Banks are looking to raise their game using technology

As fintech disrupts the banking industry, Indian lenders have been quick to embrace new ideas

In July, the Reserve Bank of India (RBI) set up an inter-regulatory working group to study issues relating to financial technology (fintech) and digital banking in the country. The aim is to understand major fintech innovations and developments and how the markets—the financial sector in particular—are adopting new delivery channels, products and technologies.

The initiative comes in the backdrop of various Indian banks testing out newer technologies in both the corporate and retail banking space, either independently or with the help of fintech companies.

Here are five major technologies that banks have either launched, or in various testing stages, and are likely to disrupt how banking is done:

Blockchain technology

Blockchain is a digital ledger software code. Essentially, it’s a record keeping technology, but the difference is that the recording happens on consensus, which is built into the system itself. Since blockchain is a decentralised ledger, all system members can access stored information. Though the blockchain technology emerged from cryptocurrency, Bitcoin, it is not restricted to bitcoins or even to the financial sector. Consulting firm PwC estimates that around 700 companies are exploring the use of blockchain, of which 150 are in the fintech space and 25 likely to emerge as leaders.

Globally, banks such as UBS AG, ABN AMRO Bank NV and Deutsche Bank AG are trying to find ways to use blockchain technology in daily banking. In India, Axis Bank Ltd, ICICI Bank Ltd and Kotak Mahindra Bank Ltd are also looking at blockchain technology. Banks see a possibility to use blockchain technology in trade finance and remittance space.

“We see a possibility to use blockchain for cross-border remittance and funds transfer in banking. We are right now in the testing phase,” said Deepak Sharma, chief digital officer, Kotak Mahindra Bank. However, blockchain-based applications can’t work in isolation and require a network to come together.

Artificial intelligence

In the artificial intelligence (AI) space, chatbots seem to have more takers when it comes to banking. Chatbots are computer programs that can imitate conversation with people using artificial intelligence. “A few examples where artificial intelligence can be used are for authentication, access, security, interpersonal recognition, virtual personal teller assistants and smart advisors,” said Rajiv Anand, executive director, Axis Bank. For instance, questions like ‘How much balance is there in my account?’, ‘How to load money from a wallet?’ or ‘How to change my address?’ can be answered with the help of a chatbot. Banks such as HDFC Bank Ltd and Kotak Mahindra Bank are looking to introduce chatbot-based technology into customer service. In April this year, DBS Bank Ltd launched a banking app in India with in-built artificial intelligence. Currently, fintech companies such as niki.ai are also developing AI-based chatbot apps and working as an enabler for the banks.

Biometrics

Financial institutions are considered one of the most vulnerable to cyber-attacks, especially with increasing digitisation. Since securing an account with a powerful authentication tool is one of the important steps, banks globally are working on technologies capable of using a customer’s unique characteristics for identity authentication. Banks and financial institutions across the globe are experimenting with biometrics for security and authentication purposes. For instance, vein authentication in Japan and monitoring of heartbeats in Canada has been tested for identification purposes to allow banking transactions.

Currently, some Indian banks are using fingerprint recognition, voice recognition and iris recognition for identification purposes. Large commercial banks such as ICICI Bank, HDFC Bank and Kotak Mahindra Bank are right now in the testing phase. Smaller banks such as DCB Bank Ltd have already launched fingerprint-based ATM cash withdrawal using the Aadhaar enabled platform.

Open API

Open application programming interfaces (APIs), too, are gaining traction in banking. Open API basically allows data to be accessible for use to larger institutions. The government has mandated an open API policy for five programmes: Aadhaar, e-KYC, e-Sign, proposed privacy-protected data sharing and the Unified Payments Interface (UPI). Many commercial banks are in various stages of using Aadhaar and e-KYC and offering products linked to it to their customers. For instance, Aadhaar-enabled biometric authentication is being used to open bank accounts.

UPI, the most ambitious project of the National Payments Corp. of India (NPCI), is now available for transaction. Since the system uses a single identifier, it eliminates the need to exchange sensitive information such as bank account numbers during a financial transaction. The objective of a unified system is to offer architecture and a set of standard APIs to facilitate the next generation online immediate payments.

Payments

In the last couple of years, the payments and transaction space has been changing with banks and e-wallet companies focusing on newer technologies. Banks are increasingly adopting technologies that can make transactions easier. Some of the major payment options that banks are betting on include virtual cards, sound waves, quick response (QR) codes and near field communication (NFC).

Virtual cards are cards that are saved in your mobile phone—you don’t need to carry a physical card. Axis Bank is looking to roll out these products soon. Banks are also testing the technology of using sound waves from the phone. To complete a transaction, the sound wave generates digital information, which is carried to another phone. It is similar to sending a picture or video using Bluetooth, except that you can’t make a monetary transaction. NFC-enabled cards allow you to transact without having to insert or swipe a card. You just have to wave your card near the terminal and the payment is made. Another technology is QR code. It is a machine-readable code, in a black and white matrix and can be read by a smartphone. Using this QR code, you can make the payment.

All these technologies are still work in progress for the banking sector. According to a June Credit Suisse report onDigital banking in India, while India may follow other developed markets in terms of impact from digital payments, there are many outcomes which could be unique to India, such as cost of transactions coming down to zero. The best customer interfaces (read apps) could own the customer.

The mechanics of monetary policy committees

After the appointment of government nominees to the monetary policy committee (MPC), the spotlight now shifts to how exactly this panel will work

Urjit Patel (RBI) governor

With the appointment of government nominees, the committee that will decide India’s monetary policy is in place. Now, the spotlight shifts to how exactly this panel will work.

Pami Dua, director of the Delhi School of Economics; Chetan Ghate, a professor at the Indian Statistical Institute, and Ravindra Dholakia, professor of economics at the Indian Institute of Ahmedabad, join Reserve Bank of India (RBI) governor Urjit Patel, deputy governor R. Gandhi and executive director Michael Patra on the committee.

While RBI has a history of working with the technical advisory committee (TAC), the terms of engagement with the new monetary policy committee (MPC) will be different.

For one, unlike TAC, where the voting was anonymous, the MPC framework requires the central bank to share the minutes of the MPC meeting, 14 days later.

These minutes will include details of how each member voted and also their statement justifying the reasons for voting in favour or against a resolution. 

 “It has become very onerous for external members now as these statements will be made public,” said Indira Rajaraman, an economist and a member of the technical advisory committee. Just like the technical advisory committee, MPC external panellists are also part-time members, appointed for four years.  Second, this greater accountability requires MPC members to meet regularly

The amended RBI Act prescribes at least four meetings a year.

TAC used to meet once in a quarter and for about three hours, wrote Ashima Goyal, economist and TAC member in a 19 September Mint op-ed.

Note that established policy boards such as the ones in Bank of England meet at least eight times a year and members receive an extensive staff briefing on the economy a week prior to the policy day.

Their meetings, too, go on for days, like for instance, the two-day conferences of the US Federal Reserve Open Market Committee.

Third, sharing of information to external members will also be key to informed decisions. One complaint among TAC members was their limited access to information, according to a top RBI official speaking on condition of anonymity. The amended RBI Act says MPC members can now request at any time, “additional information, including any data, models or analysis”.

Fourth, the role of the central bank governor and her/his deputies will also change under the new regime. In the past, the governor just had to listen and act independently.

A Mint story showed that rate decisions under governor Raghuram Rajan’s tenure were not in accordance with the majority TAC view most of the time. But any disagreement with MPC members will have a larger implication for policymaking.

A market participant said on condition of anonymity that any dissonance in the views of MPC members and the governor could spell uncertainty and disturb the markets.

 “The TAC was advice, and after that the governor and the finance minister did as they liked. The MPC is an executive body. It makes the decision,” said Ajay Shah, economist and researcher at the National Institute of Public Finance and Policy.

According to the monetary policy framework, agreed by RBI and the government last year, the central bank will look to contain inflation within a band of 4% plus/minus 2 percentage points. The amended RBI Act says that the panel “shall determine the policy rate required to achieve the inflation target”.

Will the MPC start functioning before the 4 October policy review?

We will know by 27 September since RBI will have to publish the schedule of meetings at least one week before the first meeting for the year.

Technology enhances human relationships

Highlights of the Mumbai edition of the Social Media Week

And, that was a wrap! Fifty-three speakers, 35 topics, and one didactic event! It’s great to be a part of such an incredible global event, where you have all the ‘social media gurus’ under one roof. This year’s global theme was The Invisible Hand: Hidden Forces of Technology (and How We Can Harness it for Good), and the Social Media Week’s events were held in the bustling city of Mumbai. What a week!

People always ask, what did you cover at SMW Mumbai, and I tell them, the right question is, ‘What didn’t we cover?’ There were numerous topics, from social media trends, ideas, content and concepts, to insights, campaigns, tools, features, products, ROI, and so much more.

On the opening day, we were joined by Vivek Nayer, the CMO of Mahindra and Mahindra, as he walked us through the ‘Power of Storytelling in the Landscape of New Media’. Nayer explained why social media is so popular. He says, “Social media encourages innovation and virality for a winning combination.” But, Nayer also highlights a critical point most brands and marketers forget. He says, if you’re looking for data there’s always plenty of it available, but data is irrelevant if you can’t use your common sense and judgement. And, that message was just from the opening day keynote. With that benchmark set, the other days didn’t disappoint.

Day two focused on ‘News, Media and Entertainment’ with three keynotes and three panel discussions. A morning speech led by the Head of Sports Partnerships of Twitter India, Aneesh Madani, gave us a glimpse into the sporting world. His topic, ‘A look at how sport connects and dominates on Twitter’ showed us how who you follow on Twitter is a direct reflection of who you are. “We have moved into a new era where we can be anywhere, but still be a part of the conversation,” he said.

Day two also included a topic most people are inquisitive about – viral videos. But, Aditya Bhat, the Content Head for Reliance Jio, approached the topic in a different way: How not to Make a Viral Video. Bhat said there was no hard and fast rule or recipe for success when it comes to making viral videos.

Bhat says that viral videos have one common element: quirkiness. “You don’t need big budgets for a viral video. You just need an impactful message.”

‘Startups and Entrepreneurship’ encompassed the third day’s focus, along with an important focus on personal branding. Kavi Arasu, the Executive Coach of Leadership and change for Social Business, presented ‘Personal Branding simplified in 60 minutes’. “In the era of social media, building your own personal brand is more important than ever,” Arasu said. While the product is important, people trust people. A little note to everyone out there: You are your own brand!

A key thought that kept arising in everyone’s mind throughout the week was, ‘Why is social media so viral?’ Angad Singh Manchanda, Co-Founder of Chimp&z Inc, had the perfect answer: “There is one common thread among everything that goes viral – relate-ability.” Manchanda says the only reason people are on social media is because it’s the biggest source of entertainment today. And, who doesn’t like to be entertained?

The closing day of Social Media Week featured some great speakers, including Satya Raghavan, the Head of Entertainment of YouTube India, who spoke on ‘Monetisation of Digital Content’. Today, a vast majority of YouTube creators just use a phone to create their content. “A YouTube thumbnail is like a window into a shop. It could determine whether a consumer clicks on it,” was one insight from Raghavan.

To cap it all off, Atul Kasbekar, film-maker and fashion photographer, joined us on a panel discussion with Anand Desai, Partner DSK Legal, and Lavin Mirchandani, Founder of GetEvangelized to talk about ‘Celebrity Monetisation, Engagement and Content Ownership on Social Media’. “Brands think getting a celebrity to advertise and promote a product will help sell the product. That’s wrong! The product quality matters first,” says Kasbekar. He believes there’s a whole new world of celebrity on social media. It has created a sub-culture, just by accretion.

The common thread that ran through the ‘Invisible Hand’ theme was how technology is enabling relationships and relate-ability between people and brands and people. It’s no longer about the hardware or software, we are looking at how technology can build meaningful relationships within online communities.

Manufacturing slowing in September, reveals SBI Composite Index

Banks’ loan books not showing significant traction

State Bank of India on Thursday said its yearly Composite Index, which is a leading indicator of manufacturing activity in the Indian economy, for September 2016, is indicating a downward momentum and is in a ‘low growth’ phase compared to the previous month’s ‘moderate growth’ phase.

Specifically, the yearly Composite Index reading for the reporting month has come in at 50.2 (low growth), compared to the previous month’s 52.7 (moderate growth), and above the benchmark level of 50.

The Composite Index has mainly two indices — SBI Monthly Composite Index and SBI Yearly Composite Index. A consistent negative (positive) month-on-month forecast in the index will lead to negative (positive) growth rate in year-on-year index after a while.

Loan book

According to Ecowrap, a publication of the bank’s economic research department, the banking sector loan book is not showing significant traction as of now, on the back of a stagnant pipeline of projects.

“In our view, the year is likely to see 13-14 per cent credit growth, but mostly on the back of refinancing by banks on completed infrastructure projects in sectors such as power and roads where there are no risks.

“In the coming months, there may be some demand from the retail side due to festive seasons. We also believe oil companies and NBFCs may avail of credit growth in the second half of the current fiscal,” it said.

Referring to a rating round-up report for the second half of FY16, Ecowrap said the debt weighted credit ratio or the quantum of debt of firms upgraded versus downgraded was 0.2, the lowest in the last three years. This signals the trend in credit quality of corporate India. Sectors that stood out in the upgrade were in consumption-related sectors such as agricultural products, textiles, and automotive components. Poor performance by sectors in the downgrade category includes steel, electric utility, and industrial machinery.

Credit cycle to improve

According to the report, “The credit cycle will turn for the better in a gradual manner. The good thing is that a part of the slowdown in corporate credit growth in the current fiscal is because of de-leveraging by corporates and subsequent repayments.

“Retail credit growth continues to be strong. Additionally, about 48 per cent of the credit upgrades in H2 FY16 was due to better order book/healthy demand, improvement in profit margins and efficient management of working capital.”

With the Pay Commission arrears and revised salary of government employees implemented from August 2016, bank deposits showed sizeable growth in September (over 20 per cent of the incremental addition in the current fiscal is attributable to these developments. This will lead to increased consumer demand ahead of the festive season.

“We are pencilling in a 50-basis point rate cut by the RBI MPC, maybe as early as in the October policy,” said the report.

Indian electronics products to touch $75 bn by 2017: ASSOCHAM-EY study

The Indian electronic products industry in India is expected to grow at a CAGR of 10.1% to reach US$ 75 billion by 2017 from US$ 61.8 billion in 2015 with increasing penetration across consumer products especially in semi-urban and rural markets, along with government push for infrastructure development, locomotive and energy, there exists a significant opportunity for rapid expansion of this industry, adds the ASSOCHAM-EY joint study.

The electronic components industry in India was valued at US$13.5 billion in 2015, growing from US$10.8 billion in 2013 at a CAGR of 11%. The market is dominated by electromechanical components (such as PCB and connectors) which form 30% of the total demand, followed by passive components (such as resistors and capacitors) at 27% , according to an ASSOCHAM-EY study titled ‘Turning the Make in India dream into a reality for electronics and hardware industry’. 

India’s attractiveness for manufacturers is growing due to availability of low-cost labor. Rising manufacturing costs in China and Taiwan are compelling manufacturers to shift their manufacturing base to alternate markets. In 2014, the average manufacturing labor cost per hour in India was US$0.92 as compared to US$3.52 of China, noted the study.

The Indian manufacturing ecosystem for electronics and hardware industry is still at a nascent stage and faces various demand side as well as supply side challenges are limited scale of operations and local component demand due to the nascent product manufacturing in India. Component demand in India is muted due to very limited value addition as primarily last-mile assembly takes place. Norms such as safety regulations for automotive, medical and industrial sectors have driven the uptake of electronic content globally.

However, manufacturers in India do not add high electronic content in the products due to limited industry-specific standards. The current market is dominated by secondary sales and primary sales are limited due to reduced disposable income in semi-urban and rural markets. The market penetration for most of the consumer appliances and electronics is currently lagging behind global average by up to 60% in certain categories and there lies huge untapped potential in rural markets (approximately 69% of India’s households).

Although global markets are witnessing rapid consumer uptake as electronic content increases across verticals (e.g., automotive with applications around safety, connectivity, infotainment, consumer electronics, smart homes, etc.); India has a slower adoption as consumers remain highly sensitive to even a marginal increase in product prices.

Due to nascent stage of electronics manufacturing in India, scale of operations is low, resulting in reduced cost competitiveness. Traditional electronics manufacturing destinations such as China, Taiwan and South Korea have built significant capacities across manufacturing value chain (SKD assembly, CKD assembly, Semiconductor Assembly & Testing Services). In addition, emerging (Malaysia, Vietnam) destinations have also built capacities. Although labor cost is low in India, labor productivity is lower than traditional destinations.

The basic infrastructure for any industry comprises good roads, power, water, telecommunications, ports and logistics. In India, availability of these facilities is not up to the mark, even in established industrial estates. While the Government has notified Greenfield Electronic Manufacturing Clusters, they still remain un-operational due to infrastructure issues.

The lack of proper roads and sales infrastructure results in distribution challenges for companies catering to markets in small semi-urban cities, rural areas and remote villages. Additionally, from both import and export perspective, there is port congestion due to unavailability of containers and long documentation process.

Availability of relevant manpower is crucial to the development of any industry. Since the electronics manufacturing industry has high dependence on skilled manpower, especially for highly specialized activities such as electronics system design, IC design and manufacturing etc., the availability of talent with relevant skill sets assumes considerable importance.

Both SKD and CKD are labor intensive and require delicate handling and process adherence during the manufacturing process. With changing technology, the labor needs to be constantly trained. However, the current labor scenario in India poses certain challenges.

According to National Skill Development Corporation (NSDC), the incremental human resource requirement in the electronics and IT hardware sector will be 8.9 million by 2022. The lack of training centers that administer courses relevant to the job functions in electronics sector is also a concern. Moreover, the country has strict labor laws including restrictions on overtime work, employee headcount and work timings for women employees, which act as a barrier for growth in the sector.

The high cost of working capital and capex-related financing (receivables and payables) due to high interest rates is a major challenge faced by domestic manufacturers, since it increases the overall cost of finance. Additionally, there is an increase in the cost of manufacturing (conversion costs) due to inadequate availability/reliability of power, high cost of real estate, etc. The cost of borrowed capital is 12%–14% in India as compared with ~5%–7% global average. Moreover, with the frequently changing energy efficiency norms, manufacturers need to make significant investments for products with a high rating.

India’s taxation system is complex, especially where indirect taxes are concerned. Currently, the base direct tax incidence in India stands at around 30%, whereas the corresponding tariff in other Asian countries is between 16% and 25%. Although, the Government has proposed the implementation of Goods and Services Tax (GST) for a state-of the-art indirect tax system, there are concerns that the industry faces in terms of the clarity on the revenue-neutral rate, non-creditable tax on inter-state movement of goods, status of existing state incentives granted and transition from existing taxation system to GST regime.

Procedural and regulatory clearances are time consuming and complex. According to industry sources, it takes up to a year to set up a manufacturing plant in the country and a new production line could take up to six months to become fully operational.

Additionally, the refund processes and clearances to avail benefits under tax are highly cumbersome and time-consuming. Procedure to claim concessional duty on many raw materials/ parts/components used in manufacturing of electronics products has been recently simplified in the Union Budget 2016-17 by introducing the concept of self-assessment.

MSME secretary urges small companies to focus on substituting imports

Monday delivering the inaugural address at the FICCI-MSME's sixth annual MSME Summit on the theme 'Propelling MSME Growth: Ways & Means', KK Jalan, the MSME secretary said:

• Government was also planning to identify 25-30 sub-sectors in MSMEs and focus on these sectors for raising productivity and enhancing the overall landscape of MSMEs.

• He urged the MSMEs in the country to update the details of their enterprises on the MSME data bank. He added that the updated data would be used for evolving parameters for the growth of MSMEs in the country.

• He said that there was a need to carry out research in this area as it has been seen that SME credit by banks was going down. There was a need to carry out academic work in the space to understand the challenges and issues of the sector.

• He suggested that for MSMEs, a dedicated financing institute could be established like private sector NBFCs. He suggested floating of separate NBFCs for assisting micro enterprises. _"I would shy away from having some SIDBI-like institution or some state institution in this because state institutions have their own problems. Therefore, let them be in the private sector," _ he said.

• Ancillary industries contribute about 50-60% of MSME manufacturing and should be focused on, Jalan said. Substitution of imports can be a major propeller of growth of SMEs, MSME secretary K K Jalan said, singling out toys manufacturing as an example.

http://bit.ly/2d49ara

http://bit.ly/2cPeIEU

Game for agri-commodities?

The Dhaanya index of the NCDEX has delivered annualised return of 19.2 per cent since January 2008, pipping most other asset classes to the post. But the high returns come with high risks

Do you know which asset class delivered the best return since the beginning of 2008? The answer is agri-commodities. While not many investors or traders would have put money in coriander or cotton seed oil cake futures, they would have made more money there than in gold or even equity.

The sharp plunge in equity markets in 2008 and the period of stagnation since 2010 have resulted in the Indian benchmark, Nifty, delivering annualised return of just 4 per cent since January 2008. Gold had its moment in the sun in the fall of 2011 but it has been a downhill ride for the yellow metal since then; resulting in yearly return of 5 per cent. Crude oil has not had it good since July 2008, delivering negative annual growth of 8 per cent. Returns from real estate have also been not much to write home about in the recent past.

However, the benchmark index of NCDEX, the Dhaanya index that is constituted with the highly-traded agri-commodities of the exchange, has delivered annualised return of 19.2 per cent since January 2008, pipping most other asset classes to the post. Some of the constituents of this index, such as rape mustard seed have given annual growth of 33 per cent since January 2008, a feat that can be matched by very few stocks.

That said, agri-commodities are not suitable for investors because there is no instrument to ride on; unlike gold where ETFs are available for investors. Agri-commodity futures traded on the commexes mainly serve the needs of the commodity producers or users of the products to help hedge their price risk. There are some arbitrageurs and traders who do operate in these exchanges but they are few in number.

While lack of avenues is a drawback, not many investors would agree to bet on rape mustard seed or jeera even if ETFs or other similar instruments were offered to them. What is it that turns off traders and investors from agri-commodities? Are their fears justified? Here we examine some of the common misgivings about agri-commodities futures to see if they are valid.

Lack of liquidity

Liquidity is a concern, but it can be surmounted by trading only on exchanges that trade higher volumes, such as NCDEX and MCX and staying away from illiquid counters.

The three largest exchanges for agri-commodities, the NCDEX, MCX (agri-commodity segment) and the NMCE together transact contracts worth ₹3,000-4,000 crore every day. This is about 2 per cent of the value of equity futures and options (F&O) traded on the national exchanges and around a tenth the value of currency derivative contracts traded on exchanges.

Liquidity in individual contracts is not too much to write home about. For instance, the top-traded contracts on the NCDEX trade roughly between ₹200 crore and ₹500 crore every day but many contracts witness less than ₹100 crore of transaction per day.

Aurobindo Gayan, Vice-President-Research, Kotak Commodities, says that there are three factors that a person must keep in mind while selecting a commodity to trade in — the volume or participation level in that commodity, the sowing and harvesting pattern and his risk appetite. He says that of the total volume of agri-commodities traded every day, roughly 40 per cent comes from the edible oil cluster — soyabean, soyaoil, crude palm oil and mustard. These are followed by sugar, cotton and other spices.

But the sowing and harvesting pattern of a commodity affects seasonal liquidity, too. For instance, soyabean is harvested between October and December in India. The users of soyabean try to buy this commodity during this period making the contract very active in this period. On the other hand, in March or April, this contract could get quite inactive.

The trader’s risk appetite also needs to be considered as the exchange charges mark-to-market margin everyday on the outstanding positions. It is best to set aside a certain sum at the outset as the draw-down or (the reduction from your capital) that you are willing to take.

Sushil Sinha, Executive Director, Karvy Comtrade, says that it is possible that an investor might be aware of the factors affecting the price of a certain commodity as the commodity is grown in the region he resides in or because he is a user and hence follows it closely. It is best to stick to such commodities where familiarity is higher.

Price manipulation

Thin liquidity on many counters that enables price rigging is one of the main drawbacks of commexes. Instances of a few players, who are privy to price-sensitive information regarding a commodity, forming a cartel to rig up the price are quite common in the Indian agri-commodity market. That is one of the reasons why the history of this segment is strewn with suspensions and outright bans of commodities. The guar gum and guar seed episodes of 2011 and 2012, where prices rocketed high in a crazy manner was mainly due to low liquidity and lack of strong players to act as counter-party.

While the market is maturing, this threat has not entirely vanished, as is evidenced by the suspension of the castor seed contracts in January and the chana futures in June this year. Threat of excessive speculation affecting the spot prices was cited as a reason for these recent suspensions, too.

The market regulator has plans to increase participation in agri-commodities by allowing domestic financial institutions, mutual funds and foreign institutional investors to participate here. Once that happens and volumes increase, this issue can be addressed. Traders can, meanwhile, mitigate this risk somewhat by staying in the more liquid counters. But the threat of the contract getting suspended, if there is a sharp one-sided movement in the commodity, continues and remains one of the greatest risks in this segment.

Fragmented spot market

The absence of a unified spot market that can provide the underlying price for anchoring the futures price is considered another drawback for the Indian agri-commodity segment. But exchanges have a process in place to ensure that spot and future prices are not entirely out of whack.

This is done through a price polling mechanism that is followed by the agri-commodity exchanges. The NCDEX follows a pretty elaborate method under which spot prices of each commodity are collected from a set of empanelled dealers and stakeholders most relevant for that commodity from various spot markets and mandis. These prices are bootstrapped (removing the outlier prices) and subject to further smoothening through statistical means to arrive at the spot price that is flashed live on the exchange.

SEBI, in a circular issued this month, has laid down rules regarding the disclosure needed to be made by exchanges regarding the methodology followed, the centres and panellists used for each commodity.

Finding a spot price to anchor commodity prices will become a lot easier once the proposed National Agriculture Market is fully operational. This is a pan-India electronic platform that will connect all the APMC mandis to create a unified spot market for agricultural produce.

NCDEX puts out live data on both the spot and future prices of contracts; this can help you select the commodity with the least variance.

Fear of government intervention

This is also not too great a concern as, over the years, the agri market has realised that it is best not to show too much interest in commodities too prone to government control.

If we consider the weights in the CPI index, for the base year of 2012, cereals and products have weights of 12 per cent in the rural basket and 6.5 per cent in the urban basket. Of the main cereals consumed in the country, rice has already been suspended from trading. While wheat and maize are traded on agri-commexes, volumes are not too high on these counters.

Of the politically sensitive pulses cluster, tur, arhar, etc, have already been suspended from trading. Trading in chana was suspended in June. Sugar continues to be vulnerable to political risk and hence, traders here need to keep a tight watch on government policies as well.

Edible oils, such as mustard, and soy refined oil have higher weights in the CPI and hence, are exposed to risk from government intervention. So, traders need to tread cautiously here as well.

Information deficit

There is a perception that commodities are a black-box with information hard to come by. But this is far from the truth. Exchanges provide a wealth of information on factors governing the price of each commodity, its price patterns and so on. Brokers also issue reports on commodities that can be quite helpful. Apart from this, investors should track the harvesting and sowing periods of a commodity, says Sushil Sinha. It is also important to follow the monsoon, on the IMD website. Most commodities are internationally traded, too, so information can be obtained from international exchanges, and research reports. Sites such as USDA (US Department of Agriculture) and the Indian Ministry of Agriculture can also be tapped.

Keeping track of mandi prices is essential at present. This can be done by following these prices on exchange websites or from the daily reports issued by brokers.

Game for risk?

To sum up, liquidity is generally low in commodity exchanges but some counters (in certain seasons) show enough liquidity to enable trading. Information is also not too hard to come by for those interested in following the market. Also, exchanges are trying to make the futures price as close as possible to the price traded on the mandis.

But the risk of sharp price movements due to price manipulation by a few insiders remains open. With SEBI at the helm, these wrongdoers could be checked, and the system cleaned up eventually. But that could take years. Meanwhile, the regulators continue to remain jumpy and continue to suspend trading in contracts with excessive price movements, leaving the users of these contracts in the lurch. This is eroding the credibility of these exchanges.

So, while agri-commodities could be an alternate avenue for making some money, it is suited only for the risk-takers.