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THE INVESTOR VOLUME 6 ISSUE 5 MAY 2013
OPPORTUNITY COST: a NOT SO
SIMPLE COST, pG. 17
lETS BANK ON WOMEN,
PG. 22
A Road less taken...
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F R O M E D I T O R S D E S K
NiveshakVolume VI
ISSUE V
MAY 2013
Faculty Mentor
Prof. P. Saravanan
Editorial Team
Anchal Khaneja
Anushri Bansal
Gourav Sachdeva
Himanshu Arora
Ishaan Mohan
Kaushal Kumar Ghai
Kritika Nema
Neha Misra
Nirmit Mohan
All images, design and artwork
are copyright of
IIM Shillong Finance Club
Finance Club
Indian Institute of Management
Shillong
www.iims-niveshak.com
THE TEAM
Dear Niveshaks,
The gres for GDP 2012-2013 were out recently and the perforance ofour nation, to put it mildly, was below the mark. We gew by 5% in the
last year which is our slowest pace in the last decade. Thats a huge wor
for Manmohan Singh. But our cover stor may feel like a stoke of cool
breeze to him. We claim that this number is as meaningless as it can get!
There are far more imporant things to look at but we wont even have
a glimpse at them since neither that is the latest fad in interational
circles nor is the panic sitation here yet. However, an increasing num-
ber of leaders social, political, business and environment leaders are
seeing Natral Capital Accounting as having tly arived. Niveshak
brings to you the new age, yet-to-take-its-proper-shape, in-line-with-IIM
Shillongs core theme of sustainabilit Natral Capital Accounting!!! We
suggest that we value the air, water, soil, ecosystem and all that we essen-
tially use for ee in our companies in our nancial statements and pay
the te cost of our actions.
Niveshak also brings some more good reads for you in this issue the
highlight is the gest column by one of our Professors, Dr. Sanjeeb Kako-
t, as a supplement to our cover stor. Let me not forget to mention that
he was the sole educationist om India to be invited to Rio+20 summit
last year and hence, has enorous perspectives to oer on the subject.
So, sit back and think as he takes you through the inticacies of Natral
Capital Accounting in his own interesting way.
Then there is the stor of miraculous gowth of Japan aer the Second
World War. What was the miracle involved is something you will dis-
cover only aer you read the issues Finistor but one thing is cerain
that the path charered by the nation aer facing the nuclear disaster
is a continuing inspiration for many other nations. FinGyaan of the is-
sue talks of the much deliberated Oppornit cost but in a reesh-
ingly new way! And you will agee, thats something Niveshak is known
to bring to ever topic!
To end this brief note, its imporant that we thank you, our readers,
for your constant suppor and appreciation. Thank you! It is your end-
less encouragement and enthusiasm that keeps us going. We hope your
interships went on well and you did leave geat impressions on your
employers. Kindly keep pouring in your suggestions and feedback to
[email protected] and as always,
Stay invested.
Team Niveshak
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C O N T E N T S
Niveshak Times
04The Month That Was
GUEST COLUMN08 Perspectives on NaturalCapital Accounting
Cover Story
11Natural Capital Accounting:A Road Less Taken
FinGyaan17 Opportunity Cost: A Not
So Simple Cost
Finistory19 Japans Economic MiraclePost World War II
Finsight22 Lets Bank on Women
CLASSROOM
25 Know Your Customer
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Rupee sinking below 56. No need to panic
said Raghuram Rajan
The Rupee breached the key psychological level of56 to fall as low as 56.01 per dollar on 23rd May,
a level last seen on September 6, 2012. Though itclosed above 56, the downfall was a continuousfifth day fall to mark its longest losing streak in
over three months. Forex dealers said the Americancurrency remained in demand even as the Reserve
Bank of India imposed restrictions of forwardcontracts by banks and arbitrage trading. It seemscapital outflow of foreign funds from falling marketsremained a major driver behind the rupees fall asdollar surges because investors are finding the
American currency a safer bet amid concerns thatGreece might exit the euro-zone. We are not theworst, but we are also not the best either in termsof depreciation. I wont say it is out of sync with
what is happening in other countries. There is nopanic-based need for new measures (on rupee).
I dont see any reason for apprehension, ChiefEconomic Adviser in the Finance Ministry RaghuramRajan told.
RBIs upcoming ination indexed bonds
look benecial for investors
Inflation erodes the purchasing power of money.Most debt products such as fixed deposits or regularbonds provide returns that
are not protectedagainst inflation.If a bank FDpays ani n t e r e s t
rate of 9%per annuma n di n f l a t i o na v e r a g e s
9.5% that
year, theinvestor losesmoney in real terms.To cushion investorssavings against rising prices, the RBI will soon
issue inflation-indexed bonds (IIBs). IIB adjusts its
interest payments depending on the inflation rate.As the inflation rate changes every year, so doesthe cash flow from the IIB. The other advantageof the IIB is that it not only adjusts the interestpayments to inflation but also the principal repaid
to the investor at the end of the bonds tenure. In
the final year, the higher of the original principalor the inflation-adjusted principal is paid to thebond holder. These financial instruments are meantto encourage savings and wean investors awayfrom gold. Whether the central bank succeeds in
reducing the attraction of the yellow metal remainsto be seen, but the launch of these bonds does giveIndian investors a low-risk option for protectingtheir savings from inflation.
J P Morgan shareholders support Dimons
dual roles of Chairman and CEO
Jamie Dimon will keep his titles of chairman and CEOof JPMorgan Chase & Co. after shareholders voted
down a proposal to split the companys top twojobs. Despite a year that severely tarnished Dimonand the firms reputation as the best risk managersin theb a n k i n g
indus t ry ,the voteto splitthe toptwo jobs
r e c e i v e donly 32.2percent ofthe total votes. Earlier to this, Dimon had suggestedthat he may eventually leave the bank if he lostthe vote. The nations largest banking company,
also saw its entire board of 11 directors re-elected.Among big-bank CEOs, Dimon ranks first for stockreturns and has been praised for leading the bankthrough the financial crisis with no quarterly lossesand a strong balance sheet. If Dimon had lost the
vote and left the bank, the banks shares couldhave fallen as much as 10 percent and erase about$20 billion in market value, according to Mike Mayo,
The Niveshak Times
www.iims-niveshak.com
IIM Shillong
Team NIVESHAK
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a bank analyst with brokerage CLSA.RBI, Sebi to get more teeth
An inter-ministerial group (IMG), constituted in the
beginning of May to ensure strict enforcement ofrules governing firms operating collective investmentschemes, non-banking finance companies and multi-level marketing firms and to suggest regulatorychanges in this regard, is set to recommend giving
more teeth to Sebi and RBI to regulate chit fundfrauds and ponzi schemes. Sebi is expected to getthe power to attach immovable properties, searchand seize assets and seek information from anyentity in connection with its investigations. Therelevant Acts would be amended for this purpose.
Though collective investment schemes fall underSebis jurisdiction, investments made in chit fundsare currently regulated by the Chit Fund Act, 1982,which has to be enforced by the respective stategovernments. To plug this loophole, Sebi had sought
direct powers so that effective action can be takenif the concerned entity has either disappeared, or
raised money in violation of securities laws, orhas fraudulently diverted public money. Such anoverhaul of securities laws was first proposed by
Sebi in June 2009.
CAD to climb again after improving in
previous quarter : Nomura
Indias current account deficit is expected to showsome improvement in the January-March period at4-4.5 per cent of GDP, but is likely to worsen againin the current quarter due to sluggish exports, highgold demand and seasonal rise in imports, Nomura
has said. After hitting a record high of 6.7 per centof GDP in Q4 2012, in the first quarter of this yearCAD is likely to narrow to 4-4.5 per cent of the GDP,owing to some improvement in trade deficit. CADrepresents the difference between inflows andoutflows of foreign currency. The Japanese brokerage
firm said, CAD is likely to worsen in the April-Junequarter as the countrys trade deficit has worsenedagain to USD 17.8 billion in April and we expect it todeteriorate further to USD 20.8 billion in May.
Yahoo! buys Tumblr and PlayerScaleYahoo! was on its shopping spree this month as it
acquired two companies Tumbr at $1.1 billion on20th May and PlayerScale at undisclosed price on24th May. While the purchase of hip blogging service,
Tumblr, wasseen as part
of a move towoo a youngeronline audience
by Yahoo!,
acquis it ionof a startupthat powersg a m e s
played on smartphones, tablets, consolesor personal computers came as a surprise to many.Tumblr claims to have 300 million monthly unique
visitors and 120,000 sign-ups every day, with about900 posts a second. And PlayerScale is a 4 year oldcompany that powers games played by over 150million people worldwide and adding over 400,000new users every day. Since former Google executive
Marissa Mayer became chief at Yahoo! in July oflast year, the company has racked up a series ofacquisitions including startups Alike, Stamped, Snip.it and a Summly application built by a British teen.
The Niveshak Times
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MARKET CAP (IN RS. CR)BSE Mkt. Cap 6,801,181
Index Full Mkt. Cap 3,283,167
Index Free Float Mkt. Cap 1,719,989
CURRENCY RATESINR / 1 USD 55.74
INR / 1 Euro 72.03
INR / 100 Jap. YEN 54.65
INR / 1 Pound Sterling 84.17
POLICY RATESBank Rate 8.25%
Repo rate 7.25%
Reverse Repo rate 6.25%
Market Snapshot
www.iims-niveshak.com
RESERVE RATIOSCRR 4.00%
SLR 23%
LENDING / DEPOSIT RATESBase rate 9.70%-10.25%
Deposit rate 7.50% - 9.00%
Source: www.bseindia.comwww.nseindia.com
Source: www.bseindia.com
Source: www.bseindia.com27th April to 28th May 2013
Data as on 28th May 2013
MarketSnapshot
CURRENCY MOVEMENTS
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MarketSnapshot
BSEIndex Open Close % changeSensex 19286.72 20160.82 4.53%
MIDCAP 6275.12 6498.66 3.56%
Smallcap 6023.86 6068.62 0.74%
AUTO 10848.28 11076.54 2.10%
BANKEX 14343.35 14799.81 3.18%
CD 7288.34 7744.4 6.26%
CG 9756.89 9679.51 -0.79%
FMCG 6116.45 6757.8 10.49%
Healthcare 8624.83 8805.66 2.10%
IT 5614.92 6061.33 7.95%
METAL 8636.85 8864.14 2.63%
OIL&GAS 8691.77 8950.96 2.98%
POWER 1732.5 1790.24 3.33%
PSU 6837.6 6814.47 -0.34%
REALTY 1892.92 1832.18 -3.21%
TECK 3413.32 3638.75 6.60%
www.iims-niveshak.com
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The term Natural Capital is gaining wide currency,
especially after the UN Earth summit at Rio in themonth of June last year. As a matter of fact, Riosaw concerted efforts to incorporate the conceptof Natural Capital Accounting into mainstreamaccounting practices of business organizations.The primary argument for this goes that theEarths natural resources, be it soil, air, wateror flora and fauna, combine to create what weterm as the ecosystem. It is this complicatedecosystem that gives rise to life and sustainsit. Human beings have succeeded in using
a variety of goods and services from this ecosystem to support life and promote civilization.In the process, the goods and services elicitedfrom nature has been transformed into tradableitems. The accounting system developed to trackthe flow of goods and services normally takesinto account the tradable goods and servicesproduced from nature but interestingly theaccounting practices do not take into accountthe basic Natural Capital!The accounting systems that are currently used
incorporate the financial capital account ofbusinesses while also attempting to include theaspects of social accounting. What is conspicuousis the absence of any system of natural capital
accounting. This absence is amazing when one
considers the fact that the fundamental well-being of man and the very survival of modernday civilization are dependent on natural capitalmanagement, and yet we have no accountingsystem for it! It goes without saying that the useof any capital, especially natural capital, withoutan accounting system is sheer madness. It isimperative that we account for the use of NaturalCapital and debit the true cost of economicgrowth and thereby take the first step towards asustainable future.
The study of natural capital accounting must startfrom the basic understanding that the ecologicalbalance of the earth is extremely fragile and ismaintained through the intricate symbiosis ofdifferent life forms. For the natural system tosustain itself, the earth would require a minimumlevel of natural resources at all times. Whileusing natural resources, one has to rememberthe fable of killing the goose that laid the goldenegg. Instead of being happy with a golden egg aday laid by the goose, the greedy owner decided
to kill the goose and take away all the eggs insideit, only to discover to his utter dismay that therewere no more eggs inside and the goose wasalso dead by then! Maintaining a basic minimum
8
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IIM ShIllong
Professor Sanjeeb Kakoty
Perspectives on Natural Capital
AccountingProfessor Sanjeeb Kakoty
Prof. Sanjeeb Kakoty did his MA in history from NEHU
and went on to do his PhD by adopting technology
and social formation to understand and explain
historical change. Currently a faculty memeber at IIM
Shillong, he has been a sole educationist from India tobe invited to Rio+20 summit last year and hence, has
enormous perspectives to offer on the subject. So, sit
back and think as he takes you through the intricacies
of Natural Capital Accounting in his own interesting
way
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level is imperative to ensure regeneration andalso allow the bare minimum required for alllife forms to survive and also thrive. Unless wemonitor effectively the use pattern of our naturalresources within the above frame work, it will leadto degradation and ultimately the exterminationof all life form. Any study of Natural Capital
reveals that there are two types of resources,renewable and non renewable. The large scaleand unrestricted use of non renewable resourceshas already pushed our Natural Account BalanceSheet into the red and the mindless use hasput a severe strain on the renewable naturalresources be it in the form of pollution, loss ofhabitat andbiodiversityl e a d i n gto climate
change.The naturala c c o u n tframeworks,at present,do not eventry to enterinto thelarger sustainability debate which takes intoaccount all life forms. Instead, it only talks aboutensuring that the national account frameworks
should incorporate into its frame work the risksof incurring massive costs to future economicproductivity by not taking into account thenatural capital stocks available today! In thiscontext, the term capital is used to describe astock or resource from which revenue or yield canbe extracted. Since the concept of human well-being is inextricably linked to the combinationof different types of capital, such as socialcapital, human capital and economic capital; allof which are based on natural capital. In this
regard, it may be pertinent to acknowledgethat there are four basic categories of naturalcapital viz. air, water which includes fresh,groundwater and marine, land, and habitatsincluding the ecosystems, flora and fauna. Overthe millennia, it has become apparent thatthat the degradation of ecosystems often leadsto irreversible changes, leading to extinctionof species and disruption of natural cyclesleading to calamities and disease. Under suchcircumstances, it becomes impossible to regain
or restore natural capital. In the event of thequantitative depletion of natural capital assets orthe qualitative degradation, it adversely impactsthe flow of beneficial services to the people. One
may cite the case of diminished catches fromoverexploited fish stocks or decreased cropyields from degraded soils. Abuse and misuseof natural systems result in impaired productionof biomass and oxygen, and the disruption ofhydrological and atmospheric cycles which inturn adversely affects the natural capital.
While it may be easy to put a monetary value onproducts arising out of natural capital that aretraded, be it agricultural commodities, mineralsor other natural resources, there are difficultiesin assigning economic values for the benefitsthat natural capital provides if they do not havea precise traded market value. In fact, the traded
value oftenexternalizesmany hiddencosts, such
as impactson airquality, waterresources andbiodiversity.It is thebiodiversitythat gives rise
to the varied ecosystems that prevail in differentparts of the world. Ecosystems are composed of asymbiosis of the physical, biological and chemical
components such as soils, water, organismsand nutrients interacting with each other andgiving rise to a unique ecology. It incorporatessub systems such as the nutrient cycle and thehydrological systems. These are fundamental toan ecosystem and ensure that it maintains itsintegrity. These interactions between structuresand processes, be it physical as in infiltration ofwater or chemical as in oxidation or biologicalas in photosynthesis, all testify to the basicpremise of biodiversity. The different subsets of
genes, species variety and ecosystems delicatelycombine to present itself to us as the naturalresource systems! In other words, we have tounderstand that the natural resource system isdependent upon the health of the ecosystem.There have been attempts, with varying results,to incorporate eco system valuation with naturalcapital accounting. For instance, the MillenniumEcosystem Assessment (MA) presented ecoservices into four categories: food and waterwere classified as provisioning services, flood
and disease control under regulatory services,spiritual and recreational activities were groupedunder cultural services and under the categoryof supporting services were placed activities
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such as soil formation, photosynthesis andnutrient cycling that maintain the conditionsfor life on Earth. Arguably, ecological functionsthat contribute to an ecosystem at large may beclassed as a service in its own right.The Globe International Commission on Land
Use Change and Ecosystems has drafted aNatural Capital Action Plan on the theme ofParliamentarians and Biodiversity. This actionplan has recommended that a ministerialposition be created within the ambit of eitherthe finance ministry or the treasury departmentfor managing natural capital. They should alsobe vested with the responsibility to develop acomprehensive set of natural capital accounts.In addition, there should be a report highlightingthe effects of integrating the true value of
ecosystem services into policy decisions.To create better synergy within all arms of thegovernment, it was felt that it is advisableto create an inter-departmental MinisterialCommittees on Natural Capital which would beadvised by an expert technical advisory group.Each government departments would alsoindividually draw up natural capital inventoriesof natural capital assets which would besynchronized with the larger inventory.In turn, this would be linked to the development
of national-scale accounting and performanceassessment for natural capital stocks. It wouldmeasure the status and flow of resources andlink itself to the conventional national incomeaccounting. In other words, the accountingframework would incorporate both the stock andflow of natural capital, and more importantlylend itself to an analysis of the interactionsbetween the economy and the environment.While the management of such natural resourcessuch as forests would be much simpler, such as
interlinking the rate of timber supplies to therate at which the overall stock of the forest ismaintained and regenerated to avoid damagingthe ecology, accessing the stock of naturalcapital and arriving at figures to ensure futureflows of benefits would be a much contestedand more complicated process.Attempts are being made to arrive at acceptablemodalities for natural capital accountingsystems. One such is the Ecosystem ServiceValuation Framework. It suggests that instead
of attempting to arrive at a complete valuationof every aspect of the environment, it may bebetter to understand the complex nature ofinteractions between it and humans. In the
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process, it would also try to clarify the natureof resources stock, flow, use and regeneration.Similar valuation concepts and yardsticks for
accounting have also emerged from numerousorganizations. Agencies such as the US NationalResearch Council, the Natural Capital Project,the US Environmental Protection AgencyScience Advisory Board, the French Council forStrategic Analysis, The Economics of Ecosystemsand Biodiversity (TEEB) and the UK National
Ecosystem Assessment, have all attempted tocontribute to the debate.However, it has been difficult to arrive at aconsensus on the scale and relative importanceof ecosystem services to human beings bothat the local and global level. This lack of auniversally accepted modality for measurementand accounting is a difficult hurdle. Toovercome some of these problems the EuropeanEnvironment Agency has suggested a CommonInternational Classification for Ecosystem
Services (CICES). This would be consistentwith existing yardsticks such as the MillenniumEcosystem Assessment (MA), and compatiblewith the integrated environmental and economicaccounting methods being considered in theUN System of Environmental and EconomicAccounts. The importance of the CICES isheightened by the lack of any classification ofecosystem services for accounting purposes.The current frameworks primarily addressindividual policy decisions, rather than act as
a broad system to be used for economic andenvironmental accounting.Notably, majority of the environmentalassets are not traded in markets. In addition,
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those that are, such as, minerals, fish or timberdo not have a system to incorporate depletionrealistically. Accounting methods for these itemsare often done on the basis of the extractioncosts. The price of traded natural resources has
no correlation to actual environmental costs.Many developed countries have tried to addressthis lacuna by trying to include such factors aspollution damage and control costs and materialand energy flows. They however stop short ofaccounting for the depletion and degradationof natural resource systems. To overcome someof these issues, the 2012 UN SEEA revision wassought to be split into two volumes. The firstwas to be a set of standardized methods forenvironmental accounting. This in turn would
sought to be integrated with the System NationalAccounts (SNA), including the existing fourcategories, with the second volume includingsectors such as ecosystem accounting, that areyet to find incorporation till now.There is no doubt that there are huge challengesto the proper development of natural capitalaccounting procedures. The first colossal stepwould be the systematic description of both thecosts and benefits associated with ecosystemservice. To ensure sustained supply from the
ecosystem the issue of reinvestment in thestocks of natural capital has to be given primacy.This would include necessary investmentsto conserve biodiversity. The concept of
reinvestment in natural capital has to includenot only preservation and protection, but alsorestoration and even limiting or desisting fromthe use of natural capital assets to ensuresufficient time for natural regeneration and
renewal. However, the lack of knowledge andconcurrence about the level of natural capitalrequired to maintain ecosystem capacity whilefocusing entirely on resource requirement todrive economic growth is the major impedimentto the development of the needed accountingsystems. It goes without saying that if mankindwere to stay alive in the business of survival,all of this has to figure in the book of accountsand we need to determine the profit and lossaccount at the end of each quarter!
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company after company represented by finance,
development, or environment ministers, CEOs,
CFOs or CROs now talk about how natural capital
accounting fit their priorities and how it can be a
tool to address some of their key policy challenges.
Existing Scenario
In the present day scenario, GDP is a widely
accepted measure of a countrys growth and
development. But it accounts for only a part of theactual performance, i.e. the income, while ignoring
the assets that are crucial in that income formation.
When a country over exploits its resources, it
does generate income but simultaneously causes
depletion of wealth. And thus, adopting GDP as the
sole measure of economic performance can project
a wrong picture, showing growth in the short run,
and hamper the overall growth in the long run. It has
We are all rather too familiar with the termsustainability. But as finance enthusiasts that weall are, do we ever think of it while projecting thatbalance sheet for the next so many decades? Or dowe ever put a star mark over that projected profitfor the eighth year from now? Well, we should. Andthat is what we deal with in this story on NaturalCapital Accounting. That projected profit of yoursfor the eighth (or probably just the second) year
from now will not actually exist if there be no waterleft to be used by your firm or in the extreme case,we run out of the air that we breathe!
As the diplomats from across the world havesupported the idea of Natural Capital Accountingat Rio+20, a new era began. A concept, which waslargely considered only academic, is now makingits inroads into the main stream measurement
of a countrys growth. Country after country and
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Anchal Khaneja & Gourav Sachdeva
Fig 1: Natural Capital, a part of wealth and overall well being hierarchy
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to better decision making for development. Figure
2 shows how Natural Capital forms a considerable
part (36 per cent) of the total wealth of a sample in
a low-income country.
Increasingly, it seems, nature is actually money. The
concept of natural capital has existed for more than
30 years. But the shift towards including the conceptinto our main stream accounting has been really
slow. The contemporary moment of global crisis in
both ecological and economic spheres marked the
moment wherein Nature is now being refashioned
as Natural Capital. This marks a material shift,
one which allows the businesses to understand the
effects of expansion on the environment and its
sustainability.
Natural Capital accounting is even more important
now as we seek to measure the success of Millennium
Development Goals and Sustainable DevelopmentGoals in the post-2015 debate. An inclusive growth
can only be achieved in the context of sustainable
development. And this requires wealth accounting
and valuation of the ecosystem. How else can we
know that achievement of goals will build prosperity
sustainably for todays generation and tomorrows?
How to Get There
Natural Capital Accounting can lead to better
decision making for inclusive growth. It can provide
a detailed framework for improved managementof an economy by assessing the value of various
resources. Its not only a means to maximize growth
but also a tool to assess the benefits and costs
of ecosystem changes. That is all well but the key
question that remains is how do we include natural
capital into our books?
The development of national-scale accounting and
performance assessment for natural capital stocks
and flows needs to be consistent with conventional
national income accounting, the principles of the
underlying ecology and measured consistently over
time. The stock and flow of natural capital should
be comprehensively described by the proposed
accounting framework and the interactions
between the economy and the environment should
be accounted for and analyzed. With some forms of
natural capital, such as forests, the flow of benefits
(timber) needs to be exploited at a rate which the
overall stock (the forest) is maintained over time
to avoid damaging the ecological infrastructure
that supports it. The present value of a stock ofnatural capital incorporates a measure of the future
flows of benefits that it can generate. The changes
in the ecosystems quality and/or quantity can be
been rightly pointed out by Nobel laureate Joseph
Stieglitz, a private company is judged by both its
income statement and balance sheet, but most
countries only compile an income statement (GDP)
and know very little about the national balance
sheet. Wealth accounting, including natural capital
accounting, is needed to assess whether growth is
sustainable or not.
Mr. Jean-Marc Hut, CFO of the giant Unilever also
said very accurately, The current financial reporting
model only tells half the story about a businesss true
performance and potential. The numbers say little
of its reliance and impact on natural capital, factors
that will increasingly influence competitiveness in a
resource-scarce world. However, many corporations
believe that businesses solely rely on financials and
are driven by their bottom lines. Still, even those
concerned only about the bottom lines - and notthe fate of nature - must now begin to realize that
the sustainability of business itself depends on the
long-term availability of natural capital.
What is Natural Capital?
Natural Capital includes all the resources such
as minerals and energy, agricultural land, timber,
fisheries and water. It includes in its purview the
ecosystems which are otherwise invisible to people
such as air and water filtration, flood protection,
carbon storage, pollination for crops, and habitatfor fisheries and wildlife etc.
Natural Capital is an asset of great importance and
constitutes a giant share of a countrys wealth. And
more so, for low-income countries where the mere
survival of communities is largely dependent on
healthy ecosystems. Thus, incorporating this critical
asset into our national accounts can definitely lead
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Fig 2: Composition of Natural Capital
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detailed by proposed accounts either in physical
units based on different indicators of ecosystem
functioning, or on changes in the monetary value
of benefits flowing from an ecosystem. The stock
of an ecosystem will change over time depending
on its degradation or restoration due to varied
human uses, and the quality of the stock ofecosystems may change with the level of pressures
that impact on ecological processes. Broadly
speaking, accounting frameworks require at least
three things: the definition and measurement of
quantities; the aggregation or adding-up of those
quantities; and, weights for the individual elements
in the aggregation index.
Institutional Framework
A major step en route to Natural Capital Accounting
is the adoption of the concept by the UN StatisticalCommission of the System for Environmental
and Economic Accounts (SEEA). The SEEA allows
the countries to use an internationally agreed
method, on par with the current System of National
Accounts, to account for material natural resources
like minerals, timber, and fisheries. There is now a
wide consensus on the need to put the concept of
natural capital accounting into action. This has led
to an increased momentum with the finance and
environmental ministries of various nations who
now want to account for natural capital in theirnational incomes. Countries are now prioritizing
their natural capital accounts. Say, if a countrys
current concern is the fast depleting coal reserves, it
begins by compiling energy accounts while keeping
the other accounts on hold. Many countries such
as Botswana, Spain and Australia are developing
material resources accounts.
Following 3 approaches have seen considerable
support from various forums as preferred over the
others for valuing environmental issues:
Environmental Valuation - The environmental
valuation approaches attempts to quantify in
monetary terms the changes in human welfare
which result from a companys environmental
impacts. It employs a wide range of techniques to
estimate changes in human welfare, sometimes
eliciting estimates directly from affected parties
(for example, by asking how much they would be
willing to pay to achieve a particular environmental
outcome), or indirectly, by using estimated
willingness to pay or accept compensation forchanges known to be caused by environmental
factors (for example, particular health outcomes)
Market prices: Market transactions are associated
with the management of many environmental
impacts and can be used to measure the same.
For example, the cost of disposing of waste,
charges paid for water abstraction and use, or
the traded price of carbon (e.g. in the European
Union Emissions Trading Scheme). However, these
prices reflect the supply and demand conditionsin imperfect markets and are not generally a good
approximation of the costs to society of the impacts
associated
Abatement costs: The cost of reducing emissions
or impacts, for example through adopting different
manufacturing practices, is termed the abatement
cost. However, the cost of abatement varies across
different technologies, each offering a given
potential for emission reductions at a different cost
There are, however, some instances where an itemor issue might be easily measurable in financial
terms and therefore included in the quantitative
elements of the accounts. Some examples are given
here:
Significant and sustained drops in share price
may occur as a result of the refusal of planning
permission motivated by environmental concerns.
Canadian gold mining company, Infinito Gold,
lost over 50% of its share value as a result of the
withdrawal of a mining concession in Costa Rica
due to concerns about the potential impacts onagriculture, endangered species and forests (Figure
3)
Clean-up costs from the 2010 Gulf of Mexico
oil spill, and associated compensation claims for
ecological damage, affected both BPs balance
sheet and its profit and loss. In the companys 2011
annual report, a $3.5 billion provision related to
Fig 3: Innito Gold lost more than half its value when the Costa
Rican court annulled a gold mine concession
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clean-up costs, and a $7.8 billion provision related
to litigation and claims associated with the spill.
Newmont mining company in Peru experienced
significant delays as a result of concerns regarding
the impact of the mine on water availability.
Overcoming these concerns has required a $150
million investment from partner, Minera Yanacocha,to build water reservoirs to compensate for the
mines impact on local water supplies.
Challenges to Developing Accounting
Procedures
In order to integrate the concept of natural capital
accounting into the existing accounting procedures,
it is important to provide for both the costs and
benefits associated with the natural capital. The
investment in the management of natural capital
signifies the costs of maintaining the ecosystem.For example, management measures to conserve
biodiversity at levels sufficient to maintain the
flow of an ecosystem service is a cost arising from
provision of benefits from ecosystems. But there
are no concrete procedures to measure the same.
Also the reinvestment can take different forms such
as protection and restoration of the natural assets
to ensure their usability.
Some of the specific challenges to developing
an overwhelmingly acceptable and practical
methodology include:
Untangling the value of ecosystem service and
the benefit that personifies the intrinsic value. For
example, the water quality and drinking water
The low incremental economic value of individual
environmental impacts versus the long-term
cumulative environmental cost of such impacts.
For example, although a small area of habitat may
have a low current economic value, the cumulative
impacts of the losses of lots of small areas of habitat
over an extended period will have large impact onthe ecosystem services supported by that habitat
in a given area
The multi-dimensional effect of change in natural
capital stock on service outputs. For example, halving
the area under forest just reduces the provisioning
service of wood production by half but it leads to
a much greater loss of host of other services such
as carbon sequestration and recreational services.
Many of the world renowned companies have tried,
in their own capacities small and big, to accountfor natural capital they utilize. But the success
stories are limited in number. One of the most
impressive among them is what PUMA did in 2010. It
actually published an environmental profit and loss
account for a full calendar year. As Pumas mission
statement says, it aims to be the worlds most
desirable and sustainable Sportlifestyle Company.
In the opening foreword of the e-P&L statement,
its CSO (Chief Sustainability Officer) Jean Paul Sartre
beautifully said, Once we know and are aware, we
are responsible for our action and our inaction. We
can do something about it or ignore it. Either way,
we are still responsible. An e-P&L statement wasdefined as a means of placing a monetary value on
the environmental impacts along the entire supply
chain of a given business and in it, a profit was
any activity that benefits the environment while
a loss was any activity that adversely impacts the
environment.
Puma wanted to know how much it would need to
pay for the services nature provides so that it can
produce, market and distribute all its products
footwear, apparel and accessories made of leather,
cotton, rubber or plastic for the long run. It also
wanted to know how much compensation it would
have to provide if nature was asking to be paid
for the impact done through its manufacturing
processes and operations. Puma focused first on
its greenhouse gas emissions and water usage
and later added land use, air pollutants and waste
throughout its operations and supply chain. The total
results revealed, that if Puma treated our planet as
it treats any other service provider, it would have to
pay EUR 8 million to nature for services rendered toits core operations such as its offices, warehouses
and stores in 2010, alone. An additional EUR 137
million would be owed to nature from Pumas
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Fig 4: PUMA E P&L results by environmental indicator
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supply chain ofexternal partners
that it shared with
numerous other
companies, and
where it had less
influence. Figure
4 reveals the
distribution of this
amount (EUR 45
million) as shared byenvironmental indicators.
As the first company to attempt to transparently
lay out its environmental footprint from cradle-to-
gate, Puma obviously caused some waves in the
corporate world. Many companies followed the
suit with some being successful and some not so
successful. Companies like Coca-Cola are working
one-on-one with organizations such as The Nature
Conservancy (TNC) and the World Wildlife Fund to
assign a monetary value to natural resources, such
as clean water, and the services they provide andthen use these calculations in making business
decisions. Coca-Cola is also working with the World
Wildlife Fund to set up water funds that collect fees
from local water users such as Coca-Cola, distilleries,and paper processing mills. Other companies doing
work on natural capital include Disney, Miller-Coors
and Xerox. Disney has committed to fund 6,000
acres of reforestation projects by 2015, not only to
lower the companys net carbon emissions, but also
to protect watersheds and habitats that wildlife and
communities depend on. These goals are rooted
in the recognition that a healthy environment
is essential to Disneys long term success, the
company has said. Miller-Coors is working toimprove business practices to protect freshwater.
The project can serve as a model for other beer
producers. SABMiller, MillerCoors parent company,
is also partnering with TNC to start water funds
in Colombia, Ecuador, Peru, and Panama. Xerox
is working with TNC to establish a methodology
for quantifying carbon emission reductions from
improved forest management that can be used by
other companies in the paper industry. The tools
will lead to a more sustainable paper supply chain
and also support local communities, the companysays.
Fig
5: Natural Capital & Financial Statements
1. In order to demonstrate how natural capital may affect or be included within financialaccounts, the following set of financial statements has been prepared and annotated.
2. Some companies will have direct impacts or dependencies on natural capital (suchas forestry companies), while others (such as retailers) will have indirect impacts ordependencies on natural capital.
3. The annotations included in the diagram below can be applied to either case.4. Please note, the gures included below are for illustrative purposes, and do not relate to
any real organisation.
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NIVESHAK 17
ArticleoftheMonth
IRMa
Vishwas M. Virani
FinGya
an
The word opportunity cost requires asincere attention be defined properlywith reasonable arguments. Opportunityis, in simple terms, a combination ofdifferent outcomes. These outcomes are
either positive, in a subjective contextor negative, again in a subjectivecontext. Although opportunity is usuallyperceived to have an affirmativeconnotation, it should not be the case. Itshould be scrutinized from all possibleangles. Opportunity approaches aperson with a pile of nuances. Thesenuances, if encountered effectively, canyield a desired outcome or result forany firm or person. In any mercantile
entity, this applies pervasively. Say, afirm in Ahmedabad produces and sellsonly mango pickle with khatta andMeetha variants. Its raw material, i.e.raw mangoes, is supplied by a smallfirm from Valsad, Gujarat. The maininput cost turns out to be around 50 lakhs per annum. This cost includesordering cost, carrying cost, purchasecost, handling cost and waste orspoilage cost. The company has not paid
much attention to efficient materialshandling due to heavy demand andsteady operations of business. Now, thevalsad-based firm comes with an offer of
acquisition and values its firm at 4 crores. Assuming this valueto have been estimated through asound valuation model, the firmmakes first offer in market to this
pickle company. The companyhas simply two options, either toaccept offer and have an exposureto mango-farming and itssubsequent benefits or to carry onits business without getting intocapital budgeting and incur inputcost worth 50 lakhs every year.If it is assumed, for simplicity ofcalculation, that cost of capitalof the pickle company is known
and is 10%, the total amount ofperpetual benefit would comearound 5 crores i.e. V = Benefitper annum/cost of capital. Now,Simple application of Net PresentValue concept generates 1crore of possible gain (differencebetween total benefit and totalcash outlay) given this offer isaccepted. In general situation,entrepreneur is likely to accept
this offer of acquisition. Now,the opportunity cost of this offeris possible gains on the amountspent for acquisition i.e. 4
Opportunity
CostA not so
simple Cost
The concept ofopportunity cost has
gained significantattention in fieldsof economics andfinance. In simple
terms, it means thebenefits lost by notselecting the secondbest alternative indecision-making.
Although it is simple
to comprehend, it isdifficult to quantifyoriginally. Moreover,
opportunity costhas two maincharacteristics:
Recurring natureand incremental
opportunity cost andMulti-entity cost.
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crores. A conventionalconcept would considerinterest amount that canbe earned on 4 croresas opportunity cost. Forsimplicity of calculation
again, assume the interestrate is 10%. If the companyhad not invested moneyin acquisition, it wouldhave earned 40 lakhsper annum as interest. Aconventional conceptdoesnt take into accountthe possible gain that canbe garnered from this interest amount.Say there are 3 possible options for utilizing
this income:1) It is possible that the company may invest thisinterest amount in diversified portfolio of equity,preference and bonds or debentures with overallpossible return of 10% on an investment. Anadditional income of Rs. 4 lakhs per year wouldbe generated. This shows recurring nature of anopportunity cost. It is, unlike traditional concept,not only the interest amount that is about to belost but also the amount that can be gained oninterest amount.
2) The company may start to produce Lemon orChilly pickle. The profitability lost on sales of theseproducts is also an opportunity cost for the firm.
3) The company can itself develop better facilitiesfor materials management from income of interestand bring down its input cost significantly. Now,say if the cost (input cost) is brought down to Rs.40 lakhs per annum, the whole capital budgetingdecision of acquisition of supplier firm provesfallacious because at input cost of Rs. 40 lakhs,
F
inGyaan
the Net Present Value ofproject would be zero.
Opportunity cost is hard toquantify at times taking intoconsideration time, energy
and other factors. Moreimportantly, its principles ofmulti-entity opportunity costand incremental opportunitycost should be paid moreheed to. These principlesapply pervasively and can be
seen in any commercial orpersonal relationship. Say,
a 21 year old boy has been in love witha girl in his class but out of apprehensions and
shyness, he doesnt enable his mind to peel backcurtain on what is going on inside a heart. The boyhas been facing this dilemma for last 6 monthsand has evidently lost possible affirmation of girl,who also somewhat likes him. This possible-to-be committed relationship is a boys opportunitycost. Because since the time he fell in love, hismind has somehow always chosen silenceas the best option and probably speaking upas second one. Moreover, the boy is bound toface incremental opportunity cost gradually and
episodically. An opportunity cost of possiblecommitted relationship gets enhanced with thepassage of time. Say, the boy begins to be moredefensive or even desperate for this matter, theopportunity cost gets enhanced. If the boy plansnot to talk to her to avoid emotive reactions, thiscost adds another incremental cost of losing outgirls attention more and probably increasing anopportunity for another guy. This incremental costis linear in relationship with time and actions of theboy. This is, however, a single-entity opportunity
cost approach. The girl may also be waiting for thisboys proposal for a long time and she drifts hermind away gradually thinking boys indifferencetowards the idea of love or any other stereotypefor that matter. Her first best option still remainssame to silently wait for his initiative and atthe end of the day; a multi-entity opportunity costcomes into picture. The cost of not being able tobe the best expressive possible is the summationof both cost borne by a boy and his girl. Hence, anopportunity cost is not simply the benefits lost by
not choosing the second best alternative!
Fig 1: Opportunity cost eminates from Scarcity of Resources
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1950-71
Finistor
y
Studies into the Wealth of Nations have been the
aim of every economist. However, the spectacularrise of some economies, as the rise of Germany andJapan from the ashes of World War II or the rise ofSouth Korea from one of the poorest countries in theworld to the league of OECD members and later therise of China are termed to be economic miracles.It has always been a point of debate if there wasanything miraculous in the development of theirrespective economies or was it just getting thebasics right. If they are really economic miracles,are there any ways to emulate these economicperformances? Can we learn a few lessons fromthe economic miracles of the past for the futuredevelopment of other economies?
After the World War II, the United States emerged asthe most powerful nation, while Europe and Asia hadexperienced extensive destruction and loss of life.The reconstruction of a new global economy startedin the 1950s. Between 1950 and 1973 the economicgrowth among the world nations was smooth,without any recessions. During this period annualreal GDP growth of developed market economies
averaged around 5 percent. Over time many Asianand European countries closed the technologicaland productivity gap with the United States. Japanwas one of the first countries to bridge this gapwith US and become the second largest capitalisteconomy in the world by 1970.
Japan was devastated during the World War II. Thehuman loss amounted to 1.85 million, while thematerial loss was about 25% of the nations wealth.Post war, the industrial production has reduced toone-tenth of that of the pre-war level. The increase
in expenditure and commodity shortage resulted inhyper-inflation. With the economy highly dependenton the US aid, the government of Japan laideconomic and corporate strategies with a commonpurpose of catching up with the US economy.
Role of Japanese government in the post
war reconstruction process:With high government activism in national planningand implementation along with powerful monetaryand fiscal policies, Japan witnessed a phenomenaleconomic growth during the period from 1950 to1971. During this period, Japans annual growthin real output was 9.45% while the industrialproduction grew at an astonishing 14.56% per year.Stable relationships were built on a foundationincluding (1) the long-term employment system, (2)corporate governance built on cross shareholdings
among businesses and with other financialinstitutions, and (3) the main-bank system. TheMinistry of International Trade and Industry (MITI),which coordinates national industrial policies,played a significant role in this economic and socialgrowth of Japan.
Japans post war economic reforms:
In an attempt to democratize Japan on both politicaland economic fronts, the so-called economicdemocratization reforms were carried out first.
Zaibatsu dissolution and Agricultural reform:Zaibatsu were big conglomerates of major companiesand banks, often controlled by a share-holdingcompany. To eliminate concentration of economicpower in a limited number of companies, financialinstitutions and landlords hands, zaibatsu weredissolved. In line with the zaibatsu dissolution, thegovernment acquired all the tenant land in excessof one hectare from the landlords and sold them totenant farmers at nominal prices. This resulted inthe drop of percentage of tenant lands from 46%to 10% and increased the number of Independent
farmers.
Priority sector production strategy: To rapidlyreconstruct the economy despite shortages ofcommodities and investment funds, MITI selected
IIM ShIllong
Prasanna Kumar V L V
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Finistory
and nurtured the industries that were targetedas important to Japans future economic growth.Industries so targeted were steel, coal mining,electricity, shipbuilding, marine and railwaytransportation, and chemical fertilizer.
Labor reforms: The rapid creation of labor unionswere caused in part by the breakup of the zaibatsuand poor working conditions with low wages inJapan, and in effect, formed The Trade Union Law.
Banking: Shortage of savings was one of thebiggest macroeconomic challenges that Japanfaced during the postwar period. In order to avoidthe risk of falling into the savings shortage trapwhere a shortage of savings leads to a shortage of
industrial funds, which in turn leads to a limitedproduction capacity, to stagnant income, and finallycomes back to aggravate the savings shortage,Japanese government implemented certain policiesthat were targeted to direct the funds to keyindustries. The policies include the introductionof the fiscal investment and loan program (FILP)and establishment of commercial banks. FILPchanneled public funds to key industries while thecommercial banks actively lent to various businesssectors.
Favorable factors:Due to the newly formed labor law, the earlyimprovements in real wages and workingconditions were significant. In addition, the unions
had compelled management to accept thelifetime employment system with restrictionsof dismissing employees in return for promiseof loyalty and priority to the company. Theimproved working conditions and higherwages achieved by the labor unions expandedthe domestic consumption markets and
contributed greatly to the development of theeconomy.
Investment as a percentage of GDP increasedgradually and high productivity growth wasbrought about by the introduction of foreigntechnology and improved engineering.The younger-generation workforce has beenmigrated from the rural area to cities bycollective employment scheme. Due to the
break out of the Korean War in 1950, the demand formilitary equipment increased steeply and triggered
rapid reconstruction of the Japanese economy.In addition, the world free trade boom created afavorable situation for Japanese exports.
Rapid Growth Period:
Eventually, the Japanese economy entered aneconomic growth process with positively reinforcingfeedback: demand expansionproduction
expansionincreases in incomeconsumption
expansionfurther income expansionincreases in
savingsinvestment growth and an expansion of
production capacity. This virtuous cycle particularly
benefited big businesses in heavy industries suchas metal, chemicals, energy and machinery.
Employers in Japans manufacturing export sector,
with its extremely high growth in labor productivity,
bid vigorously for both skilled and unskilled workers
subject to remaining internationally competitive
at the fixed exchange rate. The wages increased
rapidly resulting in increased purchasing power of
the workers. As in the Scandinavian Model, these
high wage settlements spread into the rest of the
economy, such as non-tradable services, whereproductivity growth was much lower. This resulted
in the increase of prices of services relative to the
prices of the goods. Hence, for 1950-71, Japans CPI,
Fig 1: Factors to Support investment
Fig 2: Key Economic Indicators foor Japan and US, 1950-71
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which includes services as well as goods, beganto increase much faster at 5 percent per year thanits WPI, which contains only goods. But Japansinternational competitiveness in its high-growthtradable sector remained balanced with the UnitedStates.
Shifting focus from industries that require expensiveimports to industries like cars that require lessimports made Japanese exports less expensive.Even though Japans miracle was not export-ledand the country did not begin substantial exportinguntil the 1960s, when the export boom did occurin Japan, it made a strong economy even stronger.
Return to the International Community:
In 1951, the San Francisco Peace Treaty was co-signed with the major allied-force countries, andJapan regained independence. Japan joined the
United Nations in 1956. Japan also joined the
International Monetary Fund and the InternationalBank of Reconstruction and Development (the WorldBank) in 1953, and the General Agreement on Tariffsand Trade in 1955.
Economic Plans that Played a Signicant
Role:
In 1960, Prime Minister Hayato Ikeda, regardedas Japans most charismatic postwar primeminister, challenged Japan to double its incomein the next decade. Under the Income DoublingPlan, consumption was boosted by cuttingtaxes, bolstering welfare, raising farm prices andreducing income inequality. Subsequent planssuch as the Economic and Social DevelopmentPlan (19671971) and the New Economic andSocial Development Plan (19701975) addressedproblems that emerged as a result of this rapidgrowth, such as pollution, income inequality, and
rapid urbanization and concentration. These plansshed light on the importance of balanced economicdevelopment.
How did it end?
The 1973 world oil crisis and its aftermath severelyshook Japans trade-dependent economy. In 1974,the GNP actually shrank by 1.8%, the first suchnegative growth in three decades. Inflation soaredin the economy and unemployment problem arose,
causing Japan to go into a recession for a shortperiod of time. However, the Japanese governmentmanaged to keep economy under control by itstight money policies and again achieved successfulrecovery. For example, Japanese companies startedmanufacturing automobiles that used less oil torun. The economy after the oil crisis stabilizeddue to governments quick response and hightechnological level already achieved. The Japanesealso began focusing on producing electronics such astransistor radios and televisions. The key to recovery
was the boom in exports of cars, electronics, andother products, which grew far more rapidly thanimports. By 1977 Japans burgeoning trade surplushad become a global issue.
Explaining the miracle:
Was the rapid growth really that miraculous? Toanswer this question, we need first to recognizethat during the rapid growth period, there was adramatic increase in working population as well.Many of these workers were moving from relativelow productivity rural jobs to more high-tech urban
ones. Helped by a favorable geographic location inthe middle of the rich raw materials and consumermarkets of the Pacific rim countries, the availabilityof technology that could be purchased cheaply,low defense expenditures, cheap raw materials(at least until the 1970s), a favorable exchangerate deliberately set by the United States at Y360to $1, and open export markets, Japan was bound,miracle or not, to overcome the two decades oflean years caused by militarism and war. To thismust be added such human factors as a legal
system that encouraged big business, an educationsystem geared to producing highly skilled workersand a high rate of personal savings (up to 25% offamily income or four times that of the average USfamily in this period) that helped Japan find capitalto invest in export oriented industries. In additionto these basic factors, the governments activismin designing suitable policies and implementingthem effectively also contributed its bit. Knowingthat any other might not face the exact socialand economic conditions, it might not be possible
emulate this stellar economic performance.However, the learning from Japans rapid growthperiod can certainly be applied wherever possiblein the amount applicable.
Fig 3: Sustainale Growth
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encourage more of women participation andSHGs in availing microfinance. There will be a
sense of freedom among the women in startingtheir own ventures. But the questions thatarise here are hard to deal with like Will thisbank for women serve the entire country? Ifyes, how long will it take to roll out across thelength and breadth of India? Will it go to thehinterlands, where bulk of our disempoweredand un-creditworthy women live? What is thatextra which will make it work even whennationalized banks and micro-credit institutionsare struggling to include people at scale in
rural areas?In the era of online and mobile banking,people hardly bother to visit banks. Soopening up women banks will require a hugeinvestment and infrastructure to be built.Such banks will be more profitable and willbe able to generate more business in ruralareas. Many microfinance institutions have
I was eagerly waiting for this years unionbudget after dismal performance of UPA 2 seems
all encapsulated with scams and scandals. Butwomen centric budget is like thinking out ofthe box and it completely took me with surprise.Will it be the last dice thrown by FM before thenext year general elections or will it be going togenerate more women entrepreneurs in future?Let us analyze it in detail.
Quite naturally, there are positives as well asnegatives by opening a women-oriented publicsector bank (PSB) with an initial capital infusionof 1,000 crore. The question is how much
will such a move create an impact? But onething that remains undoubtable is that termslike women empowerment and financialinclusion will surely get a boost.
Women customers will certainly feel comfortableon being serviced by women bankers.Penetration of such banks in rural areas will
SIIB Pune
Rohit Ranjan
Let's Bank on Women
Indias frst women-only bankproposed : Do we really need one?
Women banks will be more
proftable and will be ableto generate more business in
rural ares
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opposed this move but I think its a positivemove for poor women sections of society who
borrow money from private money lenders torun their business. Competition will definitelyget stiffer but opportunities do seem to emergefrom it.
Addressing the gender related aspects ofempowerment; it will certainly fulfill a socialgoal. A women run banks arelikely to attract women clients,promoting inclusive financingand other women livelihoodschemes.
But did we need to startsomething new like this in acountry where there are 26nationalized banks, 21 privatesector banks, 34 foreign banksand numerous cooperative andlocal banks? Such moves createa serious doubt on our ownavailable resources.
To look at an example, a similar banking modelwas started in Pakistan 14 years back in the
name of First Women Bank but it didnt go along way. It currently has only 38 branches allover and the work culture is corporatish.
On the contrary, let us witness the success storyof India Post which, through its infrastructureand network, has implemented many plans intoaction. It has more than 1.54 lakhs post office
branches out of which around 90% are in ruraland semi-urban areas. Each post office has
been providing banking services like Post OfficeSavings Bank to people for decades. Peoplewho grew up in rural areas without banks, orin places where petty bankers were too strictto entertain the illiterate villagers, know whereto go for the safe-keep of their precious money
that little window at theirneighborhood post office.
Its not a long trek to thepost office. There is a postoffice for every 7176 people
in the country. In rural areas,the coverage is even better one for every 5682 people.Even when the same UPAgovernment was struggling tofind a way to transfer the wagesfor NREGA beneficiaries, it wasthis network that came to itsrescue. About 2.2 crore people
get their NREGA payments through the postoffices today.
People in rural and semi-urban areas who arefamiliar with the post office savings banks alsoknow that it is the most women-friendly andinclusive banking system where agents evencome home to take your money, update yourpassbooks and even return the money onmaturity. In rural areas, there are about 2.69 lakh
NIVESHAK 23
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Fig 1: First Women Bank Ltd , an all-women bank in Pakistan
A women run banks are
likely to attract womenclients, promoting inclusive
fnancing and other women
livelihood schemes.
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agents who come home to help people, mostlywomen, with banking. Almost all these agentsare also people from the neighborhood and arefamiliar with the beneficiaries. It is a uniquebanking eco-system that only Indian Post canclaim credit for. It is a model that has evolved
over time and is very hard to replicate becauseit is driven by the sheer needs of people, andnourished by trust and relationships.
It will be difficult to establish another systemlike India Post with such network and coverageanywhere in the world. Currently post offices
provide only savings facilities. However, it hasdecided to set up Post Bank of India and is all
ready to apply for banking license by July undernew RBI guidelines to operate as completebanking system.
P. Chidambaram would have been more prudentin utilizing this network to provide financialservices to women at minimal cost. It will takearound decades to establish numerous womenbanks all over India. Will it employ womenagents to provide door to door service to women?What kind of banking guidelines will it follow?There are many questions which have been left
unanswered. Last time they lured farmers byannouncing a relief package which includedthe complete waiver of loans given to smalland marginal farmers. Called the AgriculturalDebt Waiver and Debt Relief Scheme, the 600billion rupee package included the total valueof the loans to be waived for 30 million smalland marginal farmers (estimated at 500 billionrupees) and a One Time Settlement scheme(OTS) for another 10 million farmers (estimatedat 100 billion rupees). This time it should notbe women who fall prey into UPA hands since Ihave a deep regard for poor women and I trulybelieve in saying that They are Bankable.
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FIN-Q Solutions
FEBRUARY 2013
1. Basisswap
2. Idiosyncraticrisk
3. GeorgeSoros
4. BanksName:ShriMahilaSewaSahkariBankCity:Ahemdabad
5. Postocesavingsbank/
Indiapost
6. Mr.DeepakParekh,HDFC,CentralBankofIndia
7. DispositionEect
8. Notching
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Sir, one of my friends, working with anNBFC called me up yesterday and asked me toinvest in an SIP. While mentioning the requireddocuments he also mentioned something likeKnow Your Customer details. I couldnt reply
anything as I have no idea about what it means. Canyou please elaborate what does KYC signify?
Know your Customer is a term commonlyused for Customer Identification Process.RBI first introduced this process through ThePrevention of Money Laundering Act, 2002(PMLA). KYC involves making reasonable
efforts to determine true identity and beneficial ownershipof accounts, source of funds, the nature of customersbusiness, reasonableness of operations in the account inrelation to the customers business etc.
How does KYC help a financial institution?
The major objective of KYC is to combatmoney laundering. Many criminals get theirmoney into the bank accounts using a falseidentity and address. The funds so depositedcan be transferred to other accounts and be
used for buying goods or services. Such transactionsshould be traced by the bank and stopped. KYC guidelinesprevent the banks and other financial institutions frombeing used intentionally or unintentionally by criminalelements for money laundering.
What are the benefits of KYC to thecustomers?
That is a very important question. A keydefence against money laundering is to preventaccounts being opened in false identities.Anyone wishing to open an account will,therefore, be asked for proof of their identity
and address. This does not imply that you are being
suspected of money laundering but, it is to ensure that nocriminal can falsely use your identity to make transactionsthat can be potentially harmful to the interests of many.Hence, KYC protects your identity from being misused andprovides safety to your investments.
Is KYC mandatory?
Yes. According to The Prevention of MoneyLaundering Act, 2002 (PMLA) which came intoforce from July 1, 2005, the Banks, FinancialInstitutions and Intermediaries need to ensurethat they follow certain minimum standards ofKYC. Also, on the part of the customers, with
effect from January 1, 2011, KYC has become mandatoryfor all classes of investors in Mutual Funds (SIP and Lumpsum) irrespective of investment amount.
What is the procedure for complying withthe KYC guidelines?
To be KYC compliant, you need to fill a KYCform which is available with your investmentor the mutual fund consultant. Along withthat you need to submit a valid identity andaddress proof. The data is then updated into
Credit Information Bureau India Limited (CIBIL) database
and checked for your credit worthiness.
Is KYC a one-time process?
For investment in Mutual funds, KYC isa one-time verification process and need notbe done again though you might be investingin multiple mutual funds. On the other hand,banks can ask for your details again even if
they had complied with the KYC norms while openingthe account. This happens when the transactions in the
account are observed not consistent with the profile. Thisis just to confirm that the account is not being used forany Money Laundering or any other criminal activities.
Is government doing something to bringawareness about the KYC process amongst thecustomers?
The RBI is determined to bring awarenessabout this concept among all of us. With thesame in mind, KYC day is celebrated on August
1 every year in major banks around the country.
Thank you so much SIr, for the explaination.
CLASSROOM
FinFundaof theMonth
Know Your Customer
NIVESHAK 25
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omIIM Shillong
Himanshu Arora
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F I N - Q
1. Name a famous Hollywood star after whom a stock index is named includingthe names of all companies that have a connection to the star
2. What is the term for an agreement between a company and its top executives
giving substantial benefits (usually in the form of stock options or cash
bonuses) in case the employment is terminated?
3. X, perhaps the most important asset anyone can possess, is a fabric composed
of 25% linen and 75% cotton. X has tiny red and blue synthetic fibers of
various lengths evenly distributed throughout the length and breadth. Identify
X. (Niveshak wishes you have lots of X in your life)
4. X is the bond index named after Y, an U.K. headquartered bank. Y was also
involved during the LIBOR scam. Identify X?
5. Bullish market refers to an upward trend in the market. What is the term that
refers to no significant movement of the stock market index?
6. He started his career as a runner in bank whom he mistook as a law firm by
its name in the employment ad and later went to introduce one of the most
important derivatives in 1972. He is currently the Chairman Emeritus in the
same exchange which launched that derivative. Name the person.
7. This term is used as a charge when a company does not do something
intentionally but recklessly ignores a problem which it has been made aware
of. Name the term.
8. Give the term for the practice of using of unrealized gains on the existing
futures position as margin to increase the size of the position, usually in
small increments.
9. In money market, what is known as non-convertible paper money?
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