Even as we appear to be increasingly aware of the need for planning, our awareness or knowledge is limited. Many pundits have highlighted the lack of “financial awareness” in our society. But the HDFC Life ValueNotes Life Freedom Index is one of the first serious attempts to delve deeper into the components of awareness.

While a majority of the respondents appear to know of the different financial products on offer, such as mutual funds, insurance, bank deposits, equity, etc.; there is a lack of awareness of fundamental financial needs.

People are cognizant of “expected” events that may require substantial financial resources – like a child’s education or marriage, purchase of a house or durables. However, awareness of unexpected events such as illness or death is much lower. This implies a focus on the medium term rather than the long term, and on events that are “visible” as opposed to more distant and “invisible” events.

Even worse is the knowledge of environmental factors such as inflation, interest rates, economic or market cycles. Given the recent volatility in financial markets, this is quite surprising – and points to a fundamental lacuna in how we Indians think about investments.

This dichotomy in awareness is revealing. We know about the various products – so obviously the high-decibel advertising by financial services firms is making an impact. But our understanding of why we are investing is very poor. If we don’t know what we are protecting ourselves from, how can we choose the most appropriate instrument? And how can we even begin to design a suitable financial plan?

Clearly there is a crying need for better education and advisors. Anecdotal evidence suggests that those selling financial instruments are focused on the short term, and don’t bother about long term planning, especially for old age needs.

But there is no point blaming advisors – after all they are driven by commission structures. It is our life, and having someone to blame is not going to take away the pain of inadequate finances in our old age. It’s time to educate ourselves. And our children. This knowledge might well turn out to be more useful than how to crack an engineering entrance exam!

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While bungling appears to be an enduring criticism of today’s government, the fiasco was a result of arrogance and a disconnect with reality.

Why should anybody buy shares of ONGC:

• when they are subsidising fuels for you and me, and therefore cannot earn optimal returns?

• when the management team has no real say in strategic decisions?

• when they have no freedom in pricing or investment?

• when politicians are likely to change rules frequently, ensuring uncertainty for investors?

• when they price their issue at a premium to market price?

• when every single PSU is treated as the private fiefdom of some politician or another?

I could go on.

But the real arrogance is they still think PSUs are “blue-chips”, that us dumb investors will lap up at any price. The market is hungry for quality, well-priced issues, as MC has demonstrated. Equally, investors don’t like junk – and that is the clear message for the government.

Poor LIC ended up paying for part of the government deficit (as other state-run companies will). Leaving aside the security of my insurance policy, money that should have gone into long-term infrastructure has been used to buy over-priced ONGC shares.

Sadly, until the Indian government gets out of running these companies, their value will only decline. If divestment or privatisation meant going below 50% and handing over management, then yes, these companies are worth a lot. And I’m sure investors will bite. But as long as the current promoter (the government) continues to siphon off money for its own ends, why should investors trust them?

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We tend to take this technology for granted, and are only reminded about it when the ATM machine is down, or the POS machine refuses to recognize our credit card. But in reality, no banking or financial transaction today can be completed without technology.

Keeping up with all of this can be a challenge for the IT departments of banks and financial institutions. In a recent study conducted by ValueNotes for Anunta, we found that the biggest challenge faced by CTOs was in integration. The other big challenge is around retaining and attracting IT talent.

In today’s complex world, integration challenges are of various types:

• between old and new applications

• between front and back end

• between peripheral and core applications

• between different organizations

This pains of integration were felt by all financial institutions, in different degrees. The head of IT at an insurance company told us, “Integration with banks is a great challenge. We get business due to bancassurance, but some of the PSU banks did not let us look at their systems.” The CIO of a pre-liberalization private bank felt that data portability from old applications to new applications was a major challenge.

Our study found a wide variance in the severity of challenges faced by different institutions – as well as their ability to cope with these challenges. Naturally, this impacts their ability to deliver high performance to customers.

Interestingly, there appears to be a stark divide between “pre-liberalization” and “post-liberalization” financial entities in India. Public sector banks, the old private sector banks and co-operative banks are struggling the most. On the other hand, new private banks, private insurers, asset management companies and large brokerages are dealing much better with these challenges. This is to be expected, given that most of these entities came into existence in the nineties. On the other hand, the older organizations have had to grapple with legacy systems and resistance from staff.

By and large, mutual funds, brokers and insurance companies operate in an environment where most competitors operate at similar levels of technology sophistication. However, this is not true of banks – where we have a wide gulf between the old and new. While correlations between business performance and IT performance are difficult to pinpoint, the sustained superior growth and competitive costs of private sector banks (like HDFC Bank, ICICI Bank and Yes Bank) does indicate that technology is a critical competitive differentiator.

And our study indicates that this differentiator will continue to impact performance in the future.

To download a complimentary copy of the white paper, “State of application performance management in the Indian BFSI sector”, please follow this link.

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There was the usual tom-tomming about growth, and how with 100+ million users, India is now No. 3 in the global pecking order. Many other similar statistics were trotted out, with the usual sweetener about the still-untapped potential of the 1 billion plus Indian population.

Fortunately, this was balanced by more realistic opinions; highlighting the digital divide between rich and poor, urban and rural, educated and illiterate. Several suggestions and solutions were put forth, typically involving some Government action, such as improved infrastructure or access or whatever.

But what is the real problem?

The first is the dismal (actual) penetration. The recently released IMRB-IAMAI report suggested that the user base crossed 100 million in September 2011. This sounds great, but their definition of “users” includes anybody who has ever used the Internet! That’s quite absurd, to day the least. Digging a little deeper, less than 20 million Indians log in daily. And that’s where one of the problems lie.

Internet in India so far has been confined to a PC world. But we sell only a few million PCs every year (9.3 million in FY11, according to MAIT). That puts even an optimistic estimate of PC population below 40 million. No doubt cyber cafes reach help reach out to a wider pool, but some people might be using more than 1 PC (office and home). But no matter how you slice and dice it, this number is unlikely to reach hundreds of millions any time soon. PC usage requires not just education and English, but is also costly. This is hugely limiting.

Like many others, I believe that Internet penetration in India will be driven by mobile devices and not computers. The numbers speak for themselves. Regardless of doubts on TRAI numbers, actual users (using their phones several times a month, usually on a daily basis) will top 500 million. A small (but fast growing) percentage of these now have “smart phones”. It’s not unreasonable to expect that we will have a couple of hundred million (real) users in a couple of years. After all, access exists, cost is low, so what else do you need?

The answer, is content! The PC user world thinks and works in English, and therefore excludes the majority of Indians. So even as we tom-tom the fact that India now more than 35 million facebook users, the reality is that 70% of our kids cannot use facebook because they’re not comfortable with English.

However, when we move to the next 500 million, or the phone users, many of them will be happier with tweeting or befriending in their local language. This is not a new revelation – all you have to do is look at the circulation of language newspapers versus English dailies, or the relative TRPs of English versus all other channels on TV. We are a multilingual, multicultural society… and we will continue to be one.

Sai (can’t recall his full name) from Google India summed this up brilliantly, when he said something to the effect that “access exists, affordability exists, what is missing is the compelling value of apps that will bring in the next 100 million”. Essentially, these people already have access – but don’t find services or applications that are compelling enough.

Buying travel or books online might constitute compelling value for you, me and other urban PC owners. But is this true for the 500 million cell phone users?

“Compelling” implies value relevant to their daily needs. This implies a greater focus on localization, not just of language, but of application. After all, a farmer in a rural area has different information and social needs than a school kid in a municipal school in Mysore.

So while the lack of compelling “Indian” apps is a constraint, on the flip side it’s a huge opportunity – waiting for a few energetic and smart Indian entrepreneurs. Don’t think of the paltry millions already online – focus on the needs of the next 500 million!

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You might quibble about whether it will be 590 m. or 600 m or 650 million, but the fact remains that urban population will close to double in less than two decades.

Much has been written on this subject, largely focused on the issue as one of impending crisis. Infrastructure is already falling apart, cities have no funds of their own, we do not have the institutions nor capabilities to manage our cities, slums will dominate and lead to social unrest, and so on. No doubt this is all true, and we need to focus our immediate attention on how to create cities that are worth living in.

Having said that, abysmal infrastructure and miserable governance in our cities will not stop them from growing. There will not be near enough jobs in rural areas, and we will see millions of new (and young) residents in our cities and towns. Without detracting from the scale of the problem, let’s try to look at the brighter side. Regardless of the state of infrastructure, a doubling of urban dwellers will transform the Indian economy.

Fundamentally, the reason cities attract migrants is that they provide jobs, which eventually lead to spending power. Further, the change in lifestyle (as compared to rural citizens) will drive demand for numerous products and services.

The biggest opportunity is likely to be in low-cost housing. These new urban Indians will need homes, but will be unable to afford the current (inflated) prices. If businesses can find a way to sell decent homes at affordable prices, there is a huge economic opportunity. Going along with this, construction related inputs – steel, cement, furniture, fittings, tiles, taps, electrical stuff like switches and wiring, and such like will enjoy an unparalleled boom.

Following on from basic needs, people will then need durables, like geysers, cooking stoves, pressure cookers, fans, televisions, etc… leading eventually to higher end products like washing machines, refrigerators and air conditioners. Naturally, this will result in a surge of demand for electricity.

Transportation will be another big need, and given the dismal infrastructure, you can expect demand for two-wheelers and cars to soar (already happening). Never mind the lack of roads – traffic jams are better than not reaching work at all!

Consumer non-durable demand will also grow rapidly, as nuclear families and working women will drive demand for packaged foods, convenience goods, cosmetics, and a variety of household products.

Finally, services such as those provided by restaurants, retailers, laundries, plumbers, electricians, maids, schools, teachers, baby-sitters, beauty salons, gymnasiums, health spas, and many, many other such, will see an unparalleled boom.

There is no doubt in my mind that this urbanisation will create huge economic demand and opportunity. The only question is whether all these consumer benefits will be enjoyed amidst squalor, or a relatively decent living environment.

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His response was unusual, to say the least! He told us that there was nothing secret about the budget (he had actually participated in several budget exercises in his career with the Customs). His explanation was simple.

Every year, the size of the budget had to increase. If we raised x amount last year, it had to go up in the next. Like all good things, growth and inflation were inevitable! So the basic hypothesis was based on how to raise more money. After that it was a matter of tinkering with some rates here and there, to achieve that end. He also mentioned that no matter how much analysts tried to decode this, it was impossible, as none of us could ever hope to understand how and where this money really came from.

While I admired his candid statements, it was also a telling indictment on the transparency of the budget (and government finances). And equally on the ineffectiveness of the media and analysts, who invariably focus on the headlines, but cannot hope to understand the internals.

His subsequent statements were more illuminating. He said that we are all focusing on the wrong side of the accounting statement. Revenues have to increase year-on-year, and debating the benefits of xyz tax on abc sector were irrelevant. Ultimately, the benefits or otherwise to a particular sector were unimportant in the larger scheme of things. Given that the size of the budget is bound to increase every year, shouldn’t we focus on how the money is being spent?

After all, every accounting statement (which is what the budget is) has a revenue and expenditure column. And most of us focused on our self-interest, tend to look only at the revenue side of things, ie. tax changes and how they affect our individual interests. In consequence, we lose sight of the profligacy and waste on the expenditure side.

His advice to the audience was to focus on the spending, not on the revenue. I couldn’t agree more!

The most heartening aspect of the entire evening was the plain speaking by the Commissioner. This helped reinforce my opinion on the high calibre of Indian bureaucrats… they’re smart enough to make a real difference, if only their political bosses gave them a chance!

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My interest in the event was not to gawk at all these weapons. I was there to meet an international client who wants us to research and perform due diligence on prospective suppliers that can help them meet offset requirements. During the course of the meeting, the client spoke about their company’s plans and ambitions for the Indian market. In as many words, he indicated that he believed that the Indian defence market was crucial to the future of the global defence industry. He went on to quote numbers in hundreds of billions of dollars.

As always, my initial reaction was one of small pride. Ah! People are taking India seriously now!

Later, while making the long walk to the exit gate, I started wondering. Is this really a good thing? It’s one thing to be happy that we’re a hugely important market for textiles, or milk, or mobiles, or a host of other consumer goods. All these demonstrate the growing wealth of Indian consumers, which is unarguably a good thing.

But arms? Does greater consumption of arms necessarily mean a healthier economy and wealthier population? Shouldn’t we be spending these billions and billions on education and healthcare, rather than weapons?

Unfortunately, the reality is that we’re surrounded by unfriendly and militaristic neighbours. And that’s not something to be happy about – regardless of the relative importance that India now has in the global defence market.

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So the top priority is not ensuring lower fares, or better service for passengers, or more safety, or industry growth – but to make sure that one of the most bureaucratic, inefficient and customer unfriendly service providers makes money (or stops losing money!). All other concerns are subservient to keeping the powerful unions of Air India placated.

Consistent with this policy world view, some months back, the Ministry apparently asked private airlines to shut down their baggage handling activities, and outsource this to Air India.

Does this make any sense? Would you order all IT companies to buy computers from a single vendor? Would you order all farmers to buy fertilizers from a single supplier? Would you order all auto companies to buy tyres from a single manufacturer?

But then, not much of what this government does seems to make economic sense. Clearly, it is an attempt to re-create a little monopoly for Air India in the hope that this will help them return to profit.

But this is clearly wishful thinking. Despite decades of running monopoly businesses, Air India and Indian Airlines repeatedly made losses. Bloated salaries, over-staffing, militant unions, constant political interference and other such endemic sicknesses ensured that customers have gradually deserted the national carrier and taxpayers are footing the bill.

We’re still shelling out thousands of crores to keep Air India alive (or rather, to ensure lifetime employment to its pampered staff). Why?

If private airlines are to discontinue their own baggage handling operations, will this not mean layoffs? Are these people’s jobs less important than those of Air India staffers?

And finally, if I lose my bags due to a screw-up by a private airline, I’m pretty sure they will try their utmost to retrieve them – if not, I might never fly with them again. But will Air India care? Especially so, if they have a monopoly on baggage handling.

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As expected, investor ire and media attention are being focused on the “big bad” Citi. “We cannot believe that Citibank could have let this happen!” This “unbelievable” is the gist of much media focus – after all, a rich multinational invariably makes an easy target.

Mr. Sanjeev Aggarwal (one of those who has lost many crores) has filed a suit claiming that Citibank was guilty of a “systemic failure”. In other words, he alleges that they did not have appropriate or adequate processes in place to ensure the safety of their clients’ money.

Maybe they did, or maybe they didn’t – but I will leave that to the courts and RBI to figure out.

My issue is with the second “unbelievable”. How could people invest their money (and significantly huge sums, to boot) without any basic due diligence? It can’t be that they’re hapless, uneducated or financially illiterate people (as could be argued in the case of the IPO scams of the nineties). This scam has pricked the fortunes of ultra-rich, ultra-smart corporate honchos!

How could this happen?

It appears that the alleged fraudster Puri promised fixed returns of 2-3% per month to entice these high net worth (HNI) suckers into parting with their cash. Now, are guaranteed returns of 2-3% at all possible? When banks offer not even 0.5% per month, and the riskiest corporate bonds in the region of 1-1.25% per month, don’t we even question how it’s possible for Citibank to offer 2-3%? Or is it simply blind faith in the multinational brand name? Or is it just greed that blinds logic?

Any investor should (and must) be able to question such claims. After all, even high-risk options like equities (on average) return sub 20% annual returns (approx 1.5% per month). And these were not uneducated (or financially illiterate) customers – they were all crorepatis! The person who filed the case runs a private equity fund that itself manages $350 million. Doesn’t he know how hard it is to generate super-normal returns?

Apart from the returns promised, apparently a faked SEBI circular named a custodian account in the name of “Premnath” (grandfather of the accused). And the investors happily wrote cheques into that account!

Wouldn’t you be suspicious if your wealth manager (assume you’re wealthy enough to have one ) asked for a cheque that is not in the name of a reputed fund or bond scheme or the bank itself? Didn’t anybody wonder who this Premnath is? And when their normal monthly statements from the bank did not reflect the newly invested funds, why did they not ask? Or is it that rich people don’t have time to read their bank statements?

On top of all this, some investors gave Puri blank cheques! Why would anyone give out blank cheques to the tune of crores? And if you do, then is it right to blame a bank that employs thousands and suffers from the statistical probability that some of its employees are crooked?

I don’t mean to belittle the losses suffered by investors, nor take away blame from Citibank (if they were truly negligent), but as in any such scam, it is the greed of investors that makes fraud possible. [Have you heard of Bernie Madoff?]

Ultimately, every investor, big or small, has to do their own due diligence. We should know by now that the financial system is designed to create wealth for the industry, not for their clients. And that anybody (yes, anybody, even a Citibank) who offers returns far higher than the norm, must be suspect.

But, on the flip side, investment history also tells us that for every investor that gets burnt, there are several more greedy fools who get blinded by the light – like moths.

So are we going to see many more such scams? You bet we are!

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