Category Archives: Finance

How Will India Become The #2 Economy …

… if it can’t get control of the rampant bribery that plagues the entire country? From what I’ve been reading, the situation hasn’t improved any since KPMG did their 2008 study that found that 84% of Indian Businesses pay Bribes (as quoted on hindustantimes.com). According to this recent article over on NDTV, India [is still] among the top bribe paying country (according to a recent Transparency International study). According to the recent study, 1 in 2 Indians (54%) have had to grease the palm of authorities to get things done. Even more worrying is that bribes to the police have almost doubled since 2006 and bribes to judiciaries for registry and permit services are up as well. In other words, it’s not the private sector that is the problem, it’s the public sector!

And if the public sector is the problem, which is especially true in Bangalore which tops in India’s bribery chart (commonfloor.com), how are they going to continue to grow in a global economy when country after country is adopting anti-bribery laws, like the Foreign Corrupt Practices Act in the US or the Bribery Act in the UK (that follows the recommendation of the OECD Anti-Bribery Convention that is attempting to eradicate bribery in all of the 34 member countries). Especially when the problem is so bad that it’s said that even [the] blind are witness to bribery in India (thaindian.com)?

I don’t have any answers. Some people are suggesting that legislation may be the answer (equitymaster.com), but if officials can be bribed to ignore it, it won’t solve the problem. If you have any ideas, please feel free to leave a comment.


Bribe, bribe, everywhere a bribe
Preventing the transaction, breaking my bank
To do this or do that, you must make a bribe

If Basel II Crippled Trade Finance, Will Basel III Stifle It?

Last year we discussed how Basel II is crippling trade finance, but it looks like the worst might be yet to come. According to some reviewers, Basel III, the forthcoming update to the Basel Accords, might stifle it.

As per this recent article in the Financial Times, the top 35 banks will face a $100 Billion Basel III shortfall in equity capital after the new regulations are imposed, with 90% of the shortfall concentrated in the biggest six banks. Barclays Capital estimates that the banks will need to hold top-quality capital equal to 8% of their total assets.

Not only will the Basel III reforms force banks to increase the risk adjustment for big swathes of their business, but it will gradually tighten the definition of what counts as tier one capital, putting many of the US banks who are already on shaky ground on top of a fault line. This could force banks to curb lending to the real economy or raise borrowing costs.

Plus, as described in this post over on the Reuters blogs, when credit in an economy is growing faster than the economy itself, a countercyclical capital buffer kicks in, which essentially says that banks need to have more capital in good times. So, instead of the 7% common equity, 8.5% Tier 1 capital, and 10.5% Tier 2 capital, the banks will need 9.5% common equity, 11% Tier 1 capital, and 13% Tier 2 capital.

And that’s just the beginning. In 2015, the liquidity coverage ratio gets introduced and then the net stable funding ratio arrives in 2018. And the committee is reviewing the need for additional capital, liquidity, or other supervisory measures to reduce the externalities created by systemically important institutions.

While stronger measures are obviously needed, as the economy cannot afford another Bear Stearns, if it’s too much, too fast, will the banks be able to handle it?

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Life Lessons from Clown College: II

   

First of all, let me apologize for taking so long to write Part II. I never expected such an overwhelmingly positive response to my previous posts, and it went to my head, and like a writer who wins a National Book Critics Circle Award for their first novel, I developed a severe case of writer’s block because the last thing I want to do is disappoint you. But thanks to some prodding, and the realization that I don’t have to tackle it all at once, I was able to capture three more life lessons that I learned in clown college that I’m sure will help you in your Procurement Career.

  • Learn to Barter (because it’s all funny money in the end)
    Not all purchases should involve exchanges of currency for goods or services. When possible, and especially when the deal is with a strategic supplier or partner, an exchange of goods or services should be considered. For example, if you’re a temporary labor placement agency buying software from a foreign IT company that needs temporary labor in your home country, consider an exchange of services in lieu of paying for support or future upgrades. Not only will this reduce cash-flow requirements in a tight economy, but it protects you from currency exchange risks in countries with unstable currencies undergoing fairly rapid inflation or deflation.
  • Be Cognizant of the Risks
    Those of you who don’t might end up without a job just like Fred ended up without a head. I didn’t know No-Head Fred, but, thanks to him, my entire class knew why you didn’t stick your head in the mouth of a hungry lion who didn’t like you. Fred didn’t understand that a lion could bite your head off and, as a result, didn’t insure that the lion was fed before performing the stick-your-head-in-the-lion’s-mouth trick. However, since the rest of us understood the risk, we always insured that the lion was fed and happy before performing the trick, and we all kept our head. Now that trade is truly global, this is one of the most important lessons for a Procurement Professional. If you’re not cognizant of the risks, you’ll never know when you might lose an entire shipment, or, if you’re not careful, your life. While a short-cut off the coast of Somalia in a shipment from Mumbai to Adan (for example) might seem like a good idea at the time, it won’t seem like such a good idea when Pirates are boarding you. North of Seoul might be the last place you want to build a new plant if North Korea declares war on South Korea. I know the risks aren’t always this big, but they can be, and if you’re not cognizant of them (and do not take the necessary precautions), you could lose your head over them.
  • Don’t Be Afraid to Laugh at Yourself
    Just like the situation gets a little tense in the dressing room when you have a poorly-timed wardrobe malfunction, negotiations in challenging economic times can get so dire that you couldn’t even cut the tension with a knife. In these situations, the only way to break the tension-ice is with a good hearty laugh, but no one is going to laugh unless you laugh at yourself first. In the first situation, the only thing you can do is look down and let out the heartiest laugh you can. In the second, you’ll have to make a slip of the tongue that’s so funny that you can’t help but laugh heartily at yourself. For example, if you were buying ball bearings and you accidentally called them bears’ balls, I’m sure laughter would break out.

I hope you enjoyed these life lessons. Until next time, please join me and eleven of my friends as we take a ride in our clown car.

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Want to Get Ahead? Speak the Language of the CFO!

For those of you who have been following the thought leaders in the space, you know that Robert Rudzki has been advocating that the key to your success is to Speak Like a CFO (Part I and Part II) for quite some time now. The reason? It’s often the fastest way to gain respect in a C-Suite that runs on financial metrics.

However, thanks to the jobless recovery, it might also be the fastest way for you to get ahead. As per this recent article in CFO Magazine on “the incredible shrinking finance department”, a combination of increasing automation, new business models, and offshoring has pushed down the average size of a finance staff by 30% over the past six years (according to The Hackett Group). Furthermore, as CFO’s are more concerned about how can I save my company than how many jobs can I save, the jobs that went away, usually to offshore locations, aren’t likely to come back to the states — ever. As a result, the majority of CFOs (75%) plan to keep domestic finance head count steady in 2011 (while only 15% plan to hire).

This means that Finance departments are going to continue to be lean, mean, and as overworked as anyone else in the organization. So when you come to them with a great proposal that’s in your language and not theirs, it’s yet another report they have to analyze and do a cost-benefit analysis on before they can judge how good your proposal is relative to the dozens of other proposals on their desk that require the same sort of analysis on which to make a decision. A task that they just don’t have a lot of time for.

But if you come to them with a proposal in their language, with all of the ROX (ROI, ROIC, and ROE) metrics, the impact on cash-flow, the internalized rates of return, and the cost of delaying the decision on a daily, weekly, and monthly basis, all of sudden your proposal (assuming it does have a significant return) becomes many times more attractive than everyone else’s. They not only see the value immediately, but they see that you are trying to help them accomplish their goal of saving the company by insuring that it doesn’t spend more than it can afford to in this tough economic climate.

So learn the language of the CFO. It might just make you the organizational superstar you know you can be.

Should Companies Really Be Building Their Own Credit Scoring Capabilities?

As per a recent article in Market Watch on “supply chain risk companies must develop credit scoring capabilities to predict supplier defaults says oliver wyman report”, a new report issued by Oliver Wyman, in collaboration with the Association for Financial Professionals, suggests that companies must develop their own credit scoring capabilities to prevent supplier defaults from jeopardizing their supply chains. In “The New Weakest Link in Your Supply Chain: Supplier Credit”, they say that companies can no longer rely solely on credit ratings from credit rating agencies to evaluate their suppliers’ financial vulnerabilities.

While I agree that credit scores are not enough, because it can be a few months before a credit score reflects a supplier with failing financial health as it will typically take a few months of missed payments before the credit score accurately reflects the supplier’s financial health, I don’t think that developing sophisticated scoring is the answer. First of all, your average company is not going to have the expertise to even begin such an exercise. Secondly, the whole point is to detect when a supplier might be in financial distress, not score them.

Would not careful monitoring of shipments, payments, and quality be enough? Most suppliers who are in distress are going to either be late with payments, late with shipments, or cutting corners in production, leading to a drastic decline in quality. If you can catch this behaviour early, then you can tell when a supplier might be distressed and start to make back-up plans, all without sophisticated credit scoring. And that’s what’s important. Not how much complexity you can throw at the problem.

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