From the Vice Presidentâ€™s Desk
Greetings from mjunction! While the developed economies are slowly recovering with the Euro zone exiting recession, activity has slowed in several emerging economies. Growth in India has weakened with continuing sluggishness in industrial activity and services. With inflation at a 7-month high and growth rate slowing to the lowest since 2002, many fear that India may enter a period of Stagflation which is typically an economic rut of stagnation instead slowing economic growth and rising inflation. However, trends like the reversal of the negative growth in manufacturing, rise in freight traffic, a pick-up in exports, good monsoons and a sharp increase in the sown area, is indicative of the Indian economy gathering momentum. But India needs more tightening to address inflation pressure. In the third issue of FJ Connect, we aim to highlight the benefits of Supply Chain Finance, especially in the current liquidity scenario and how financejunction can partner with you to address this crisis and help your business grow.
Vinaya Varma, Vice President, mjunction
PART 1 ECONOMY & MARKET REVIEW
Vinaya Varma, Vice President, mjunction
GLOBAL ECONOMIC OUTLOOK Growth in major emerging markets though still strong is expected to weaken as compared to the earlier IMF Forecast. The emerging market and developing economy growth rates are now down by 3% from 2010 levels, with Brazil, China and India accounting for about two-thirds of the decline. However, growth in the emerging and developing economies is expected to remain strong at 4.5%-5% in 2013-2014 supported by a strong domestic demand, recovering exports and supportive fiscal and monetary and financial conditions.
The International Monetary Fund (IMF) in the World Economic Outlook Report released in October forecasts global growth to average 2.9% in 2013. This is below the 3.2% growth recorded in 2012. However, growth is expected to rise to 3.6% in 2014. Much of the pickup in growth in 2014 will be driven by advanced economies. The output in advanced economies is expected to expand at a pace of about 2% in 2014, about 0.75% point more than in 2013.
IMF Projection in the World Economic Outlook: October 2013 Global growth is still weak. Advanced economies will be the growth drivers and the emerging economies are expected to be weaker than earlier projected 10
0 1.8 1.5
-0.1 0.1 -0.2
Past Data Unites States
Difference from July 2013 WEO Projections Emerging Markets & Developing Economies
0 -2 -4 -6
PART 1 ECONOMY & MARKET REVIEW
STAGFLATIONARY TRENDS IN INDIA The International Monetary Fund's World Economic Outlook has lowered India's growth to 3.8% in 2013 from 5.7% estimated earlier in April on account of poor demand and weak manufacturing and services sector performance. As per the IMF’s recent report, in terms of GDP at factor cost, India's growth is estimated to be 5% in fiscal year 2012, at 4.25% in 2013 and around 5% in 2014. In 2012, India's growth rate was 3.2%, while in 2011 it was 6.3%. The slowing growth rate along with inflation reaching a 7-month high in September instilled fears of India entering a phase of stagflation. However, Finance Minister P Chidambaram is confident that Indian economy will soon regain its momentum and grow at over 5.0% and perhaps closer to 5.5% in fiscal 2014.
GDP at 4.4% in Q2, FY-14 India's Gross Domestic Product (GDP) slowed by a decline in mining and manufacturing stood staggering at 4.4% in the second quarter of 2013. This is the lowest quarterly growth rate since 2002.
Opposite Directions Growth in India’s gross domestic products has been slowing for several years and in recent months the wholesale price index has started the rise at a faster clip
Year-on-Year GDP Growth 10%
The Wall Street Journal
Sources: Statistics Ministry (GDP); Commerce Ministry (WPI)
Indian GDP Annual Growth Rate Percent change in Gross Domestic Products 10
10 9.4 9.7
The economic activities which registered significant growth in Q2 were:
Year-on-Year change in WPI
Community, Social and
9.4% Personal Services
8.9% Real Estate Business Services Trade, Hotels, Transport and 3.9% Communication
3.7% Electricity, Gas & Water Supply
Source: www.tradingeconomics.com | Ministry of Statistic and programme implementation (MOSPI)
INFLATION AT A 7-MONTH HIGH Hitting its highest level since February of 2013, India's headline inflation rate (based on monthly WPI) rose to 6.46% in September from 6.10% in August. July's inflation reading was revised to 5.85% from 5.79%. The build-up inflation rate in the financial year so far was 5.64% compared to a build-up rate of 4.84% in the corresponding period of the previous year. The rising food and fuel prices, weakening rupee are some factors which is adding to the inflationary pressures. The index for food prices rose by 18%, energy costs are up 10% and manufactured goods prices rose by 2.0%. Consumer Price Index (CPI) based inflation rose to 9.84% in September from 9.52% in August.
India Inflation Rate Annual change on Consumer Price Index 10
2.7% Agriculture, Forestry & Fishing
8.07 7.74 7.23
7.56 7.69 7.5 7.55 7.58
4.77 4.58 5.16
Source: tradingeconomics.com | Ministry of Commerce & Industry
INDEX OF INDUSTRIAL PRODUCTION
India Industrial Production Percentage Change Year-over-Year
Pointing to a likely expansion in October Index of Industrial Production (IIP), the Business Cycle Indicator (BCI), lead indicator to IIP, grew 4.5% in September (y-o-y) compared to 4.3% in August this year.
Business Cycle indicator growth (%change Y-o-Y) 6
GDP at 4.4% in Q2, FY-14
IIP grew at a slower pace of 0.6% in August asby a India's Gross Domestic Product (GDP) slowed compared to 2.8% in the previous month. IIP decline in mining and manufacturing stood fell by 1.1% in August as compared to aquarter year ago staggering at 4.4% in the second of 2013. This is the lowest quarterly growth rate since 2002.
PURCHASING MANAGER INDEX (PMI) Signaling a sharp deterioration in the business activity, the HSBC India Composite Output Index declined to its lowest in four and a half years to 46.1 in September from 47.6 in August. While the fall in manufacturing production eased, there was a sharp decline in the output of the services sector. The HSBC Services PMI was at its weakest since April 2009. It slipped from 47.6 in August to 44.6 in September. The HSBC Manufacturing PMI for the manufacturing industry stood at 49.6 in September, higher from 48.5 in August.The PMI's new business index was at its lowest since February 2009 as it fell to 45.0 in September from 46.6 in August.
Source: www.tradingeconomics.com | Ministry of Statistic and programme implementation (MOSPI)
KEY POINTS Service sector output contracts at sharp pace New business received by private sector firms decreased at quickest pace since February 2009 Private sector employment falls for first time in 19 months
HSBC India Composite Output PMI 50 = no change on previous month. S.Adj
Increasing rate of growth 65 60 55 50 45
Increasing rate of concentration
Manufacturing and services PMI
India Inflation Rate Annual change on Consumer Price Index
7.50 7.50 7.00
6.50 6.00 5.50
Source: tradingeconomics.com | Ministry of Commerce & Industry Source: Market Angel Research, Note: Level Above 50 indicates expansion
The Dun & Bradstreet (D&B) Composite Business Optimism Index for October-December 2013 stood at a18 quarter low of 134.9, a decrease of 4.2% as compared to the same period last year. The index for June-September of 2013 stood at a 130.6. While the index has marginally improved compared to the previous quarter, it still lags behind the Q4 2012 level.
BUSINESS CONFIDENCE DROPS TO THE LOWEST The uncertainty in the global markets and domestic factors like weak industrial growth, weak FII inflows, slow progress in project clearances and regulatory hurdles continue to destabilize business sentiment and test the confidence of business community resulting in the business confidence of India Inc for OctoberDecember quarter dropping to the lowest level in 4.5 years.
Source: Dun & Bradstreet (D&B)
Dun & Bradstreet (D&B) Composite Business Optimism Index- Oct-Dec 2013
64 220.0 62
• Increased the policy Repo Rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 7.25% to 7.5% with immediate effect
The Reserve bank of India (RBI) has now turned its focus to addressing internal determinants of the value of the rupee, primarily the fiscal deficit and domestic inflation.
• The Reverse Repo Rate under the LAF stands adjusted to 6.5% and the Bank Rate stands reduced to 9.5% with immediate effect • The MSF rate and the Bank Rate are recalibrated to 200 basis points above the Repo Rate
To address tendency of the stagflationary trends, the RBI plans to closely and continuously monitor the evolving growth-inflation dynamics with a readiness to act pre-emptively, if necessary. The policy stance and measures set out in the Mid-Quarter Monetary Policy Review (September 2013) aims to restore normalcy to financial flows and mitigating exchange market pressures and creating a conducive environment for the revitalisation of sustainable growth.
Key policy rates
Reverse Repo Rate
9.00 8.00 7.00
In the Mid-Quarter Monetary Policy Review in September, RBI implemented the following measures:
• Reduced the Marginal Standing Facility (MSF) Rate by 75 basis points from 10.25% to 9.5% with immediate effect
• Reduce the minimum daily maintenance of the Cash Reserve Ratio (CRR) from 99% of the requirement to 95% effective from the fortnight beginning September 21, 2013, while keeping the CRR unchanged at 4.0%
Source: RBI, Angel Reserch
Mibor & Base Rates
Axis - Base Rate
HDFC Base Rate
SCB - Base Rate
MIBOR - 3 month
11 MIBOR - 1 month
PART 2 RBI POLICIES
Q4 2002 Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013
Mibor is largely used only for inter-bank borrowing and lending. The Mibor is currently used for majority of deals struck for interest rate swaps, forward rate agreements, floating rate debentures and term deposits. It is used as the
GROWTH AND SIGNIFICANCE OF SUPPLY CHAIN FINANCE In January last year both the International Chambers of Commerce and International Monetary Fund predicted a dip in the demand for trade finance products. They cited the lack of credit and liquidity from banks, the capital restrictions and the global economic uncertainty. However political, economic and geographic risks reducing the financing of larger capital projects are fueling the need to mitigate supply chain risk through new alternative finance models. The new technology driven supply chain finance models like models based on pre-shipment finance and early payment discounting, alternative finance channels, buyer-driven finance and receivables finance (factoring) has emerged in as a viable SME financing model and is seen as a growing market. There is no reason why this trend would not continue through 2013 and expand into new markets.
THE FINANCEJUNCTION SOLUTION financejunction provides an array of supply chain finance solutions like Channel Finance, Insta Loans and Buyer Finance which aim to improve an organisationâ€™s ability to put financial resources to their most productive use. Our SCF solutions not only make your supply chain robust but also give the ability to react quickly enough to adjust strategy to current market situations. Our SCF solutions service both the sell and buy side of the supply chain. On the supply-side, we aim that the supplier has access to funding to ensure
base rate for deciding the interest rates for loans, savings and mortgages. At the same time, it is also used as a base rate for many financial products, which includes futures, options and swaps. The Mibor rose sharply in July 2013. Since Mibor is used as a yardstick for inter-bank borrowing and lending and interest rates for loans, the rise in Mibor led to a corresponding rise in the base rates. The rates at which banks borrow increased which was resulted in a rise in the interest rate for loans which increased the cost of funding.
Dependent on technology-driven platforms, corporates are seeing the benefits of helping their channel partners with working capital challenges and the process efficiencies and cost savings of B2B integration and e-Invoicing. A report that surveyed corporate heads of SCF revealed steady growth. The SCF market is predicted to grow (in terms of turnover) by between 10%-20%. By offering their channel partners SCF, corporates have a double benefit. By holding on to their cash for longer, the channel partners optimize their working capital and they also help mitigate the growing concern of insolvency risk within the supply chain. This enables corporates to run efficiently and allows them to invest in other areas such as sales or acquisitions, thereby promoting growth. Small and medium enterprises (SME) globally are still struggling to get access to credit and by leveraging the credit rating of their customers, SCF provides them an alternative finance option at competitive rates.
timely inventory production while minimizing the borrowing cost. On the buyside, we aim to get the buyer optimal payment terms and discount options via early invoice payment over interest on cash. Both buyers and suppliers have two foundational interests ensuring liquidity through all stages of the supply chain and increasing visibility into both physical (inventory) and financial aspects (funding) of the supply chain. By par tnering with banks on one end and the buyers and sellers on the other, financejunctionaddresses all these requirements by offering largely unsecured finance at competitive rates.
The Competitive Framework. Source: Aberdeen Best In Class Process
SCF decision-makers have access to external trading partner financial information 28%
Ability to segment trading partners to prioritize SCF enablement 53%
Single platform to bring buyers, suppliers and financial institutions together 15% Performance
Executive management actively collaborates in the organizationâ€™s supply chain initiatives 68%
Ability to access SCF at Various stages in the supply chain 44%
Online visibility into financial supply chain events 64%
Online visibility into shipment status and in-transit invetory 64%
PART 3 SUPPLY CHAIN FINANCE
Mibor (Mumbai Inter Bank Offered Rate)is the interest rate at which banks can borrow funds, in marketable size, from other banks in the Indian interbank market. It is an overnight lending rate calculated daily by the National Stock Exchange of India (NSEIL). This rate is given to first class borrowers and lending institutions, and is based on an average of lending rates offered by major banks throughout India.
CASE STUDY financejunction introduces ‘Fixed Arrangement Fee’ structure for Channel Finance Customers
The Client A Channel Partner for leading steel major partnered with us to avail our Channel Finance program. They are distributors for Bihar & Jharkhand and have branches in Jamshedpur, Ranchi, Dhanbad, Koderma, Gaya and Patna.
The Business Challenge
financejunction Diary Events that kept us busy
Fee Model limited them from rotating/churning their channel finance limits. As per the Variable Arrangement Fee Model, a certain percentage was charged per transaction.
Cost of Finance
Implementation of ‘Fixed Arrangement Fee’
I. 6 times increase in channel finance availed ii. Cost of finance reduced by 79.28% iii. Improved net margin and profitability
The Approach The SolutionIn February 2012, the Fixed Arrangement Fee, calculated as a certain financejunction percentage of the channel finance limit the steel major granted for the channel partner, was implemented. The Fixed Fee + Applicable introduces Fixed Service Tax & Education Cess would be payable quarterly at the beginning of the quarter. Arrangement The objectives of the Fixed Fee model were: 1. To lower the overall borrowing cost which would have a positive Fee impact on the channel partner’s net margin and profitability financejunction understood their pain point and reworked the existing arrangement fee model to bring it in line with their expectation. They restructured the variable arrangement fee model and introduced the Fixed Arrangement Fee model. The Fixed Arrangement Fee would enable them to avail channel finance at an interest cost which is one of the most competitive on an unsecured basis in the industry without having to pay a fee each time they utilized the funds.
2. To reward and recognize the channel partner for using channel finance as a preferred route for making payments to the steel major 3. To ensure that they meet their sales target set by the steel major.
Results & Achievements The Channel Partner benefitted greatly by migrating to Fixed Arrangement Fee structure in February 2012. 1. Increase in Channel Finance availed: After switching to the Fixed Fee Structure, the channel finance availed increased by over 6 times in the 20 months (Feb’12-Sep’13) as compared to 20 months (Jun’10-Jan’12) earlier. 2. Lower Cost of Finance: The cost of finance reduced by 79.28% which resulted in a saving of Rs. 9.64 lacs (Feb’12 - Sep’13). financejunction thus helped the channel partner increase their net margins which in turn helped their business grow.
FINANCEJUNCTION DIARY: EVENTS THAT KEPT US BUSY • The Indian Coal Markets Conference, 24-25 September 2013 The 7th Indian Coal Markets Conference & Awards Dinner was organised by mjunction and IHS McCloskey on 24-25 September at The Westin, Gurgaon. The conference saw a rich participation of more than 200 delegates from the coal value chain of 9 countries. Awards in 7 categories were bestowed upon organisations to recognise their commitment and service to their customers. Among the prominent speakers were former Coal Secretary Alok Perti, Planning Commission Energy Advisor I A Khan and former Power Secretary R V Shahi, Coal India Limited Director (Marketing) B K Saxena.
PART 4 FINANCE JUNCTION DIARY
• ejunction Convocation, 19 September 2013 The convocation ceremony for the first batch of the ejunction and ISR™ (Individual Social Responsibility), an employee volunteering program of Apeejay Surrendra Group, partnership and the 44th batch of the Godrej Waterside centre was held on 19 September, 2013 at our Godrej Waterside premises. The convocation was attended by senior officials of both mjunction and Apeejay. The CEO and MD of mjunction Mr Viresh Oberoi and the ejunction. The managing trustee Mr Suvajit Chakraborty were among those who attended the convocation. From Apeejay, the director Mr Ashok Ghosh, Chief Technology Officer Mr Subhashis Saha and the VP Technology & Corporate Communication Ms Renu Kakkar attended the ceremony. In the last quarter 132 ejunction graduates found employment with companies like PWC, Ambuja Neotia, Globe Facility etc.
CLIENT APPRECIATION “From the overall perspective channel finance has helped us, in a big way, in the success that we have had in our retail business. Because at any given point of time, there might be instances when our distributors may need a little bit of financing support because there are some dealers who take some credit and there Tata Steel does not encourage credit sales to our distributors. Therefore channel finance is a big tool which has been used quite successfully over a period of time and I think it has stabilized in a very significant manner as of now. So, all our distributors, barring one or two, are under the channel finance programme with various banks but obviously the gateway is mjunction, and the kind of service provided by mjunction and the banks is quite appreciated by the distributors over a period of time.” Mr. Ashish Anupam – Chief of Marketing & Sales, Long Products, Tata Steel
“Channel finance has been a good service for us as I had explained. It gives the required liquidity to our distributors because they operate in a very credit intensive environment and for them to survive in the environment, cash is an important issue. Availability of cash has been made easier by channel finance. Also, the channel finance is providing the facility for them of getting very competitive rates, which has reduced their cost of finance.” Mr. Sharad Sharma – Chief of Planning at Long Products, Tata Steel
mjunction is the largest ecommerce company in India. It is a 50:50 venture promoted by the Steel Authority of India Limited (SAIL) and TATA Steel.
mjunction Services Limited Godrej Waterside Tower – I, 3rd Floor, Plot No. 5, Block – DP Sector – V,Salt Lake City, Kolkata – 700091, WB, India Tel: +91 33 6610 6100 Fax: +91 33 6610 6187/ 6179 +91 33 6601 1719 / 1720
TATA Centre, 43 Jawaharlal Nehru Road, Kolkata 700 071 Tel: +91 33 6610 6100 +91 33 2288 2606 Fax: +91 33 2288 2078