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Tata Capital's Praveen Kadle: Financial Inclusion 'Is Not Going to Be Achieved Overnight': India Knowledge@Wharton ( http://knowledge.wharton.upenn.edu/india/article.cfm?

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Tata Capital's Praveen Kadle: Financial Inclusion 'Is Not Going to Be Achieved Overnight'
Published : September 09, 2010 in India Knowledge@Wharton

Praveen Kadle, managing director and CEO of Tata Capital, has been with the Tata Group for the past 18 years in various leadership roles. In an interview with India Knowledge@Wharton at the recent Wharton India Economic Forum in Philadelphia, Kadle discusses a range of issues like the turnaround at Tata Motors in the early 2000s, the acquisition of iconic British brands Jaguar and Land Rover, and the key objectives at Tata Capital. India, Kadle says, needs to focus on financial inclusion, and he believes that the Tata Group can play an important role in this. He points out that in rural and semi-urban India, savings are primarily in the form of gold or land and these don't give high returns. There is a need to educate people about financial products and also make these accessible to them, he notes. An edited transcript of the conversation follows. India Knowledge@Wharton: Praveen, thank you so much for joining us today. Praveen Kadle: Thanks for inviting me.

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India Knowledge@Wharton: I would love to talk to you about Tata Capital, of course, but before that, could you tell us a little bit about the turnaround of Tata Motors when you were there? Kadle: I joined Tata Motors [when] I was transferred from another Tata company at the end of 1996. At that point in time, Tata Motors was doing quite well, but one was quite clear about the problems related to its operations. These were systemic problems, especially the high cost of operations. The market share was coming down and [there were problems with] product acceptability in the car division. It was quite clear that the company had to clean up its act as soon as possible. So from 1999 or 2000, we started looking at the cost structure. We brought down costs significantly. We improved employee productivity significantly. We restructured our operations. Some of the non-performing assets (NPAs), or underperforming assets, were either sold or were made to sweat a lot so that we could get back returns. I think working capital management was one of the key areas where we did significant restructuring. We used to have a huge inventory problem and about 27% of our total revenue was locked in net working capital -- not gross. So we decided to make the company get into some kind of reverse mode. From positive net working capital where a lot of money was blocked, we thought that we should get into negative net working capital. It took us about a couple of years. [We] had to completely change the paradigm. Credit policies had to be changed. Inventory management policies had to be changed. We had to rework our policies with our vendors for inventory management, the procurement system, as well as for payment terms, but finally we did succeed. Tata Motors has had a net negative working capital for the last almost eight or nine years. India Knowledge@Wharton: How did you change the paradigm? Kadle: Let me give one example. [Earlier] we used to have [a system of] 80% credit and 20% cash when we sold our vehicles. We talked to our dealers. We provided them with the banking channel support system. We brought in a lot of IT systems. All of that really helped. And, of course, the mindset changed among our senior employees and also with the dealers. [All] this helped us to shift from 80% credit. Now we have 100% cash [sales]. Similarly, we used to [carry] a huge amount of stocks [in order to] manage our production flow
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Tata Capital's Praveen Kadle: Financial Inclusion 'Is Not Going to Be Achieved Overnight': India Knowledge@Wharton ( http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4520)

systematically. But we came to the conclusion that we could have the same efficient production flow without holding [unnecessary] inventory at our end. We had to have a better kind of a production planning process with our vendors and a good IT system through which we could continuously monitor our own internal production requirements [and] the flow from the vendors to us. And with that we could bring down the inventory levels. We used to have 90 or 100 days of inventory. We could bring it down to 30 days or so. Similarly, we used to have about 90 days' receivables. We brought that down to seven to eight days. By using new banking products we could get [an] extended payment schedule without impacting cash flow for the vendors. In fact, vendors started giving us cash discounts. We used the banking channels really effectively. That improved the payables in terms of number of days. India Knowledge@Wharton: Was it a result of the strengthening of the company's financial situation that the strategic goal of expansion also came about -- specifically, the targeting of the Land Rover and the Jaguar acquisitions? Could you take us through some of your strategic thinking behind those two acquisitions? Kadle: After the turnaround that happened in 2001 and 2002, there was a very clear-cut strategy direction. One, of course, was in the commercial vehicle business. We were one of the largest truck makers in the world. But we lacked technology in the high end of truck manufacturing. One option was to build it internally. The other option was to go for inorganic growth. In 2003 and 2004, we were successful in acquiring the Daewoo truck company in South Korea. That helped us a lot in terms of upgrading our technology in high-end truck manufacturing -- the heavy truck manufacturing. Thanks to that success, we looked at our car business. And in the car business we found that while we were very good in small car manufacturing and small car technology, we lacked the technology in the high end of the luxury segment or the premier segment of car manufacturing. If we were to build it on our own it would have taken us a lot of time as well as a lot of money. We got the opportunity in early 2007 or mid-2007 to look at Jaguar Land Rover, which Ford Motor Co. was looking to sell. I think we got the technology, the market, the product, the good people and the good technology facilities at a fairly good price. More importantly, it helped us in terms of building our international market business, particularly in the premium segment vehicles. We also found that we could perhaps bring the low-cost manufacturing advantage from India to the U.K. and bring down overall costs without compromising on quality. So today, if you look at commercial vehicle manufacturing, we are in the top five in truck manufacturing and cover the full technology -- from small trucks to top-end trucks. And if you look at cars, we have our own Nano, which of course is breakthrough technology. And then we have the premium segment vehicles through the Jaguar Land Rover acquisition. So we are a full-fledged automobile company, both in commercial vehicles as well in the car segment. India Knowledge@Wharton: Your thinking about being able to bring lower costs into high-cost operations in the premium segment is very interesting. How has that been working out? Kadle: We have already started working on lowering component costs by having some of the component vendors from low-cost countries to supply to the U.K. plant. More importantly, in vehicle designing, we have an inherent advantage with the software engineers - in Tata Motors and its subsidiary Tata Technologies. We have close to 4,000 high-class software engineers who can develop right from a small component to the full vehicle design. So, one can bring the advantage of low cost without compromising on quality, vehicle design, component design and manufacturing. India Knowledge@Wharton: Turning now to the Nano, can you tell us what the current situation is and what your plans are? I hear a number of people asking when the Nano will be available in the U.S. Are we likely to see them being driven around Philadelphia any time soon? Kadle: Tata Motors certainly has plans to bring the Nano to different parts of the world and I think the U.S. will be one of its target markets. India Knowledge@Wharton: Let's turn now to your present role, which is in Tata Capital. What is
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Tata Capital's Praveen Kadle: Financial Inclusion 'Is Not Going to Be Achieved Overnight': India Knowledge@Wharton ( http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4520)

the company's primary mission and what are some of your key objectives? Kadle: When the Tata Group looked at its new growth strategy, it found that the financial services market was going to be one of the key growth areas in India. The Tatas used to have a very strong presence [in this sector] in the late 1950s and late 1960s before the bank or the insurance business, which were either fully or partly owned by the Tatas, were nationalized. We found that if we were to take the group into the new growth areas, a presence in financial services would be the key requirement. So in 2007, we started Tata Capital. Also, India requires a huge amount of financial inclusion. Therefore, one can also get the social objective achieved without compromising on the commercial aspects of doing the business. We are in the corporate finance business, where we lend to corporate clients, mostly to mid-size and small companies, which are today not getting the right kind of credit from the banking system. We are also in investment banking, where we support mid-size companies [that] are not getting the right kind of financial advisory or investment banking advice. We are looking at the capital market in a big way, both in equity as well as in the debt market -- especially the debt market, which needs to be strengthened. We are setting up a private equity fund to help some of these mid-size companies. From the financial inclusion point of view we are in the process of developing a very robust distribution and broking network for distributing financial products across the country. You are aware that the Tata name connotes a strong image of trust and confidence. Rural and semi-urban India has a strong trust in the Tata name. We should use this strong trust in the Tata name for financial inclusion. Of course, [it should be] in a commercial sense, but at the same time to achieve social objectives. These are the four or five key areas in which the Tata Group is working. We are also in the businesses of mortgage financing, auto financing and so on. India Knowledge@Wharton:It is a wide range of activities that you have just described. The financial services industry in India has become so competitive, not just with domestic companies, but also with international players becoming active in private equity and so forth. How do you differentiate your firm from the rest of the market? Kadle: Unfortunately, Indian regulations don't allow large corporations like the Tatas to get into full-fledged banking or commercial banking. So we are registered as a non-banking financial services company, which doesn't allow us to get access to the low-cost current accounts and savings accounts of retail consumers. So we certainly have a cost disadvantage on the funding side. But what we are trying to do is to keep our operations cost-efficient by using technology and by using highly-motivated employees to have much better employee productivity and the right kind of processes. We also are looking at how best we can acquire top-quality businesses or customers and in the process keep NPAs low. So the emphasis is [to keep] costs low and productivity high. If you grow the business reasonably well you will also have the ability to access funds at a relatively lower cost. To some extent we are successful [in that]. We are a 100% subsidiary of Tata Sons, the holding company of the [Tata] group. The group has capitalized the company quite well right from the beginning. That also helps us in terms of having a very high credit rating and allows us to access relatively lower-cost funds. India Knowledge@Wharton: What opportunities do you see in the rural Indian market? Kadle: There is huge potential in rural and semi-urban markets. The savings rate in India is very high -- more than 34%. But in rural and semi-urban markets the savings are invested in gold, which is an illiquid asset, or in land, which again [does not offer] the right kind of return. Or in the best case situation, [their savings are] maybe in a fixed deposit with a co-operative bank. So, rural India is not exposed to many of the high-return financial products like equities or mutual funds or even insurance, which can take care of the risk part also. This is where a company like Tata Capital, which has a strong name and a strong distribution network, can play an important role in educating rural India, in terms of converting some of [their] non-productive or illiquid assets, or low-income assets into relatively higher-income assets, which will also give them better liquidity
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Tata Capital's Praveen Kadle: Financial Inclusion 'Is Not Going to Be Achieved Overnight': India Knowledge@Wharton ( http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4520)

and better returns. It is a long haul. This objective is not going to be achieved overnight. You need to have a long-sustaining ability, which is what we are ready to do. Tatas don't do business only for a few years. Tata Capital and the Tata Group can play an important role in financial inclusion by bringing rural India and semi-urban India into a network of these financial products. India Knowledge@Wharton: What has been the biggest leadership challenge you have faced in your career? How did you overcome it? And what did you learn from it? Kadle: That is a difficult question. In terms of leadership challenges, I worked as a CFO all along and now I am a CEO. A CFO is always supposed to be a critic of the company's financial health and tries to help the company improve its financial health. As a CEO you are supposed to set the whole game plan in terms of growth and at the same time, sound financial health, sound processes and all that. So from being a bean counter to now actually be somebody who is executing, I think, is a key challenge. India Knowledge@Wharton: So you are actually producing the beans, not just counting them. One last question: How do you define success? Kadle: I think success, again, is a relative term. From the company's point of view, if we can achieve our objective of [becoming one of] the top three or four financial services companies in India, maybe in the next 10 years, I can say then we have achieved something of significance. India Knowledge@Wharton: And for you personally? Kadle: Personally it is a great challenge. I have been asked to set up something from almost ground level. If I can create a very successful financial services business for the group, I would be very happy. India Knowledge@Wharton: Praveen, thank you so much for joining us today. Kadle: Thank you.
This is a single/personal use copy of India Knowledge@Wharton. For multiple copies, custom reprints, e-prints, posters or plaques, please contact PARS International: reprints@parsintl.com P. (212) 221-9595 x407.

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