and hotels also offer wedding packages as weddings also offer a holiday flavour to the people who move out to attend weddings at distant locations. Destination weddings require organized planning thereby resulting in an increased demand for wedding planners and planning market. Destination wedding can have both people going out as well as flying into India. India •Most popular destinations chosen in India are Rajasthan, Jodhpur, and Goa •Royal wedding party in a fort or palace or even out-oftown wedding is a common trend these days

Service Tax • It is mandatory for the players to pay service tax to the Government • The service tax amounts to 10.3% of the total amount paid and this generally acts as a major setback for the planners on the whole Hotel Cost • There is no fixed amount that a hotel can charge for a wedding registration • 5-star hotels in India have varied rates for such occasions which at times divert prospective clients to fly abroad for their wedding Unfavourable wedding seasons and dates Association of marriage with astrology heralds unfavourable non-wedding season affecting wedding planning sector. For Hindus, marriage is held in high value and a lot of emphasis is given to astrology. Dates are considered that meet ‘nakshatra’ ‘tithi’ and other astrological considerations.
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This demarcates the year into wedding season and nonwedding season, especially for Hindus. Further, ‘raashis’ (moon sign) of bride and groom are also considered to find suitable and compatible dates. Limitation of wedding in terms of astrological perspective: Planets: Unfavourable planetary positions heralds ill effects in a married couple’s life which causes fear among most Indians Horoscopes: Horoscopes of brides and grooms are compared before deciding on dates for wedding If in case of unfavourable planetary position or even unfavourable matching of horoscopes occurs, either the wedding get postponed or simply called off. Thus, unfavourable dates for wedding acts as a barrier to growth of wedding planning sector. Industry Trends
Online classified players diversifying into wedding planning


Bharat Matrimony -It goes beyond matchmaking services to provide other related services like wedding planning and honeymoon planning -‘Matrimony Directory’ includes all such services wherein it gives the listing of wedding planners, contractors and decorators Wedding planning online software Planning a wedding is a cumbersome affair which wedding planners undertake. Software tools are being developed that bridges the gap between Wedding and the IT industry. An organized and effective tool to manage the process is now in the offing which merges wedding planning with software tools. An effective method of making wedding planning smooth, these tools are spreading both in metropolitan and smaller towns. This software allows customers to enjoy the wedding by managing the entire event through its customized solutions. Shaadi-e-khas -Web-based wedding management software that provides unique solutions towards making the tedious planning process easier -It is available on every Smartphone and offers 3 packages - Package includes a 30-day free trial, silver (costing INR 2,500) and gold (INR 5,000) -Application provides assistance to manage guest lists, send invites, create checklists, manage vendors and expenses, manage RSVPs, develop images and video libraries, print reports and many more management features -Also, it has varied options including classic and royal wedding themes at affordable prices for customers 3-D Presentations Wedding planners are now permeating innovative ideas through technological advancements. 3-D is now being used to deliver presentations in order to give a more life-like feel of the event. Earlier what used to be communicated through pen and paper drafts has now transpired into 3-D formatted delivery structure. This format primarily renders a more lifelike picture of designs and décor of the venue thereby giving more clarity to the idea presented to the clients. Key Players The competitive landscape of the Indian wedding planning industry has following major players:

Theme wedding

Trends Wedding planning online software

3D presentations

Theme Wedding Theme weddings are weddings arranged and executed based on certain themes chosen both by the bride and groom. Themes are used to make special moments unique. Earlier themes revolved around options of colours, motifs and any particular style, but with increasing disposable income and aspiration to stand out from the rest, extravagant lavish set-ups have evolved. These weddings are popular in the West but fast becoming a rage among the affluent class in India. Currently, following themes are most popular in the Indian wedding industry: • Arabian theme • Royal theme • Romantic theme • Fairytale/fantasy theme Online classified players diversifying into wedding planning There has been an upsurge of online matrimonial sites that have begun providing additional services other than match-making on the lines of wedding planning services. Another trend speaks of online matrimony sites having tie-ups with wedding planners wherein such names get listed in their directories Tie-ups of wedding planners with online marriage classified players usher a symbiotic relationship wherein both parties gain towards providing a complete package of match-making and wedding to customers. Therefore, players are increasingly looking towards maximizing
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Euro Debt Crisis

their coverage in this sector: -It lists wedding planning services as a wing under its service umbrella -Through ‘’, an online wedding directory, it provides listing of different caterers, florists, make-up artists, decorators, musicians, DJ’s and many more -Through Shaaditimes, a wedding portal, it delves into ways to plan one s wedding


• • • • • •

Exotic Indian Weddings India Wedding Planner Marry Me Mystical Moments Shaadi Online Wedent Group

Source: Company Website, Capital IQ and press articles These players provide complete end to end event management solution to their customers. This allows the customers to focus on their core business at the same time planners manage their event. They not only cater to the rich but also provide services for low budget wedding affordable by middle class customers.

Recommendations Based on the in-depth analysis of the industry, one can come up with the following recommendations for the players of this industry: • They can look towards categorizing business into different levels like premium, gold and silver to focus on various customers • Maintain transparency by passing lists of vendors and suppliers of resources to clients so that they can view their work portfolio • Try to get testimonials and brochures printed as word-of-mouth forms an effective means of advertising • Should look towards getting featured in ‘wedding fairs’ to increase visibility • Players should provide some discounts on their services to early birds during wedding season as a means of promotion

References 1) 2) – “The Flourishing Indian Wedding Industry”, Jun 2010 3) McKinsey Global Institute – “Rise of India’s consumer market”, May 2007 4) – “Destination dos replace the Big Fat Indian Wedding” Feb 2011 6) The Economic Times – “New-age wedding celebrations catching the fancy of gen next” Mar 2011

ANSWERS TO FIN- QUIZZITIVE, NOVEMBER 2011 1.Wall Street 2.Decimal Coinage System was introduced 3.Meryll Lynch 4.First bank to sell prasad Parikshit Vilas Loke
Welingkar Institute of Management Development and Research

Durga prasad Kavali

5. Watergate Scandal which led to the resignation of US President Richard Nixon and popularised the term Money Laundering. 6.John Bogle.He is Known as the Father Of Mutual Fund Investing.He created the first S & P 500 Index Fund. 7.Payment Float 8.Nostro Account 9. Advance -Decline Ratio 10.Asset Stripping.

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In-Fin-NITIE Vol 3 23


Quant for a Career : Realm of Opportunities
Prasenjeet Bhattacharya Assistant Vice President ING Investment Management India
There always have been both excitement and apprehension about ‘Quant Finance or Financial Engineering’. It often becomes quite tricky to explain what actually a Quant does and more importantly what exactly ‘Quant’ means. So, is it a person who works with numbers ? or, a substitute of other available strategies (mostly fundamental), or rather just a magic pill which did quite well in past few years and later caused the global turmoil/recession. There’s a lot of bewilderment regarding what exactly it’s all about. Firstly, it’s important to build awareness and the capability of Quant as such in every walk of our life and not just in, ‘Money Management’. Who/what is a Quant : Quantitative analysis is done across all modern industries. For example Prediction of performance attributes of hydraulic cements (e.g. Portland cement) requires improved means of material characterization. This involves classifying particle size and shape characterization for concrete-making materials that can: (1) be used to determine the effects of materials, processing, and environmental variables on the performance of concrete, and (2) provide the basis for significantly increased utilization of fly ash in concrete .This is then used to separate glassy phases from mineral constituents. The spatial distribution of these phases (glassy vs mineral), the surface texture characteristics of the particles, and the overall particle shape affect almost all aspects of performance and ultimately durability in the concrete-making process. ( I hope these things are taken into account while constructing flyovers and skyscrapers ). Now let’s see an comparative example of a ‘classification’ tool. A quant is capable of designing and implementing mathematical models to find a solution for a given problem. It could range from creating a pilotless fighter jet (Artificial Intelligence) to design a play station( optimization) etc. However in investment world mostly they are involved in doing risk assessment, derivative pricing , predicting market movement and asset allocation. Put simply, Quants use sophisticated math models to make money. Opportunities in Indian Market Globally actively managed quant funds account for close to 17 percent of the total asset under management. Although the use of quantitative methods in stock selection and portfolio construction is well accepted globally they are relatively new to India. Depending upon the interest and affinity one might chose to apply the quant skill in either Buy side/Sell side, build trading systems like Credit Suisse’s AES or join a hedge fund setup to run absolute return kind of strategy.

Electron image of an fly ash material containing glassy phases (green) with mineral constituents ( alite, belite, aluminite, dolomite etc).Improved means of classification techniques are required by scientists to increase fly ash utilization in concrete making process.
In-Fin-NITIE Vol 3 24

An example of self organizing map (SOM)for the betas of 500 stocks in the BSE 500 index. Each colored hexagon represents the beta of the stock. Classification techniques like SOM can be used to classify the stocks into groups and leads to a better asset allocation strategy.

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In Indian markets we generally see the demand of quant skills mostly in middle office risk modeling or trade support ( Morgan Stanley , Nomura etc), derivative pricing and modeling in Sell side. Off late lot of boutique houses and existing asset management companies have started offering ‘quant style of investing’ , to their clients. Here the opportunity lies as Quant portfolio managers and Quant Research Analysts. Another area which is catching up fast is of High Frequency Trading, and lot of boutique shops have already opened their doors. However due to lack of quant skills in India these shops are operating just based on the speed bit i.e. index arbitrage and cross currency arbitrage. The future of this area in Indian market is huge if skill is also blended with speed, opening a whole new world of high frequency products.

Various articles and news came up post the credit crisis criticizing the quant way of investing. However one must understand that Quant as an investment style gives different flavors of strategies. For ex. Long-Short (involving leveraging), Derivatives based (involving pricing of puts and calls), long only, absolute return etc. Quant as tool is used differently to achieve the desired objective for the underlying strategies. To site example Long/short strategies suffered huge losses during 2008. Losses were initiated mostly due to the rapid un-winding of one or more sizable quantitative equity market-neutral portfolios. Given the speed and price impact with which this occurred, it was likely the result of a sudden liquidation by a multi-strategy fund or proprietary-trading desk, possibly due to margin calls or a risk reduction. These initial losses then put pressure on a broader set of long/short and long-only equity portfolios, causing further losses. Losses were not due to the failure of the model. But pure long only funds did pretty well then as well. Quant is often misunderstood and confined to the limited prowess of value and momentum models to generate signals for ‘stock picking’. Quantitative investing involves more evolved process to seek alpha. That’s why globally people are moving from stock picking and trading models, to simpler (by objective) robust portfolio construction methodologies. And that’s why one can see a mixed result in terms of performance for different quant strategies right from Aug 2007 (when it began) thru mid 2010. Within investment management , automating the analysis on fundamental bottom-up factors (earning momentum, book to price, balance sheet) and blending in a portfolio should not be labeled under quant styles. Although it implements a quantitative approach (in term of automating) it fails to incorporate the structural dependencies of the stocks which is critical if one aims to build a fund/portfolio. Looking the stocks in a standalone fashion only highlights its underlying factors (fundamental factors or macro etc) and due to the lag nature of these factors most of the funds would miss the initial reversal rally. Moreover each market behaves differently as a function of its political stability, growth of economy, extent of idiot traders in the market etc. These factors along with many others offer a huge amount of information base and also more noise and confusion. Effective quant techniques help isolate useful information from noise and aid in designing a more stable process. If Bridgeway, Vanguard and Goldman funds had not done well in the crisis period there were funds like Simons of Renaissance Technologies Corp. and David Shaw of D.E. Shaw Group that did exceptional.


Errors like straws, upon the surface flow; He who would search for pearls, must dive below.

Fixed Income quant is probably the next biggest area by value. Fixed income mean short term interest rate prediction and hence its impact on federal policy analysis. The math is more complex as the underlying is multi dimensional. RBI is working closely with N.C.A.E.R and other research houses to develop quant framework for policy analysis and interest rate behavior forecast. However going forward the challenge would be to bring innovative product mandates in areas of portfolio solutions and asset allocation amidst all the SEBI mutual fund and PMS regulations. With the Alternative Investments regulation coming its way, it will open a wide realm of opportunities, as newer asset classes would also be allowed to be a part of the investable universe. Challenges

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In-Fin-NITIE Vol 3 25


Simmons’s Medallion Fund was up 80% in 2008. The debate though would be endless but to sum up one must not typecast all quant funds in a same manner and look for transparency in the model and the underlying strategy it implements, and that should be the key differentiator. Summing Up Quant is much beyond just numbers and math’s. It’s a blend of several disciplines. For example concepts from evolutionary biology are used in devices like iTunes in their music on demand application, machine learning techniques used in robotics are used in combinatorial protein design a branch of organic chemistry. And all of these intra discipline advancements are now being applied in financial world .No wonder lot of physicist have turned into known wall street professionals (Dr. Emanuel Derman to name one).

Quant techniques are used to learn the science behind the changing behavior of any phenomena. It could be from studying the behavior of a particular Stock ( or stock market) to a behavior of your spouse . Past behaviors serve as important indicators ( not the ONLY indicator) to study the underlying phenomenon. After witnessing the credit crisis and recent turbulent markets, active quant portfolio management is changing towards more flexible approaches that would be equipped to capture the fast changing dynamics of risk and return across different asset classes. More evolved methods of risk management techniques are put in place to capture the intra horizon and event based scenarios. A good quant manager/modeler through experience learns to be neither too concrete nor too abstract, to choose some part of the spectrum between behavioral and quantitative, between science and psychology, between Feynman and Freud.

Fin Sights
Investment Style of William J. O’Neil - CANSLIM
C – Current quarterly earnings per share have increased sharply from the same quarters’ earnings reported in the prior year (at least 25%). A – Annual earnings increases at a compound rate of no less than 25% (P/E is unimportant – probably in the range of 20 to 45 with these stocks) annually over the last five years. N – New products, new management, and new highs. Stocks with a good “story.” S – Supply and demand. The less stock available, the more buying will drive up the price. Look for stocks with 10 to 12 million shares outstanding. L – Leaders and laggards. Stick with those stocks that outperform and shed those that underperform. I – Institutional ownership. Favor companies that are “underowned” by the top professional investors. (For related reading, see Institutional Investors And Fundamentals: What’s The Link?) M – Market direction. Buy stocks on major downturns, but avoid purchases after a decline of 10% or more gets underway.

In-Fin-NITIE Vol 3 26

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Market Perspective
NSE INDEX: February 21, 2012 Close Price: 5607.15 Since last 15 Months; Index was trading regularly with lower tops and lower bottoms; ever since it made a peak at 6338.50 in the month of November 2010; however this month (February 2012) it has broken peak and has given a first sign of Bull Pattern on charts. Let us understand the chart pattern & its trend as per points with the help of Nifty Monthly Charts.

Ravi Nathani NSE Today







Line One: First Peak & Bottom Formation on charts Point A: - First Peak on charts which was in the month of Nov 2010 & the level was 6338.50 Point B: - First Bottom on charts which was in the Month of February 2011 & the level was 5177.70 Time Consumption: 4 Months Line Two: We had Lower top & Lower Bottom – Confirmation of Bearish Trend on charts Point C: - Second Peak was patterned on charts in the month of April 2011 & the level was 5944.45 Point D: - Second Bottom was in place in the month of August 2011 & the level was 4720.00 Time Consumption: - (6 Months) Peak was made in 2 months whereas bottom was prepared in time frame of 4 months. Time ratio is at 1:2 (Peak / Bottom) which indicates further selling on rise Line Three: Once again a Lower top & Lower Bottom was patterned on charts. Point E: - Third Peak was in the month of October 2011 & the level was 5399.70 Point F: - Third Bottom was in the month of December 2011 & the level was 4531.15 Time Consumption: - (4 Months) Once again peak was patterned in 2 months; however bottom was also made in 2 months. This indicates a time ratio of 1:1; bear cycle complete. 21st February 2012 Close: 5607.15 Nifty had a sharp rally & gained 574.95 points in the month of January 2012 whereas the bearish trend line was still not broken. As markets gained above 12% in just one month; therefore the momentum indicated that we would get a rally in month of February and would break 5400 on chart which was the strong resistance and also a trend changer for the same. We got 2 confirmations for the reversal of the trend as 5400 was broken on charts, one was broken Bearish Trend Line & other was strong resistance / peak broken. As expected Nifty has broken the bearish trend line on charts and has given a confirmation of a bullish pattern on charts; in simpler terms Nifty is out of the bearish mode and has changed its trend to Bullish; that means once again Bulls would be stronger than Bears in Short, Medium and Long Term. Best trading Strategy for Investors: Hunt for opportunities to buy at dips as index is expected to outperform whereas good quality stocks would lead the rally; investors shall start building fresh portfolio’s as markets have ended the Bearish Cycle and has started a fresh New Bull Pattern on charts whereas this time we would possibly get “New Highs on Index” in a span of next 10 – 12 months…. Disclaimer: I don’t have any investment exposure in Nifty Futures & Options. This article is written by Mr. Ravi Nathani who is a technical analyst based from Mumbai, for more details visit www.

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In-Fin-NITIE Vol 3 27

Mark to Market

Nifty Indices

Date 14-Nov-11
5148.35 3738.85 9275 8126.1 10736.5 2614.65 6210.3 1195.3 2922.55 4697.65 2996.7 3084.35 237.35 6150.55

5564.3 4277.95 11074.9 8173.05 10545.55 2753.65 6703.05 1304.25 3369.4 4833.95 3103.85 3842.4 280.75 6869.7

8% 14% 19% 1% -2% 5% 8% 9% 15% 3% 4% 25% 18% 12%

Nifty Indices - Performance

In-Fin-NITIE Vol 3 28

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Mark to Market

Commodities Performance
SILVER GOLD CRUDE -4% -3% -2% -1% 0% 1% 2% Returns(%)


Date 14-Nov-11
4977 28941 57400

5039 27870 55673

1% -4% -3%

Currency INR Performance

Yen(100) - INR Gain/Loss Euro - INR

USD-INR 0% 1% 2% 3% 4% 5% 6% 7%

14-Nov-11 17-Feb-12 Gain

50.3748 49.2401 2% 68.8069 64.7951 6%

Yen(100) - INR GBP-INR
65.42 62.07 5% 80.3257 77.963 3%

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In-Fin-NITIE Vol 3 29

Fin Quizzitive
1.Identify this pattern. 5.In February 1993 Enam Securities underwrote the IPO of a then unknown IT company which was ‘barely subscribed’ when it close. Enam had to pick the unsubscribed portion of which it eventually made ‘crores’. Identify the IT company 6.Who represented India in the Bretton Woods Conference? This person also played an important role in nationalising RBI? 7.Connect Raj Rajaratnam, Peter Bacanovic and Ivan Boesky 8.Michael Douglas played ‘Gordon Gekko’ in the film ‘Wall Street’ who purchases companies with the intent of selling their assets individually for profit. What is this process called? 9.What is an asset with an artificially inflated value called? This term derives its name from the practice of cattle farmers who force feed cattle with water before weighing them for sale. 10. Connect the following

2.CEO of NetJets, a wholly owned company of Berkshire Hathaway, was recently fired by Warren Buffet for his controversial trading activities in the stock of Company X. Identify the CEO and Company X. 3. Royal & Sun Alliance entered India financial market as the first foreign insurance company through a JV with an Indian company. Name the company. 4. Identify these gentlemen who played a pivotal role in accounting reform and investor protection.

Mail in your answers to : with the subject ‘Fin-Quizzitive’ before March 20, 2012. Winner to get a cash prize of Rs. 1000/In-Fin-NITIE Vol 3 30

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Building a strong conceptual foundation for and gaining practical insights into, understanding and managing business remain two of the most critical ‘goals’ for management students while at the b-school. Those with a keen interest in finance may achieve both these goals through tracking an industry sector of choice for the entire duration of their stay at the b-school and understanding various financial concepts by applying them in the context of a few selected business entities active in that sector. Entities with different business models Anupam Dubey may well be chosen here so as to deepen the understanding. Such an exerManager, Infrastructure cise would help students gain an insight, not only, into specific concepts like Advisory at CRISIL working capital management, long-short term financing and capital structure CFA - US NITIE Mumbai, PGDIM in relation to specific business entities but also into sector level elements that impact business like regulatory environment and demand-supply scenario. The duration (1-2 years) of this exercise would expose students to the changing prospects for the sector as well as to the manner in which the business entities adapt to such changes. Financial analysis of entities operating within the same sector, on an ongoing basis, would enable students to develop various benchmarks (related to revenues/cost heads, margin etc) and business valuation of these entities would help students apply their understanding of business and finance to paint an overall picture of each business that is closest to the real. Periodic equity research and sector development reports released by various investment banks/research houses, available on the internet, should provide a lot of guidance to the students through out the tracking period of 1-2 years. Post b-school, the sector level focus developed through this exercise would also help students in various sector specific corporate roles like Corporate Finance, Credit risk management, Project Finance, Investment Banking, Investment Management, or Venture Capital/Private Equity.


Team “Street”

Ameeth Devadas-91 8652722406 Anil Kumar Singh-91 8108347223 Karthik Mahadevan-91 8108346826 Keerthi P-91 8108344648 Nimit Varshney-91 8652721338 Suarabh Bansal-91 8652782080 Siddharth Jairath-91 9820191862


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In-Fin-NITIE Vol 3 31

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