“Demystifying the world of finance” – Part I

“Governments don’t rule the world, Goldman Sachs does!” (Alessio Rastani, a hitherto unknown trader, during his recent ~4 minutes of fame interview to BBC)

Rajeev looks puzzled these days. First 2 years of the Engineering degree went in a jiffy and now it’s time for him to get serious about his career. He observed something peculiar; many of his seniors are getting placed in ‘Banks’ and he could not quite figure out what an Engineer, a Chemical Engineer to be specific, could possibly do at a ‘Bank’. And these jobs pay rather well, and are the hottest pursuits on the campus. He is wondering if the stardom surrounding the ‘finance’ jobs is for real and what exactly does one do in a ‘finance’ job. The article below, 1^st of a 3 articles series, is written by Nimilita Chatterjee (a seasoned banker herself) to enlighten Rajeev and many others like him.

Let us play the ZNMD game – What is the first word that comes to your mind when one says FINANCE –money, deals, stock markets, number crunching, MS Excel, a support function, or BORING? All of these are possibly true except the BORING part. Finance is indeed a world of opportunity for a student, just like other sectors, except that in Finance one deals with financial products which are intangible (can’t be seen or touched) unlike soap and oil. A financial product is in fact a more challenging product to create and sell as there is no physical product and it  is highly influenced by macro economic factors like the RBI’s policy, the growth of the economy etc. on which one has very little control.

Before you get all awed, understand this. Finance is a very broad based term and covers the complex world of money matters. The way all Civil Engineering companies do not necessarily build only houses (some build roads, some build ports, some build bridges and some build power plants etc.); different Finance companies are also engaged in different types of businesses. A few of these are –

1. Investment Banks – the big daddies of the industry. A small set of very high performing individuals (like the trader in the video) who work primarily in high end financial products by helping a company access the stock and bond markets to raise money for expansion or other needs. They also help companies in mergers and acquisitions, corporate finance, professional investment management for institutions or high net worth individuals, and merchant banking. Other significant aspect is trading, be it stock market, currency market, bonds, commodities, metals; these guys literally move the world’s money from one end to another. Goldman Sachs, Lehman Brothers (went bankrupt in 2008) are examples of I-banking firms.

2. Banking– this is possibly the broadest term of all. Banks are small worlds of their own and are largely split into 3 key verticals –

1. Retail Banking (customers are individuals like you and me; Savings Account, Fixed Deposits, Personal Loans, Credit Cards are examples of retail banking products)
2. Wholesale or Corporate Banking (customers are small, medium, or  large businesses and the products are therefore tailor made for them such as Project Finance, Business Loans, Salary Accounts etc.) and finally
3. Treasury (the people who trade the money invested by depositors in stock markets, bond markets, the foreign exchange market etc. and ensure the assets (loans) and liabilities (deposits) of the Bank are always in the right balance

State Bank of India, ICICI Bank, Citibank etc. are examples of Finance companies that can be classified under this category.

3. Insurance Firms – similar to Banks they are worlds of their own but the products they create and sell are Insurance products. The fundamental principal on which insurance works is pooling of risks (100 guys pay 100 Rs. every year so that when one of them dies in a given year, the bereaved family may get Rs. 10,000 to see itself through the financial distress). The three broad categories of insurance companies are –

1. Life Insurance – sells products which cover the risk of untimely death of a human being (could be sold to an individual or to a group)
2. General Insurance – All other insurance products (Motor, Health, Fire, Property, Theft & Burglary, insuring events like World Cup etc.) are covered under this category. Again can be sold to an individual or to a group of individuals or to a business entity
3. Reinsurance – a VERY niche set of companies. They insure the insurance companies  :)

Examples include LIC (Life Insurance), Oriental Insurance (GI), Swiss Re (Reinsurance company) etc. One clear area of specialization which exists in insurance but not in any other industry is the area of Actuarial Science (will cover in detail in next article).

4. Equity Research– Before large and high value investment decisions are made, there is a large amount of research which is done on the industry and the companies into which the investments are made. Broadly equity analysts or researchers develop insights regarding the value, risk, and volatility of a particular share in the stock market, and thus assist investors to decide whether to buy, hold, sell, or avoid the security in question. Equity research organizations stand on their own or maybe captive to large investment banks and service only their clients. Nomura’s equity research arm is example of a captive unit and Edelweiss is a standalone Equity Research company. Also Equity Research/Analysis at no point must be confused with Business Analytics or Market Research (covered later in the article)

5. Broking firms – A brokerage house, also called a brokerage firm, is a company licensed to buy and sell shares or securities. Acting as an intermediary between buyers and sellers, the revenue is earned from commissions. A brokerage house may offer a variety of investment products. Typical choices include stocks, mutual funds, and options, as well as government and corporate bonds. Often a brokerage house may offer market research and investing strategies also as an added service to its clients. Anand Rathi is an example of a brokerage firm.

6. Business Analytics firms – In Business Analytics customer level transactions are analysed and predictions are made based on past trends. The data volume that is analysed is huge (running into millions of records) and specialized tools and techniques (SAS, SPSS etc.) are used to mine this data. These are not “pure” finance sector companies per say as the same analysis can be done for an FMCG or a Telecom company also but till date major application of BA remains in Finance sector where traditionally the data available for analysis is huge. A Business Analytics can be an in-house team for a bank (say Citibank) or a stand alone service provide also (Fractal is an example)

7. Market Research firms – Market research companies are mot finance companies at all (though often are mistaken as one) but are industry agnostic. Market research projects usually are questionnaire led studies which could be qualitative or quantitative in nature where the client is looking for answers to a particular set of questions to develop a product for the market or assess a market gap. ORG Marg and IMRB are two leading Market Research companies in India.

8. Credit Information Bureaus –are relatively new phenomenon in India and are independent organisations licensed by the RBI to compile data on an individual/organisation’s identity, credit transactions and payment histories. These companies present a consolidated view of the customer’s information and repayment history to a lender when an individual borrower/company is looking to take a loan in the market.  No opinions on lending decisions are given by these organizations and they are therefore only fact providers for lending institutions like banks. Examples include CIBIL, Equifax etc.

This is definitely not an exhaustive list and with in what is covered, it’s just the tip of the iceberg (didn’t I say Finance is a VERY broad field :)?). Feel free to comment if you need detailed information on any finance related topic and I shall be happy to assist. In next article(s) we would explore what are the various types of finance jobs, just the way there are various types of finance companies!

About the author – Nimilita Chatterjee, an XLRI Jamshedpur graduate of 1999, has 10+ years of experience in Banking & Finance with companies like Standard Chartered Bank, Barclays Bank and Equifax. The article has been written in her personal capacity and does not reflect the views of any of her current or previous employers.