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YES-CFO Insights a Comprehensive Compilation of Thought Leadership Articles

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YES-CFO Insights a Comprehensive Compilation of Thought Leadership Articles Issue I Feb 2012 YES-CFO Insights A comprehensive compilation of thought leadership articles Investment and Growth Opportunities in FY13 - CFO on the centre stage Foreword It gives me immense pleasure to present the first edition ofYES – CFO Insights , a quarterly publication which aims to become a valuable repository of experiences, thoughts, and insights of erudite CFOs across India. TheYES – CFO Insights covers contemporary themes, and includes contributory articles on topics pertinent to recent economic developments and policy changes that will help CFOs to make far-sighted decisions and seize hidden opportunities leading to consistent growth of their organizations and industry at large. I am also pleased to share with you that further to the successful launch of the YES BANK - National CFO Forum on September 7, 2011 in Mumbai, we have launched the New Delhi Chapter of the Forum on February 14, 2012. The YES BANK – National CFO Forum has been conceived to recognize the deeper role of CFOs, and provide them with a unique knowledge and thought leadership exchange platform. The Indian economy has been one of the fastest growing economies in the world; however, in the past one year, it has witnessed volatilities on the back of the global crisis. Despite the magnitude and proliferation of the financial challenges, India Inc. has been able to effectively showcase its combined abilities and competencies in managing and responding to the new economic global order, and is now looking forward to take a giant leap in the next growth cycle. As we move to the new financial year, the introductory edition of YES - CFO Insights has attempted to collate opinions of some renowned thought leaders and industry experts on the theme ‘Investment and Growth Opportunities in FY13 - CFO on the centre stage’. My sincere thanks to Mr. Y.M. Deosthalee, Mr. Deepak Amitabh, Mr. Gautam Sen, Mr. Milind Sarwate, Mr. O K Balraj, Mr. P K Goyal, Mr. Prabal Banerjee, Mr. Rajender Prasad, Mr. Shekar Viswanathan and Mr. T.N. Subramaniyan , for sharing their valuable thoughts with fellow CFOs, and the industry at large, towards the formation of this treasure of innovative ideas, key insights and valued experiences. I look forward to the continued support and active contribution from all Forum members in the future editions of YES - CFO Insights. Thank you. Sincerely, Dr. Rana Kapoor Founder, Managing Director & CEO - YES BANK Chief Mentor - Governing Council - YES BANK National CFO Forum 1 Message from the Chairman’s Desk We are indeed in the midst of challenging times. The world is grappling with lower growth, high indebtedness and fiscal consolidation. Overall, there is stress in the financial system. India has huge potential and opportunities to gain position of significance, globally. However, India needs to focus on growth, better fiscal management and a disciplined approach in decision making. Economic agenda needs to be separated from political ambitions and the country needs to march ahead at a galloping pace. In such testing times when the Balance Sheets of many companies are stretched, capital is scarce, liquidity continues to be challenging. There are tremendous responsibilities on CFOs to strike a delicate balance between judicious capital allocation and growth. While there is no doubt that Cash is King, CFOs should not lose opportunities to help the organization gain market share and consolidate their position in the business. There are several ways in which CFOs can add value. It is time to create''Centres of Excellence' in services. It is a difficult concept for the businesses to accept. However, sharing a common technology platform, promoting operational excellence in areas such as Human Resources, Accounts and Procurement will go a long way in creating an efficient organization. Every organization needs to have a Risk Management framework. Given the volatility in markets, dealing with all aspects of Risk including Financial, Business, Regulatory, Market and Reputational Risk is essential. CFOs have a major role to play in establishing such a Risk Management Framework. They need to look at global practices and emulate relevant practices within the organization. One of the important attributes of a successful CFO is efficient and responsible communication within and outside the organization. They are a link between the Investors and the Management. The process of communication has to be continuous and both ways. Most of the CFOs today regularly interact with media and are important constituents in the value growth journey of organizations. The economic landscape of the world is changing very rapidly and Indian companies are aspiring to be global. Creating a global mindset is central to exploiting global opportunities. CFOs have played a very crucial role in shaping their organizations. They need to continuously work smartly with speed. These challenging times will also throw opportunities for career growth and personal development. My best wishes for the CFO Forum. Mr. Y. M. Deosthalee Chairman and Managing Director - L&T Finance Holdings Ltd. Chairman – Governing Council - YES BANK National CFO Forum 3 Managing Volatility and Risk in the current Global Economic Scenario - Shubhada Rao, President & Chief Economist, YES BANK Ltd. In common parlance, making a distinction among uncertainty, risk, and volatility can be tricky. Uncertainty describes a situation where several possible outcomes are associated with an event, but the assignment of probabilities to the outcomes is not possible. Risk, in contrast, permits the assignment of probabilities to the different outcomes. Volatility, on the other hand is allied to risk. Volatility provides a measure of the possible variation or movement in a particular economic variable or some function of that variable, such as a growth rate. After the Great Moderation observed in the world economy during 2002-07, a period which was characterized by low unpredictability in asset prices and economic variables, the period thereafter has seen quite the contrary. The growing linkages of national markets in currency, commodity and stock with world markets and existence of common players, have given volatility a new importance – Based on the property of its speedy transmissibility across markets. Since the collapse of the Lehman Brothers in 2008, volatility has seen a structural shift upwards for most of the asset classes like currencies, equities, and commodities. Measured by the five year moving average of the coefficient of variation, the trend in volatility has almost doubled for the Rupee, BSE Sensex, and Crude oil in the last fifteen years! The speed and severity of the global economic downturn and the accompanied surge in volatility, illustrate the importance of a comprehensive risk management strategy and the need to be attuned to changing forces across the business landscape. It is perhaps difficult to recall a more challenging environment of enduring volatility, mitigating risks and struggling for growth. Experiences such as these prepare all including us as banks to focus on coping with short-term headwinds while positioning for creation of long-term safety nets simultaneously. Managing volatility thus requires institutions including banks to promote domestic financial stability, ensure that domestic instability is not Source: YES BANK, Bloomberg transmitted internationally, and guarantee that international institutions and the rules of the game are not themselves a cause of volatility. With business cycles becoming shorter and harder to predict in terms of turnaround, businesses and industry have inevitably to contend with, and manage, not just their normal core business risks, but also financial risks like foreign exchange, interest rate, and commodity price risks. Financial institutions, and, in particular, banks, are supposed to and must build up their resilience to both expected (i.e., risks) and unexpected (i.e., shocks) losses. Creation of a three tier risk management structure as a proactive measure within banks can be constructive. At the first level, the top management must play a critical role to create controls to ensure that overall risk remains within acceptable levels and rewards compensate for the risks taken. The second level could be at a macro level, encompassing measures to manage risk within a business area. The third and perhaps the most crucial is the mitigation of risk at a micro level – with measures performed by individuals who take risk on behalf of the bank. From a micro perspective, managing volatility pertains to the effective management of expected risks. Although expected risk induced volatility falls into the realm of known unknowns, it is important for firms to determine their level of threshold for pain and tolerance, and then adequately align their internal policies around them. Besides maintaining adequate capital, the banking system can consider some of the following: 4 § Carve out a Volatility Fund from their capital to deal with any exigency § Prepare robust internal models for predicting turning points for business cycle through a framework of leading indicators § Submitting internal projections to regular stress testing and ring fencing balance sheet operations from asset price volatility to the extent possible through a judicious use of hedging techniques Not only are the internal strategies crucial, but as a bank, playing an indomitable role in the economy's financial intermediation, it must disseminate and share with its clients across all sectors, the in-depth
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