Export is considered a high-risk high-return business by many. Transacting business with an overseas partner thousands of miles away is a daunting factor for many. As a result, majority of SMEs are happy to supply locally and stay away from export.

SMEs in India contribute 40% to the total exports directly and a significant amount of exports indirectly through large trading houses or third parties. However, in spite of their sizeable contribution to exports, less than 0.5% of SMEs are actually engaged in exports. 

Whar Are The Perceived Risk Factors  ?

Assurance of timely payment and lack of risk mitigating avenues are considered major factors for such reluctance. The issue was studied in detail under the project ‘Strategies and Preparedness for Trade and Globalisation in India’, a ministry of commerce, Unctad and DFID initiative. The study suggested that SMEs may take the following steps to manage their payment risks and take remedial measures if bad debt does occur.

Know Your Buyer

The first step in the management of export payment risk is to get a credit rating report of your buyer. There are many agencies in India that provide credit rating reports on companies internationally. There are also companies which specialise on specific countries. Further, an SME can also approach its bank to secure a report on the buyer through its banking channels. Similarly, insurance companies help their customers getting credit reports.

However, a credit rating report can not guarantee against payment default and at best is an added comfort. Moreover, credit report report on companies outside USA and Europe are not always available or are as reliable.

Typically, a credit rating report costs $ 100 to $ 150. Delivery time is usually 7-10 days, faster the delivery, higher is the cost. Dun and Bradstreet, Mira Inform are some of the agencies SMEs can approach.

Credit Insurance

The next step is getting insurance for exports. In simple terms, the purpose of export credit insurance is to insure against the payment default. ‘Trade credit insurance’ or ‘credit insurance’ is an insurance policy and a risk management product offered by export credit agencies (ECAs) to business entities wishing to protect their balance sheet asset accounts receivable from loss due to credit risks such as protracted default, insolvency andbankruptcy.

The export credit insurance market in India is dominated by Export Credit Guarantee Corporation (ECGC). Having been a monopoly until recently, it is believed to have 80-90% marketshare. After deregulation of the insurance sector, all three biggest global credit insurance companies—Euler Hermes, Atradius and Coface—have consolidated their presence in India as re-insurers. Major players in the credit insurance market in India include ECGC, Bajaj Allianz, ICICI Lombard, Iffco-Tokio, New India Assurance and Tata AIG. The insurance cost varies from policy to policy and tend to cost between 0.3% and 1.0% of annual turnover, depending on previous bad debt history and current debt management practices.

Indian SMEs should take a note that most of the credit insuring companies in India do not cover risks such as commercial disputes; causes inherent in the nature of goods; buyer’s failure to obtain import licence; insolvency/default of agents like banks (other than the stock holding agent); risks covered by other general insurers like transit loss; exchange rate fluctuations for short term; failure of exporter to fulfil terms of contract, etc.

Debt Collection

In spite of best precautions - bad debt is an eventuality for which businesses need to prepare for. In such situations, professional assistance from debt collection agencies (DCAs) could be considered. Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed. Some agencies, often referred to as ‘debt buyers’, purchase debts from creditors for a fraction of the debt’s value and pursue the debtor for the full balance.

Debt collection agencies in India have struck alliances across the world. When an SME approaches an agency for debt collection and provides details of bad debts, the agency quotes its success commission against recovery. The collection agency makes money only if it is collected from the debtor (often known as a ‘no collection, no fee’ basis). The agency takes a percentage of the debt that is successfully collected, sometimes known in the industry as the ‘pot fee’, or potential fee, upon successful collection. This does not necessarily have to be upon collection of the full balance and very often this fee is paid by the creditor if they cancel collection efforts before the debt is collected.

A contingent fee structure (‘no collection, no fee’) is pretty much the standard for collections around the world. Depending on the type of debt, the fee ranges from 10% to 50% (though more typically. the fee is 15-35%) plus the advanced upfront cost that is adjusted towards success fee. In case of litigation, the fee would go higher. Some agencies offer a flat fee, called ‘pre-collection’ or ‘soft collection’ service. Historically, fee is based on the size of the account, the amount collected and the type of handling (whether in-house or through a lawyer or lawsuit). However, other factors that may be used to set rates include the age of the account at placement, location of the debtor, strength of the case.

There are agencies operating in India as well as country-expertise agencies. The study suggested that SMEs should be careful when choosing debt collection agencies and should take into account the firm’s reputation, its customer base (one should select an agency that specialises in collecting from the category of customer the SME serves); size (an agency too big might not accord enough attention to small debts and a very small one might not be worth risking the collection if the amount is big); and its legal and financial position.

One should check as to how the agency proposes to pay the money once it is collected. An agency that maintains ‘trust accounts’ should be preferred. A trust account is a separate account where money from collections is held until remitted to the SME.

The study, published by FISME in a handbook form, enlists nine India-based buyer credit report providers and 21 country-specific ones. It also provides contact details of 13 debt collection agencies (operating in India) and around 400 agencies operating globally.

Blog Author : Dr. Amit K Chatterjee        Tags : export credit, risk mitigation, bad debt collection, credit rating

Blog Sector :

Blog Categories : Financial Services / Banking / Insurance

Supply chain management is a key success factor in organized retail. For competitive price - retailers need to buy directly from producers, avoiding middleman commissions. Worldwide, retailers tie-up with producers for bulk purchase of manufactured goods and agro commodities.

Given land holding pattern of India where average farm size has been getting smaller and smaller (from 2.27 Hectare in 1970-71 to 1.27 Hectare in 1995-96) - sourcing large agro commodities from producers is truly a nightmare for any supply chain management system.

Contract farming was thought to be a logical solution. However, there is a plethora of issues on land ceiling act, lack of homogenous land use etc. that any corporate desirous of setting up contract form has to overcome. As a result, contract farming in India has been dominated by very large corporates who need regular supply of agro commodities for their own production. Examples are Cadbury in cocoa, PepsiCo in potato, chillies and groundnut, Unilever in tomato, chicory, tea and milk, ITC in tobacco, wood trees and oilseeds, and Cargill in seeds. Among domestic corporates are Ballarpur Industries, JK Papers and Wimco in eucalyptus and poplar trees, Green Agro Pack, VST Natural Products, Global Green, Intergarden India, Kempscity Agro Exports and Sterling Agro in gherkins, United Breweries in barley, Nijjer Agro in tomato, Tarai Foods in vegetables, M Todd in mint etc.

Clearly, no retailer would like to get into contract farming, which in any case, is not among their core areas. Given such supply constraint - retailers are moving to co-operatives in increasing numbers for better supply chain management. The buyers list includes ITC's e-choupal, Reliance Fresh, Heritage Foods and many more are the in the process to join the co-operative movement.

Reason is obvious as the co-operatives are registered under the mutually-aided co-operative society Act. For instance, as pilot, the Federation of Farmers' Association (FFA) of Andhra Pradesh has initiated a move by setting up eight co-operatives in the state for mango which has helped in mitigating losses to an extent of Rs 2-3 crore. According to Mr. Chengal Reddy, chairman, FFA - about 4,000 farmers in over 1,40,000 acres are working across eight co-operatives in Chitoor for mango production. This is being sourced by Coca-Cola to an extent of 3,500 tonnes of mango. Owing to the increasing demand, we are planning to increase it to over 12 co-operatives by this year end.

Interestingly, FFA has forged relationships with ITC in Medak district in Andhra Pradesh for sourcing vegetables on about 200-300 acres with over 700 growers and is in talks with Heritage Foods for supplying over one lakh bags of Sona Masoori rice. On the same lines, a co-operative movement is already in place for dairy products in association with National Dairy Development Board (NDDB).

Blog Author : Dr. Amit K Chatterjee        Tags : retailers, retail chain, indian retail, retail supply chanin management,

Blog Sector : Agriculture

Blog Categories : Retailer / Retail Products / Retailing
Fruits and Vegetable - Fresh

Riding a rising consumption growth – steel prices are set to soar during 2010. Though recession and ensuing economic slowdown considerably dented consumption growth during 2008-09 its unlikely to influence demand-supply gap significantly in coming years. After reaching the highest point during July-August 2008, steel prices declined by more than 50-60% in the aftermath of the global recession. Since then, prices are on a strong upward ride with prices in the international market also firming up. For example, prices of hot rolled coil (HR) which, in the fourth quarter of 2008-09, were ruling at about 29,500 per MT, are currently at around Rs 32,000-35,000 per MT. That’s about an 18% increase. Its highly likely that high prices will persist, given that HR coils are used primarily in the automobile industry.

Steel Production : India is the 5^th largest steel producer in the world, producing 55 MT  steel that accounts for 7% of total global production. Steel production in India has increased by a compounded annual growth rate (CAGR) of 10.03 per cent over the period 2001-02 to 2006-07. During the same period – CAGR of world steel production was 8.3%.

The National Steel Policy has a target for taking steel production up to 110 MT by 2019–20. With the current rate of ongoing greenfield and brownfield projects, the Ministry of Steel has projected India's steel capacity is expected to touch 124.06 MT by 2011–12.

Thanks to establishment of new state-of-the-art steel mills, acquisition of global scale capacities by steel makers, continuous modernisation and upgradation of older plants and backward integration into global raw material sources - India today occupies a central position on the global steel map. However, is it enough to quench ever rising thirst for more steel from India’s rapidly growing real estate, consumer goods and infrastructure sectors ?

Consumption Growth : In the midst of recession and economic slowdown – India consumed 26.49 MT of steel during April – September’ 2009, a growth of 5.7% over same period last year on account of improved demand from sectors like automobile and consumer durables. Today, Indian steel consumption accounts for about 5% of global consumption.

A Credit Suisse Group study states that India's steel consumption will continue to grow by 16 per cent annually till 2012, fuelled by demand for construction projects worth US$ 1 trillion. Given the low per-capita steel consumption figure of 35 Kg against 150 kg across the world and 250 kg in China – its only logical that steel consumption will rise rapidly in coming years.

Steel players like JSW Steel and Essar Steel are increasing their focus on opening up more retail outlets pan India with growth in domestic demand. JSW Steel currently has 50 such steel retail outlets called JSW Shoppe and is planning to increase it to 200 by March 2010. They expect at least 10-15 per cent of their total production to be sold by their retail outlets.

Essar Steel which currently has over 300 retail outlets across the country, plans to set up 5,000 outlets of various formats soon. It expects to sell 3MT of steel through the retail route in two years.

Demand Supply Mismatch :  While demand growth has been robust, supply of steel has been tight in recent years. Structural issues like delay in capacity augmentation, land acquisition difficulties for new steel projects and other impediments such as floods in Australia and Indonesia, snowstorms in China and floods in Jharkhand and Orissa have played significant role in moderating supply level.

Import has been brisk - according to American Iron and Steel Institute (AISI), India imported 52,000 MT of steel during October’ 2009, a growth of  32% over previous month.

However, during the same period United States imported a total of 1,560,000 MT of steel including 1,177,000 MT of finished steel, bringing imports for the two materials up by 29% and 15% Month on Month  respectively. This was the highest monthly total import figure since February.

With recession ending and global economy picking up– imports are rising, firming up steel prices globally.

Rising Input Cost:  A major reason for increase in steel price is the cost-push effect of higher raw material prices. Contract prices of coking coal and iron ore are set to rise. Prices of iron ore contracts, which are due to be renegotiated early next year, are expected to be finalised at higher levels of anywhere between 10% and 25% over those of 2008-09. Iron ore contract prices in 2008-09 were sealed at $75 a MT, while coking coal prices were sealed at around $300 per MT. While in the current year, long-term coking coal prices have fallen to $128 per MT, in the spot market, prices are ruling slightly higher.

Expect Steel Prices to Rise in 2010 :    December can easily pass off as a watershed month for long product prices. The thrust of about 9% in the last 4 days (Dec 19-22)  has amazed all. Although the reason apparently is  a Govt crackdown on illegal mining resulting in shortage of iron ore and sponge iron and a speculative one at that – it may as well be harbinger of price trend in new year. 

Blog Author : Dr. Amit K Chatterjee        Tags : steel price, global steel price, iron and steel, market trend, steel industry analysis

Blog Sector : Industry Analysis

Blog Categories : Steel, Finished Products – Angles, Fittings, Bends
Iron Ore and Industrial Iron Products
Steel, Primary - Plates, Billets, Ingots

Indian Glass industry is going through difficult times. Excess capacity, slump in demand, and slowdown in key consuming sectors are leading to falling glass prices.  To make matters worse, fresh capacities coming on stream is likely to push prices further down.

The demand now is estimated at 2,750 tpd (Tonnes per Day) while supply is about 3,600 tpd, including 400 tonnes of imports. The new capacities that will begin commercial production, namely Sejal and Hindustan National Glass, will increase supply to more than 4,500 tonnes a day.

A modest 10-12 per cent growth in consumption would have sufficiently absorbed new capacities. Given the low per capita per anum glass use in India of only 0.76 kg,  compared to 3.5 kg in China, 5.2 kg in Thailand and a very high 14 kg in Japan, there is ample scope for growth. Indeed, its is surprising that Indian per capita consumption of glass is lower than that of many developing countries.

However, with slump in real estate sector and slow recovery in automotive sector – stagnation in demand is likely to persist for most part of 2010.  It’s a moot point how many manufacturers have the staying power to remain in market.

According to industry sources, market for architectural glass declined by three per cent in the first half of 2009, the first such decline seen in over a decade. The decline has been felt more in the high-end products, mainly because many of the large real estate projects have been delayed. Exports too have taken a hit, because of the economic slowdown in the West. Over the last few years, the industry has grown at 10-12 per cent a year.

Manufacturers are trying to export, sometimes even at un-remunerative prices. Markets for Indian glass are West Asia, the Mediterranean region, Australia, New Zealand and parts of Far East. However, anticipating unbridled growth, the industry invested in fresh capacities in other markets too, of which at least three float lines started commercial production in the last one year. The slowdown in the US and Europe ensured that demand in these markets slipped drastically.

Indian Glass Industry:  The modern Indian glass industry is around 100 years old. In the first half of the last century the industry was rather primitive, melting the glass in pot furnaces and small tank furnaces that were fuelled by either coal or gas--although some furnaces at the coastal cities used furnace oil.

From the early 1950s the glass industry started manufacturing using modern equipment, both for melting and production. Collaboration with multinational companies gave a boost to the industry. It was in the lost decade of the twentieth century that the Indian glass industry started to seriously compete globally, installing improved furnaces to conserve energy and therefore reduce the cost of production.

The cheaper availability of natural gas in some parts of the country also enabled the industry to reduce energy costs to some extent, and the flat glass industry upgraded to the float process.

If we leave aside the multinationals (Asahi, St. Gobain, and Guardian) , there are currently about 65 tempering lines, compared with 49 in 2006, 12 in 2003, and three in 1998. The capacity utilization of the processed glass industry is estimated to be less than 45 percent. There are about 20 double glazing and eight laminating units operating in the country.

Blog Author : Dr. Amit K Chatterjee        Tags : glass, indian glass industry, float glass, sheet glass, architectural glass

Blog Sector : Industry Analysis

Blog Categories : Glass - Sheet Glass, Laminated Glass, Mirror
Glassware and Glass Products

Indian dairy product is becoming viable in world market once again. Global milk powder price has hit a 15-month high in November’ 2009 – making domestic products exportable. High global price has become a dampener for import of milk powder making domestic industry outlook that much positive.

Fonterra - largest milk processor in the world – maintains an Internet based sales platform called Global Daily Trade. As per Global Daily Trade - average price of Whole Milk Powder (WMP) is USD 3437 per MT ex New Zealand ports for current month. This is the highest since August’  2008 when WMP price stood at USD 3705 per MT. Ironically, WMP price was a paltry USD 1829 during March – June’ 2009. Increasing demand from global food processors is the main reason for such high price and is expected to remain firm as world economy recovers from recession through 2009-10.

Another reason for such stiff jump in global prices is general decline in milk production in Western Europe, Australia and the USA where farmers reduced herd sizes because of falling milk prices.

Above all, the European Commission has scaled down export subsidies . For example, the refund on skimmed milk powder (SMP) shipment has been slashed down to zero from Euro 228 per MT. Similarly, refund for WMP came down to Euro 175 from 350 and that of butter oil reduced to Euro 456 from Euro 787.

Indian Dairy Industry Outlook Positive

Increasing global price and declining production makes Indian dairy industry outlook positive. On one hand, industry feels safe from large scale import, as has been happening throughout 2008. On the other hand, high global price has made Indian dairy products viable for export.

 Import is Virtually Ruled Out

During 2009 – Indian imported 20,000 MT of Butter Oil at an average price of USD 1700 to 1800 per MT. Today, the same Butter Oil from New Zealand is quoting at over USD 4700 per MT !   Add 30 per cent import duty and other expenses – the final price will be much higher than ex-factory ghee price, which is currently Rs. 240-270 a Kg.

Same story for milk powder – during July’ 2009, SMP price from East Europe was USD 1800 – USD 1900 per MT. Today, it costs at least USD 1000 more per MT and is likely to scale even higher.

Export Is Viable Now

Export of Indian dairy product has already started. During Aug – Oct’ 2009, over 3000 MT casein has been exported. Apart from Exporters, Indian farmers are getting good price for milk even during winter when traditionally milk prices fall.

Blog Author : Dr. Amit K Chatterjee        Tags : milk, dairy products, whole milk powder, skimmed milk powder, butter oil, export

Comments for this blog : 1        Blog Sector : Industry Analysis

Blog Categories : Milk and Dairy Products
Processed Food and Snacks
Edible Oils, Oil Seeds, Biofuels

Global recession of 2008-09 has left large scars on world financial body, with banking sector being worst hit. After the collapse of Lehman Brothers - 81 banks went belly-up in the USA till August' 2009

However, Indian banks have confounded the downward trend with an average annual increase in pre-tax profits of 20.4% during 2008. Not a single bank from list of 32 top ranking banks found to incur loss during the recession.

 What is the secret behind this amazing story ?

 There are many positive answers such as:

1.  Indian banks follow prudent credit policy

2.  Close monitoring by Reserve Bank of India

3.  Low or Nil exposure of Indian Banks to Global financial markets  etc.

While all of above are true, there is a dark secret that banks and political class do not like to discuss - failure of banks to reach out to small businesses and poor. Indian banks prefer to park their money in secure Govt bonds or lend to large clients. Ironically, billions of rupees are stuck in bad credits, euphemistically called Non Performing Assets (NPA), with such large clients. But banks in India have shown remarkable reluctance so far in reaching out to all sections of society.

After all, its so much safer and easier to park money in Govt bonds than developing financial market !

It is debatable whether this over-cautious approach of risk-aversion has helped Indian banks in securing their financial health - but undoubtedly there is a social cost that the nation must pay. If banks do not offer loans to farmers and other needy sections of society who have no other source of credit but local loan sharks - the nation pays in terms of reduced GDP and depleted human development.

Banks are meant to offer loans to all credit worthy entities and help in developing entrepreneurial spirit. Easily available soft loans can work wonders among small and marginal sections of societies. Banks in developed countries perform this crucial social needs by reaching out to all sections of society.

Indian Banks are still in Medieval Age

In the USA and Europe - banks follow innovative ways of investment that has resulted in a highly developed financial market. Consumers enjoy low interest rate and easy credit. True, banks sometimes overplay their part and get into risky areas - as happened in US housing finance sector leading to current recession, but no one can deny obvious benefits of a highly evolved financial markets and its contribution to society. Roads were much safer before Henry Ford - but can we dream of an automobile-free world !

Indian banks have steadfastly avoided small businesses and marginal sections of society, focusing on safe govt securities or elite clientele. In fact, opening a bank account in India is so very difficult for these sections, let alone getting bank credit.

Small Business - Victim of Bank Apathy

India has a thriving small scale sector of 42 million units that contribute to 30% of national income. More than 100 million people work in these units as owner or worker. Yet, many of these units are far removed from banking sector. Worst hit are micro enterprises (with less than $50,000 investment in plant and machinery) majority of whom are not eligible for any bank loan, no matter how good their balance sheet looks or how excellent are the credit history of their owners.

The share of micro enterprises in net bank credit fell from 4.2% in 2002-03 to 2.8% in 2007-08. Of this, the share of enterprises with an investment below $10,000 fell from 2.2% to 1.6% of total bank credit.

BPLR - How to Discriminate and Confuse Low End Consumers

Another anomaly is Benchmark Prime Lending Rate or BPLR. Introduced during November' 2003 - BPLR is the interest rate at which Indian banks are expected to lend to their best borrowers. Purpose of a published BPLR was to enhance transparency in the pricing of loans. However, over 70% of bank loans are priced below BPLR !

Plentiful liquidity is the prime reason for this anomaly. India has one of the highest savings rates in the world and Indians consider Banks and Post Offices as prime places for safe keeping their savings. With such high savings rate and extremely cautious credit policy - all Indian banks are flushed with excess liquidity.

As all Indian banks (private or public) are extremely choosy about whom they lend money to - handful of borrowers who pass bank prudential test are shopping for loans, leading to a rate war among banks. Faced with stiff competition, banks do lower their loan rates, but they are always reluctant to cut their BPLR. Since October 2008, Reserve Bank of India (RBI) has cut its policy rate by 5.75 percentage points — from 9% to 3.25% — but banks have not reduced their BPLR even by half as much.

Rise and Rise of Micro Finance in India

Just as nature abhors vacuum - markets have a way of punishing inefficient players by offering opportunity to bold and deserving ones. Absence of banks from large sections of society has helped micro-finance companies to fill the vacuum and expand rapidly over large parts of India.

2008-09 has been billed as watershed year for Indian micro-finance institutions (MFI). During the year - client base of MFIs has increased by 60% (22.6 million during 2008-09 against 8.9 million previous year). Investment in MFIs during the period has been a staggering $ 130 million.

Balance Sheet of many MFIs reveal a very high cash and bank balance with much smaller loan portfolio than outstanding borrowings. Indian Banks will soon have to repent for a lost opportunity.

Blog Author : Dr. Amit K Chatterjee        Tags : indian banks, consumer lending, interest rate

Comments for this blog : 1        Blog Sector : Economy

Blog Categories : Financial Services / Banking / Insurance

Reduced production and growing consumption may induce a spurt in rubber price in near future. During April to October' 2009 - rubber production in the country was 4,35,125 tonnes against 4,80,230 tonnes last year resulting in a fall of 9.4%.

Consumption during the same period was 5,36,100 tonnes against 5,20,375 tonnes last year -  a healthy growth of about 3%.

 The production-consumption mismatch resulted in a sharp rise in imports and a corresponding fall in exports. Imports increased 133 per cent to 1,26,472 tonnes (54,283 tonnes), while exports plunged 92 per cent to 3,859 tonnes (34,000 tonnes).

Timely import of rubber has helped the country to have a rubber stock of 2.19 lakh tonnes in October against 1.50 lakh tonnes last year.However, import may not sustain at such high level as most top rubber producing countries have reported lower production. As a result, prices are likely to remain firm in domestic as well as international market.

 Given the surge in automobile sales and likely entry of several new tyre manufacturing industries - consumption growth is likely to remain same or even scale up to over 5%. Even existing domestic tyre manufacturing companies are busy in installing more capacity - there is no escaping from rubber shortage in near future.

The Rubber Board has scaled down the production target for the current fiscal by 2.8 per cent to 8.40 lakh tonnes from the earlier estimates of 8.67 lakh tonnes announced in April.

Blog Author : Dr. Amit K Chatterjee        Tags : rubber, tyre, demand supply, indian rubber industry, prices

Blog Sector : Industry Analysis

Blog Categories : Natural and Synthetic Rubber, Rubber Compounds

PPC Resources

PPC is ideally suited for web-sites looking for buyers. Its skillful use can drive quality traffic to any web-site almost instantaneously. Even with a modest conversion ratio - web-site owners can recover advertising cost and make decent profit. For many web-sites, acquiring a client means repeat purchase and consequently long term business

Featured Listing - An Alternative to PPC

Conclusion

So, which advertising model is right for you ? It actually depends upon your business model, click-through averages and conversion rates. Your advertisement cost should be well below what you earn from your web-site. You must device ways of measuring ad effectiveness before selecting any model. What looks impressive on paper may not work out the same in practice. Hard data on ad effectiveness helps you select the right model or change an existing one.

** Brands mentioned above are registered trademarks of respective owners ** AdWords and AdSense are registered trademarks of Google Inc.

Happy and Productive Surfing

Blog Author : Dr. Amit K Chatterjee        Tags :

Blog Sector : Search Engine Optimization (SEO)

Blog Categories : Web Design / Graphics / SEO Services