5 Ways to escape the Credit Death Trap for todays, young professionals

1) Live within your means – An often used statement seldom put into practice. But, one that holds a lot of weightage when it comes to ensuring you bypass the credit debt trap. Better opportunities, higher pay packages, lifestyle changes are some reasons why young professionals often risk living on credit. But better financial sense should prevail in restraining those that enter into such risk.

2) Curtail unnecessary expenditure – If you follow the previous advice, there is no need to move into this one. You are doing fine. But, if you haven’t, then control unnecessary expenditure that you can do without. Whilst maintaining your lifestyle, leisure events and other such activities is important, you could do away with the ‘extra’ or ‘largess’ spending.

3) Save – Whilst Indians are known to have the saving ‘genes’ most young professionals now have kept this on the back burner. It’s good to save not just for a rainy day but for everyday, later on, when you would need it the most. Keeping aside a fixed portion of your monthly salary in savings is advisable. If you find it difficult to do that maintain quarterly saving calendars.

4) Invest smartly – All of the above advices are interlinked, leading to investing your saved money in smartly. Whilst the personal finance markets/industry comes up with saving instruments almost every week, what suits you best is what you should focus on. Keep your short and long term financial goals in mind before making any decisions. Take the help of a professional to assist and advise you. Seniors in your family or friends circle could also provide feedback but again the end choices are yours and make them thoughtfully. Beware of the ‘get rich’ schemes and plans thrown at you, research well before letting gullibility take over. And off course do read the fine print carefully. 

Electronic Trading & The Indian Portrait

For many years stock exchanges were physical locations where buyers and sellers met and negotiated. Exchange trading would typically happen on the floor of an exchange, where traders in brightly colored jackets (to identify which firm they worked for) would shout and gesticulate at one another – a process known as open outcry or pit trading (the exchange floors were often pit-shaped – circular, sloping downwards to the center, so that the traders could see one another). 

With the improvement in communications technology in the late 20th century, the need for a physical location became less important and traders started to transact from remote locations in what became known as electronic trading. Electronic trading made transactions easier to complete, monitor, clear, and settle and this helped spur on its development.

By 2011 investment firms on both the buy side and sell side were increasing their spending on technology for electronic trading. With the result that many floor traders and brokers were removed from the trading process. Traders also increasingly started to rely on algorithms to analyze market conditions and then execute their orders automatically. 

The move to electronic trading compared to floor trading continued to increase with many of the major exchanges around the world moving from floor trading to completely electronic trading. 

Trading in the financial markets can broadly be split into two groups:

• Business-to-business (B2B) trading, often conducted on exchanges, where large investment banks and brokers trade directly with one another, transacting large amounts of securities, and
• Business-to-consumer (B2C) trading, where retail (e.g. individuals buying and selling relatively small amounts of stocks and shares) and institutional clients (e.g. hedge funds, fund managers or insurance companies, trading far larger amounts of securities) buy and sell from brokers or "dealers", who act as middle-men between the clients and the B2B markets

The increase of electronic trading has had some important implications:

• Reduced cost of transactions 
• Greater liquidity 
• Greater competition
• Increased transparency 
• Tighter spreads

The uneven pace of financial sector liberalization in India has been a bone of contention for some time. There have been similar disagreements about the manner in which electronic trading has been regulated. Foreign firms have entered India expecting it to be like other developing markets, but have found it much more difficult to compete effectively, facing hurdles in rolling out their services.

In a new report, the growth of electronic trading in Indian exchange-based markets, including equity, foreign exchange, and commodities. The Indian capital markets have gone through a gradual pace of liberalization. Over the last decade, steps have been put in place to allow technologies such as algorithmic trading, direct market access (DMA), and smart order routing (SOR). The country’s financial markets are poised to become international centers for electronic trading.

India's debt markets have experienced rapid growth and along with that electronic trading also risen sharply, with the market growing at a CAGR over 75% since 2005.

Technological change has increased the connectivity of participants, bringing down search costs. A new form of “hot potato” trading has emerged where dealers no longer play an exclusive role. That’s progression out there for you!

NSEL Crisis – Can We Acquit Brokers?

                                                               

Why Brokers are Equally Guilty as Defaulters? ·    They pushed investment into NSEL platform assuring higher yield following internal due diligence as eye-washer ·    Most of the brokers carried out  purchases without clients order and without securing warehouse receipt/delivery order ·    They even collected transaction charges and sales tax for stocks that didn’t exist in warehouses ·    They undertook financing activities in line of NBFC  to earned additional return on money lent ·    They enjoyed lion’s share of arbitrage profit, while NSEL received trading fee only ·     They failed from the perspective of market intelligence being either “deliberately ignorant” about the state of affairs or they simply didn’t care two hoots so longs as their earning and commissions remained intact

Unfolding of crisis at National Spot Exchange (NSEL) involving Rs. 5,600 crore of payment has certainly raised eyebrows on the functioning of very seasoned broking community who have been crying hoarse that they have been taken for a ride, while the Exchange along with its parent company and other group companies has paid a huge price for misdeeds by few key employees, brokers and handful of investors. The person who built the FT edifice has been on judicial custody while the involved key officials have been out on bail and most pertinently no question is asked to the brokers who were very actively involved in the process that led to the massive defaults. Moreover, there is no concrete action against the defaulting members even after one year. All the investors / brokers made financial gains until July 2013 when the market was halted due to government directions. However, entire blame shifted to the NSEL thereafter. Thus the current situation resembles a scenario marked with “multi-polar gain with unipolar responsibilities”.

Willful Participation in T+2 & T+25 Contracts to Make Arbitrage Profits: During 2012-13 the equity markets were not doing well and many brokers participated in T+2 & T+25 contracts to make arbitrage profits. The brokers – supposed to be experts and knowledgeable – participated in the contracts after duly assessing the risks and after exercising due diligence. They pushed investment into NSEL platform assuring higher yield to the clients/investors for higher brokerage income. Meanwhile, many brokers sold these contracts as part of portfolio management.

Funding Clients like NBFC to Earn Additional Return: Most of them also funded their clients to earn additional return on money lent, while luring the clients of 15-16% “risk free annualized return”. The brokers provided funds to their clients at 10-12%, and the clients in turn invested that money on NSEL trading platform expecting to earn 15-16%. Thus the brokers earned 10-12% as interest + 3-4 basis points commission on trades where there was 3-4% 'risk-free' spread for the investors.

Assuring Existence of Stocks in Warehouses: Besides, assuring their clients with regard to return and safety, the brokers even assured about existence of stocks in warehouses. Even several brokers visited warehouses of the borrower members for verification, but never complained to NSEL about missing/shortfall. Again, since some of the brokers were acting as C&F agents, then the onus to check stocks in the warehouse partly falls on them.

Trading without Clients’ Order & Warehouse Receipt/Delivery Order: Even at times, purchases were carried out by the brokers without clients order and even without securing warehouse receipt or delivery order.

Massive Last Minute Client Code Modifications: Again, though changing of client code was allowed on NSEL, it was observed that there were massive “last minute client code modifications” by a single brokers.

Collecting Transaction Charges & Sales Tax for Stocks that Never Existed: What’s more, they even collected transaction charges and sales tax for stocks never existed.

Hence, all brokers failed from the perspective of market intelligence being either “deliberately ignorant” about the state of affairs or they simply didn’t care two hoots so long as their earnings and commissions remained intact.

Now, they are adhering to “Head I Win; Tail You Lose” strategy to safeguard their vested interests. 

Employee Fraud – Back in News

In Dreams Begin Responsibilities: Delmore Schwartz

Employee Fraud – Way Forward from Organizational Perspective

Corporate frauds or white collar frauds are not committed by professional criminals but well-educated employees who know that committing frauds can damage their reputation and destroy/limit career options. While a few recent cases have gained media attention due to the huge sums, almost all financial services organizations grapple with multiple incidents of employee fraud.

What Drives Employees to Commit Fraud?

In the corporate world, fraud occurs majorly due to false representation or disclosure of wrong information and due to abuse of position. From an individual’s point of view, there are three conditions required for employee fraud to occur:

·    Pressures due to Dire Necessity: There could be many reasons for an employee’s overpowering need to commit a fraud, e.g., medical/family emergency, debt, lavish life style, personal financial emergencies, expensive habits, gambling, etc.

·         Taking Advantage of Opportunity: An act for personal gain with least chances of getting caught.

·         Rationalizing Precedences: An employee with a strong need and a reasonable window of opportunity to commit fraud can find ways to rationalize his/her act.

Preventing Employee Fraud

This can be addressed through a three -pronged approach:

A. Organizational Policy: Having a set of unambiguously drafted and unequivocally articulated organizational policies relating to employee fraud is a pre-requisite. These include policies pertaining to fraud:

·             Prevention: Employee background checks, compulsory job rotation, avoiding potential conflicts of interest, access to sensitive data, etc.

·                 Detection: Maker-checker-auditor approach, vigilance squads, compulsory leave, multi-level customer interaction, whistle-blower protection, etc.

·       Management: Internal investigation process, disciplinary actions including criminal proceedings, etc.

·                      Communication: Detailed and continuous communication of these policies is necessary to drive a clear understanding of expected behaviours.

B. Organizational Incentive Processes: Rewarding short-term achievement could end up incentivizing behaviour, which may not be in line with organization’s long-term goals. Disproportionate focus on the year’s KRAs against long-term contribution and value creation could result in employees taking a short-term approach to their work.

·         Setting Target at Reasonably Stretched Level: While “stretch” targets are necessary, setting them at unreasonable levels may tempt employees to take short cuts.

·         Fostering Right Management Attitude: While an over-aggressive attitude of management toward profitability and performance can lead to an environment that is ripe for fraud, a lax attitude toward internal controls and valuing ends over means can also result in pitfalls.

·         Uniform & Consistent “Zero Tolerance” Policy: As the way an organization responds or reacts to detected fraud cases plays an important role, a swift, uniform and consistent “zero tolerance” policy is sine qua non.

·         Timely Communication: Timely communication to all employees without compromising on confidentiality helps in reducing speculations, building transparency and making employees partners rather than just recipients of management actions.

C. Organization Culture: Perhaps the most important and least appreciated aspect is the impact of the prevailing organizational culture on employee fraud.

·         Ensuring Daily Observance of Value Statement: A well-articulated organizational value statement/code of ethics/conduct is the hygiene factor, while actual daily observance by each member within an organization is the real differentiator.

·         Healthy Precedence: The way leaders/managers are rewarded and the way their careers are affected go a long way in shaping the personal career strategy of an employee.

·         Uniform Philosophy on Integrity – Irrespective of Environment: An organization’s overall philosophy on integrity in the external environment is also important. An organization that aims to be a model corporate citizen with a “clean” image is more likely to inspire a high standard of behaviour among its employees.

Organizations – Victims of Employees Fraud

·         Reebok India: Mr. Shubhinder Singh Prem & Mr. Vishnu Bhagat (former COO)

·         Tata Finance: Mr. Dilip Pendse & his associates

·         United Bank of India: Ms. Archana Bhargava (Former CMD)

·         NSEL: Mr. Anjani Sinha (Former MD & CEO), Mr. Amit Mukherjee (Former AVP – Business Development) & Mr. Jai Bahukhandi (Former AVP – Warehousing)

Conclusion        

Employee fraud – being a complex issue – requires a multi-pronged approach, consisting of employee-friendly HR policies, intelligent organization design and control systems, clear organizational policies, smart incentives and leadership by example.

Financial Inclusion (Engulfing the generic clique)

“The case for financial inclusion is not based on the principal of equity alone; access to affordable banking services is required for inclusive growth with stability.

Achieving financial inclusion in a country like India with a large and diverse population with significant segments in rural and unorganized sectors requires a high level of penetration by the formal financial system.”

-          Smt. Usha Thorat, Deputy Governor, Reserve Bank of India

Financial Inclusion- providing access to financial services for all has gained prominence in the past few years as a policy objective in all countries of the world. Financial Access 2010, a report of the World Bank released in September 2010 estimates that about half of the households in the world have no access to a bank a/c. A cross country analysis using Financial Access 2010, data indicates that a 1% change in GDP per capita is associated with a change in around 0.3 to 0.6 % in the no. of deposit accounts per 1000 adults.  CRISIL has launched an index to measure the status of financial inclusion.

One of the real time leading examples of financial inclusion that depicts agricultural empowerment in the exact sense is The NSEL commenced connecting the farmers through an efficient platform by facilitating direct selling of agro produce to consumers with integrated delivery systems and assured security. It thereon had a progressive ripple effect in the overall castor seed economy. Gujarat and Kerala have been success stories to reminisce for years to come.

Due to price transparency in the electronic markets, financial inclusion has flourished and trade participants are aware about price levels at the spot exchange. Farmers having an alternative market platform could negotiate a better price.

Therefore, the bottleneck of location gets eliminated and on the flipside supplementary benefits trickle in. Single terminal access to buyers makes buying decisions nippy.  Institutional interference in agriculture marketing is a changed vista altogether. 

Financial Inclusion, in a lay man’s language is highlighted as:-

v The delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society.

v Financial Inclusion has only gained importance since the early 2000s.

v A stark example of financial inclusion in India is the Aadhar-linked bank accounts planned by RBI. Such is a step to meet its commitment in financial inclusion.

v The long struck disease of debt-traps over the poor people will be eliminated. Unlawful money lenders and corruption have been a devastating curse.

Hence, there are transformational steps need to be taken to achieve greater financial inclusion. Let us deliberate on specific key elements:-

ü Relaxing KYC norms

ü Advancement of technology

ü Rural evolvement and progress

ü Simple and basic structure of operations

Important pressing needs makes focusing brain lens on financial inclusion indispensable, such as:-

v Inculcating savings habit

v Providing formal credit avenues

v Plugging gaps and leaks in public subsidies as well as welfare programs

Reserve Bank of India is realizing the value of banking for the poor and such vision has come into action by NSEL being the torch bearer. Such is the metal to move past stagnation and advance towards sustainability.

Along with RBI’s mandate to open branches in rural India with strength of above 1000, are the policies incentivizing usage and perking up livelihood of the greater good. This catalyst bourse has provided market intelligence and serves as a think tank cum information bank, enabling farmers to take informed as well as down to business decisions.

Bringing long term domestic savings to the stock market can be accomplished with financial inclusion. Even common sense given, financial inclusion is the key to stimulate growth and rural development, control inflation and enhance efficiency.

The Indian Government is taking proactive steps such as rural employment under the National Rural Employment Guarantee Act (NREGA), in which payments are made through bank accounts, with job cards serving as a document of identity. The UIDs planned to be provided to residents will further facilitate financial penetration as these will serve to meet the KYC norms for account holders with small value transactions.

Consequently,

It is Spot-on to say, “Mobile services, not wallets will lead to financial inclusion.”