Microfinance: Real Issues, Practical Problems and Ground Realities

In the last post regarding microfinance I had pointed out interest rates are not the only and not the most crucial issue with microfinance and that too when most major players in MFI space have brought down their interest rates to the tune of 24-26%. But for an industry reeling with credit crunch and regulatory strangleholds, it is facing crisis of its lifetime and is battling for its survival, problems never seen to come to an end. In this post we will take up a few of numerous practical issues being faced be the industry in ground operations, leaving regulatory issues for some other time to discuss.

Problem of Under-Lending

In current operation of MFIs the lending slabs are absolutely fixed. There is no customisation. First criteria of loan allowed is based on whether the loan is being availed for the first time or  second or third consecutive term. Few companies set the criteria of loan amount on the basis of purpose of loan. Both of the criterion seem to be decent metric for fixing the cap on loan disbursed to an individual. But when we look at the actual amounts of where the cap is fixed, it becomes difficult to find a rationale. According to credit policy of a national MFI organization, they give loan of INR 10000 for both Cattle rearing as well as Goat rearing. Now there are two things – How do you fix same valuation for both cattle and goat business? And second problem is where does one get a cow or buffalo for 10000 (an average cattle costs anywhere between 25-40000)? This is the perfect case of ignorant credit pricing and under-lending.

If an urban consumer needs a loan he gets exactly what he wants but in case of rural customer, even when we talk of financial inclusion, the amount she gets is not based on her need rather is based on the policy of the lending NBFC. Lending can be defective in two ways: a) Over-lending and b) Under-lending. In case of over-lending, the consumer utilizes major part for productive purpose and the leftover is used for consumption purposes but in case of under-lending, since our target audience doesn’t have savings to add up to the financed amount to use it for productive purpose, they use the entire financed amount for consumption purposes. Hence under-financing backfires big time as it doesn’t serve the purpose of upliftment of the people it was actually meant to and secondly it also is more likely to turn into bad debt for the lender.

Fraudulent MFI Employees

There has been many instances where the employees of the MFI companies has absconded with the collected EMIs of the customers or many a times the proper book keeping of collected EMI is not done and is reported as default on the part of the customer. This has a long term bearing on the credit report of the customer these days as now a days the MFI industry is following a credit check process of external agency (HIMARK), something similar to CIBIL. Even if the customer has paid her due, her name gets registered with credit agency as defaulter and she looses her credibility for future loans. Now either she is disqualified for any further borrowing or has to pay the default amount (which she has already paid once)  to get her name cleared of the defaulters list which is certainly not possible for the customer base we are talking of because they are already cash strapped and many of them even belong to BPL category.

KYC Documentation

India is a large country with world second largest population and with such a huge population we all know the quality of work done by Election Commission and the PDS department in terms of documentation. For a rural customer the only KYC documents available are Voter Id cards and Ration Cards, and me having worked in the industry for nearly an year now, I can safely say that more than 70% of all VCs and RCs incorrect entries. 70% seems a large number and it seems improbable that so many ID proofs are incorrect but take my word for it. One thing or the other or something all of them  is always wrong.. be it first name, title, spouse’s name, address or even gender. Now if the banks or NBFCs are not ready to compromise with the documentation, we are effectively eliminating at least 50% of rural population from microfinance services and subsequently financial inclusion.

There are many more issues that MFI industry and its customers are facing in day to day operations all of which are not possible to be summarized in post.. Will take up some of them in subsequent posts.. That’s all for now.

Chain Mails and Social Awareness Cont.. The Martyr Bhagat Singh

Continuing from the last post I wrote about an internet hoax, here’s one more:
Recently I found a picture being circulated on the net regarding how India treats traitors like heros and treat martyrs and patriots as dust and dirt.

First I must praise the person who starts all this nonsense because he has time to create a  Photoshop edited picture and write all the crap but doesn’t have a little time to look for fact. Looking out for facts takes at the max 10-15 mints which is much lesser that working on Photoshop.

Now, coming to the picture being circulated.. it says that the person named Sir Sobha Singh who also happens to be the father of noted writer and journalist Khushwant Singh testified against Sahid Bhagat Singh in court for Assembly bombings by Bhagat Singh, Rajguru and Sukhdev. It also says that GoI has given not recognition to Bhagat Singh whereas Sobha Singh was rewarded in many ways. We will deal with all these issues point by point basis. This will not only slay the hoax but will also help us revise our history which most of us have forgotten.

So first we should know who this Sobha Singh was.. Sobha Singh was a Punjab born prominent builder of pre and post independence if India who was awarded “Sir” by British govt after he testified for the bombing case. Remember it was not Indian govt. who bestowed upon him this honor. Source: http://en.wikipedia.org/wiki/Sobha_Singh_(builder)

But there was one more Sobha Singh who was born in Haryana and went on to become a renowned painter in the post Independence era. The theme of his paintings was Sufism and Sikh religion and its gurus. He had nothing to do with Bhagat Singh whatsoever.

As said in the picture  Padma Shree was awarded to a painter by that name in 1983 for his contribution to Indian Arts while the said “Sir Sobha Singh” of british era died in 1978.Source: http://en.wikipedia.org/wiki/Padma_Shri_Awards_(1980%E2%80%931989)

Again the postal stamp was issued for Sobha Singh the painter in 2001. 

And now as for renaming of Connaught Place, it was being contemplated to name the landmark of Delhi in the name of the Sobha Singh, the builder. The idea has anyhow been dropped after huge protests and rightly so. Isn’t it better to name such an important landmark after an Indian rather than the Duke of Connaught who once upon a time used to live in Britain. Having important places named after our erstwhile rulers just represent our colonialistic mindset.

 Now coming to the accusations that this country doesn’t give recognition to patriots like Shaheed Bhagat Singh..

Indian postal department has issued many stamps to commemorate the legend of Bhagat Singh. One of which is being attached here. 

On 15 August 2008, an 18-foot tall bronze statue of Singh was installed in the Parliament of India, next to the statue of Subhash Chandra Bose. A portrait of Singh also adorns the walls of the Parliament’s Central Hall.

The National Martyrs Memorial was built on the cremation spot in Hussainiwala in 1968. The memorial is located just one km from the India–Pakistan border on the Indian side and has memorials of Singh, Rajguru and Sukhdev.

The Bhagat Singh Memorial was built in 2009 in Khatkar Kalan, the birth place of Bhagat Singh at a cost of 16.8 crore. The Supreme Court of India also established a museum to display landmarks in the history of India’s judicial system, displaying records of some historic trials. The first exhibition that was organised was the Trial of Bhagat Singh, which opened on 28 September 2007, on the birth centenary celebrations of Singh.

So, unfair and indeed a disrespect to our great heroes to spread such rumors and hoaxes. It just shows that how less we actually know about them, how less we know about their legacy and our history. To be a proud Indian we need to be proud of our legends and for thet we need to actually know them.

A (Re)Take on Microfinance Lending Rates

Backdrop

Last I posted something dated September 27, 2010 on this blog regarding regulation of interest rates charged by MFIs. Its been over a year now and a whole lot of water has passed down the bridge since then. First of all, now I have become a microfinance professional from being a microfinance student back those days. Then in the past one year microfinance industry has underwent all that a sector witnesses in its long life cycle of, say a decade. Undergoing a freefall from the Zenith in its hay-days of early 2010, the sector is now struggling to find it Nadir. Stocks of SKS Microfinance, the flag bearer of Indian Microfinace has come down to INR 85 from its highs of INR 1436, i.e. a fall of approximately 94%. Microfinance industry, from being a largely unregulated sector in past has become a sector which is under constant scanner and scrutiny with lot of regulatory measures being taken by Reserve Bank of India. One of the regulations of RBI pertains to interest cap which I took up in my last post and hence that’s going to be the theme of this post.

Reduced MFI Interest Rates

RBI guidelines instruct all MFIs to cap the interest rates charged by then to 24%. Apart from sporadic cases of unorganized MFI companies who charged upto 36%, most of the large and organised sector’s mainstream MFIs charged interest rate of 24% to 26%. Hence the RBI regulation has made a difference of at the most 2%. Now let’s have a look at this change from the customer’s perspective – what does a reduction of 2% mean to her?

Let’s make a few simple calculations considering a JLG loan of 15000 because that’s the most common amount lent to a MFI customer for various interest rates.

A loan of INR 15000 @ 26% : 12 monthly EMIs of 1433 :: Total amount of 17195

A loan of INR 15000 @ 24% : 12 monthly EMIs of 1418 :: Total amount of 17020

A loan of INR 15000 @ 22% : 12 monthly EMIs of 1404 :: Total amount of 16847

At the first glance we would say that RBI has certainly taken a step in the right direction. It gives the customers a protection from those petty MFI who charged in the excess of 30% to brin it down to 24%. Also we would note that how benevolent of the companies which reduced further 2% to 22% on their own initiative !!

The Right Treatment to The Wrong  Diagnosis

But how many of the MFI clients would be really be benefited by this as all the major players did not charge more than 26% anyways. Hence for majority of the clients the gain is of 14-15 rupees per month or INR 175 per year. So, the question is will this end the miseries of poor, earlier oppressed by high interest rates. For an MFI customer who repays seventeen thousand in an year, does one hundred and seventy five rupees extra make much of a difference to him?? Personally I don’t feel so. For a rural or poor customer who has traditionally been excluded from mainstream financial resources, the priories and issues are entirely different. She doesn’t care whether she has to pay a couple of hundred rupees more. All she cares about she becomes part of financial inclusion. She wants to have access to credit as and when required. She wants to get banking facilities. She wants choices in terms of borrowing as well as saving.

Hence I would say that when we talk of reducing interest rates by a percentage point or two, and it’s benefits for the poor, we are actually asking the wrong question. The real problem lies elsewhere, few of them being under-lending, access to finance, illiteracy regarding processes, fraudulent staffs of MFIs and most importantly the regulations regarding the credit policy meant to be protecting the customers but in reality, hurting them.

Hope to take up these issues in subsequent posts.. Critical views would be appreciated..

Power Corrupts!! Does it? No, Power brings reform!!

It’s a most often quoted line:

“Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men.”

First a little historical perspective: The historian and moralist, John Emerich Edward Dalberg Acton, popularly known as Lord Acton (1834–1902), expressed this opinion in a letter to Bishop Mandell Creighton in 1887.

Do I subscribe to this view? No Way!! At least not in entirety.

It’s easy for them who never tasted power to say this for those who are in power, more because they never have faced the situations, the predicament of the latter. And also, it’s the feeling of the commoner that they are not enjoying the privileges that come along with the responsibilities keeps them in a lookout for an opportunity to demean them.

Does power corrupts a person? Let’s put it in different way. Does power lead a person to do things which are not good for the common good? The answer of this lies in another question. Who reaches to the position of absolute power? In modern history, two most cited dictators have been Adolf Hitler and Joseph Stalin. To this list we may also add Deng Xiaoping, Suharto, Sukarno, Fidel Castro and many more. All of them had power.. absolute power. They lead their country with iron-fist crushing all opposition.

But then, the theme question of this post: were they corrupt? I would say – they were far from corrupt. But my opinion is not worth even a penny. Isn’t it? So let’s look at these individuals in some perspective, and yes, let’s look at them in some perspective without any preconceived bias.

Joseph Stalin – USSR: 1924 –1953: Russia witnessed Bolshevik Revolution in the month of October 1917. And was in the phase of reconstruction but inappropriate infrastructure and series of famines, Russia was facing toughest of times. Industrial output in 1922 was 13% of that in 1914. A recovery followed under the New Economic Policy, which allowed a degree of market flexibility within the context of socialism. Under Stalin’s direction, this was replaced by a system of centrally ordained “Five-Year Plans” in the late 1920s. These called for a highly ambitious program of state-guided crash industrialization and the collectivization of agriculture. With seed capital unavailable because of international reaction to Communist policies, little international trade, and virtually no modern infrastructure, Stalin’s government financed industrialization both by restraining consumption on the part of ordinary Soviet citizens to ensure that capital went for re-investment into industry and by ruthless extraction of wealth from the kulaks. Five year plans were gift of Stalin to the world. Russia was only country to compete with USA in terms of scientific advancement and space missions.

Adolf Hitler – Germany: 1933 – 1945: Germany was subjected to the worst kind of humiliation after World War I by resting all the responsibility of war on the shoulders of Germany and penalizing them by stripping them off all their natural resources like Coal and Iron rich Saar basin, Lorrain and Rhine valley being handed over to France. Restrictions were imposed on the army size they can maintain. It was Hitler who served as ordinary soldier in Bavarian reserve regiment reignited the nationalistic feelings and got back what originally belonged to Germany. Under his leadership Treaty of Versailles was broken and Germany retraced the path of progress after reclaiming its surrendered resources and land. It was Hitler who made it possible that Germany won’t be subjected to similar humiliation after World War II as it was after World War I.

Now the question is, these two individuals had absolute power. But, were they corrupted? Did they make their countries worse off? No individual is perfect. Everyone has inherent demerits in their personality and so even these two were not flawless. They did their share of mistakes, but let’s imagine a probable situation. Had there been no Stalin or no Hitler, would USSR and Germany have been the same as they are. Remotely so. Germany could never got its pride back and neither would Germany been the industrially developed country that it is now without all the resources that had been unlawfully been taken away. Same for USSR, had there been no Stalin, there won’t have been five year plans, no space missions and USSR would have been languishing in poverty for years.

Let’s get back a little closer – to home – to India. We are a proud “Democracy”.

We elect our representatives. Every five years we go to voting booths to proudly exercise our voting rights. We have achieved phenomenal growth in all walks of lives. But have we got over our entire problems? We are still home to the largest number of poors. Still there isn’t enough employment opportunity. Every other week a new corruption news mocks on our faces. Caste is something that still decides who will rule us regardless of their qualification. Still we are a proud Democracy.

We have ever been proud of our democracy. But whatever democracy given to our country, is that all we wanted? Are we all satisfied with the progress we have made in past 60 years? India became independent in 1947 and Germany started rebuilding after 1945 – nearly the same time period. Have both countries rose to equal heights? But still we are a proud Democracy.

But ask to the intelligencia of the country. Ask that how many of them harbor a secret desire of a brief stint of Autocracy. In many of the endless discussions with my friends the common reaction is: “to hell with Democracy.. A small phase of dictatorship is what India needs”. Democracy is still bound by petty issues which relates to appeasement of one or the other section of the society even though they are anti-progress. Reason? The representatives we elect don’t have the power to take radical steps. They fear of a particular section turning their backs on them. Take for example the Indo-US nuclear deal. Everyone knows, its indispensible for a power (electricity) starved nation like ours. But there were and are roadblocks in clinching that deal, only because the government did not have absolute power. Remember!! We are a proud Democracy.

Progress needs radical steps which are near to impossible if you care to please all. Progress and common welfare needs power. Absolute power. Absolute power doesn’t corrupt the individual who posses it. It gives him authority to march forward without roadblocks.

That’s end to this episode. Expecting Comments… mostly harsh ones for me not being an “Ideal Indian” citizen. For not being someone who is proud of his nation’s Democracy.

Chain Mails and Social Awareness

Recently a friend frowarded me a mail. The mail contained a letter claiming to be “Letter written to Prime Minister of India from Editor, Times Of India”

As it goes with me, the voilent urge to swim against the tide again overpowered me leading to little bit of Googling.

First let me reproduce the “so called” “Letter to Prime Minister” from the gentleman who called himself Prakash B Bajaj.

First let me reproduce the letter from the gentleman:

LETTER OF THE EDITOR OF “THE TIMES OF INDIA” TO THE PRIME MINISTER OF INDIA

Dear Mr. Prime minister,

I am a typical mouse from Mumbai. In the local train compartment which has capacity of 100 persons, I travel with 500 more mice.  Mouse at least squeaks, but we don’t even do that.

Today I heard your speech, in which you said, ‘NO BODY WOULD BE SPARED’.  I would like to remind you that fourteen years have passed since serial bomb blasts in Mumbai took place.  Dawood was the main conspirator.  Till today he is not caught.  All our Bollywood actors, our builders, our Gutka king keep meeting him, but your Government can not catch him. Reason is simple; all your ministers are hand in glove with him. If any attempt is made to catch him, everybody will be exposed. Your statement ‘NOBODY WOULD BE SPARED’ is nothing but a cruel joke on these unfortunate people of India.
Enough is enough.   As such, after seeing terrorist attack carried out by about a dozen young boys,  I realize that if same thing continues, days are not far away when terrorists will attack by air, destroy our nuclear reactors and there will be one more Hiroshima.
We the people are left with only one mantra. Womb to Bomb to Tomb.  You promised Mumbaikar Shanghai; what you have given us is Jalianwala Baugh.
Today only your home minister resigned.  What took you so long to kick out this joker? Only reason was that he was loyal to Gandhi family.   Loyalty to Gandhi family is more important than blood of innocent people, isn’t it?

I am born and brought up in Mumbai for last fifty eight years.  Believe me; corruption in Maharashtra is worse than that in Bihar. Look at all the politicians, Sharad Pawar, Chagan Bhujbal, Narayan Rane, Bal Thackray, Gopinath Munde, Vilasrao Deshmukh all are rolling in money.   Vilasrao Deshmukh is one of the worst Chief ministers I have seen.His only business is to increase the FSI every other day, make money and send it to Delhi, so Congress can fight next election. Now the clown has found new way and will increase FSI for fishermen, so they can build concrete houses right on sea shore.  Next time terrorists can comfortably live in those houses, enjoy the beauty of the sea and then attack our Mumbai at their will.

Recently, I had to purchase a house in Mumbai. I met about two dozen builders. Everybody wanted about 30% in black. A common person like me knows this and with all your intelligent agency & CBI, you and your finance ministers are not aware of it. Where all the black money goes? To the underworld isn’t it? Our politicians take help of these goondas to vacate people by force. I myself was victim of it. If you have time please come to me, I will tell you everything.

If this has been a land of fools, idiots, then I would not have ever cared to write to you this letter. Just see the tragedy.  On one side we are reaching moon, people are so intelligent;  and on the other side, you politicians have converted nectar into deadly poison. I am everything Hindu, Muslim, Christian, Schedule caste, OBC, Muslim OBC, Christian Schedule caste, and Creamy Schedule caste; only what I am not is INDIAN. You politicians have raped every part of  Mother India by your policy of divide and rule.

Take example of our Former President Abdul Kalam. Such an intelligent person; such a fine human being. But you politician didn’t even spare him and instead choose a worthless lady who had corruption charges and insignificant local politician of Jalgaon WHO’S NAME ENTIRE COUNTRY HAD NOT HEARD BEFORE. Its simple logic your party just wanted a rubber stamp in the name of president. Imagine SHE IS SUPREME COMMANDAR OF INDIA’S THREE DEFENCE FORCES. what moral you will expect from our defense forces ? Your party along with opposition joined hands, because politicians feel they are supreme and there is no place for good person.

Dear Mr Prime minister, you are one of the most intelligent persons, a most learned person.   Just wake up, be a real SARDAR.   First and foremost, expose all selfish politicians.   Ask Swiss banks to give names of all Indian account holders. Give reins of CBI to independent agency. Let them find wolves among us. There will be political upheaval, but that will be better than dance of death which we are witnessing every day.  Just give us ambience where we can work honestly and without fear. Let there be rule of law. Everything else will be taken care of.

Choice is yours Mr. Prime Minister.   Do you want to be lead by one person, or you want to lead the nation of 100 Crore people?

Prakash B. Bajaj
Editor Mumbai-Times of India

 

I am very often surprised to see such mails evoking the kind of response they do. May be I am less of an Indian than rest of us are. or may be not. Out Indian–ness lies dormant and wakes up to only to calls given by these “WAKE-UP” mails.

No wonder internet is such a powerful media today. It can move masses when they are still in their cozy chairs or beds of AC confines. It doesn’t require them to gather in thousands and generate a mass hysteria as was required in the days of Gandhi or Nehru.

Well, coming to the point.. This mail of clarion call for rolling heads..

This has been circulated over several thousand times from person to person and certainly will continue to do so.. at least till when India’s PM is Mr Manmohan Singh, because till then the premise of this mail would be valid.

The language of the mail : Horrendous to say the least. Tons of grammatical and usage mistakes.

Just two examples:

Congress can fight next election

what moral you will expect from our defense forces

And add to these, heaps of rhetoric using connotation to nuclear bombs, Hiroshima, Swiss banks etc.

I don’t say that grammatical mistakes demean the message of the mail in any way. But what I mean to ask is that doesn’t it entice its reader and the propagator to question the authenticity of the letter which claims to be written by “Editor, TOI, Mumbai”. Can a national newspaper have an editor of such standards?

If it can then God save the publishing house.

But then the quality of English in the letter forced me to run a crosscheck on the genuineness of the claimant to be editor of TOI

And this is what I found out :

Times of India, Mumbai Edition : 12th December 2008

Page 3

http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Source=Page&Skin=pastissues2&BaseHref=TOIM/2008/12/12&PageLabel=5&EntityId=Ar00506&ViewMode=HTML&GZ=T

Its not that I don’t subscribe to the sentiments shared in the letter. I probably, bang my head more often, ruing the pathetic state of affairs than the person who drafted this letter or those who keep on forwarding mails hoping to generate mass movement. A mass movement to what effect – to change the PM? To bring in equally inefficient opposition to power? I myself don’t have the answers and I am sure, none have.

But the sole motive of me writing all this crap is just that we – as educated citizen, should run a reality check before spreading such propaganda stuff of attention and fame seeking individuals like Mr. Prakash Bajaj. If you take the pains to Google a little, you will what a celebrity he became after this letter giving interviews to print and electronic media.

 

Thanks for bearing with me (if you really did)

Hope to get some response on my integrity as an Indian or rather, lack of integrity.

Should MFI lending rates be regulated?

There has been long standing debate over the “exorbitantly” high interest rates that the MFIs charge. And this is an even bigger issue because the customers who are made to pay these high interests are not wealthy segment of the population but the poor and the ultra poor. Hence, it becomes a question of ethics, that whether it is fair to charge such high interest from the poor whom the MFIs claim to “serve”. Typically MFIs are charging around 24% in India on a declining principal basis and this rate has come down from as high as 36% in the intial days of MFI operation in India.

Although, MFIs typically borrow from banks at around 10-12%, the ultimate beneficiary (borrower) pays upwards of 2% (or 24% per annum). The extra of 12% charged is justified toward high cost of operations, self sustainability and growth of the MFI.

“The industry is projecting a 2-3% decline in the effective interest rate. The interest rates should start declining over the next six months.   MFIs will have to bear customer interests in their mind and they do not front load and ask for higher processing costs or contributory margins,” said Mathew Titus, executive director of Sa-Dhan. Very recently two MFIs — Bandhan and Ujjivan have announced a reduction in their interest rates which presently stands at 18-19% which can be considered as first steps towards rationalization of interest rates charged.

Now we should focus to the topic, whether there should be a cap on the interest rate that the MFIs charge from its customers and whether there should be any directive regarding the interest rates from a regulatory body. On a personal note, I feel that any such directive as guidelines won’t hurt as it would be in a form of suggestion to the MFIs which they are independent to follow but if any such directive comes as a binding rule then that is not good for microfinance industry on a macro level. Microfinance is still in a growth phase in India and more importantly it has been successful in doing what all the govt. sponsored subsidized programs have failed in and that is to provide access to credit to the poor and ultra poor.

Looking from the cost side of MFI operations, MFIs get their funds from banks at 10-12% interest and they charge 24% from their customers. At the first look it may seem on the higher side but accounting for the operational costs of MFIs we can say that even the MFIs are not making exorbitantly big bucks in the sector. MFIs are not “not-for-profit” organizations. Apart from being self sustainable, they have to earn some profits as well. Any PE fund which invests in MFI business is not doing so for charity, they expect returns from it as they treat MFIs as just another business. If there is a minimum bar on the interest, it will affect the overall profitability of the sector. Amidst the hue and cry of govt. regulation and cap on rates charges, it is important to note that, there has to be incentives for business houses to invest in the field otherwise the microfinance industry will ultimately dry up and the poor will be left on their own without any access to financial services and to credit to be more precise. Hence, it’s better to prove them credit at a bit higher rates than depriving them of everything.

At this instance we may take a corollary. Some ten years ago, when telecom sector was emerging, the service charges were exorbitantly high because the technology was new and there were fewer players in the market. Had government stepped in at that instant and placed a regulation regarding the rates, telecom companies charge, would the telecom sector in India grew at in the same dimensions as it has actually does? The answer is a resounding NO. if there would have been regulation, many of the operators would have lost the incentive to be in the market and would have simply backed off. But now that the sector is fully grown, the forces of an open market is driving the prices. No regulation is needed now to check prices.

Similarly, in the initial phases of microfinance industry, we can’t choke the growth of the sector by imposing regulation. Competition within the industry will automatically bring the rates down as the sector emerges e.g as Bandhan and Ujjivan recently reduced their rates, other players in the area will be forced to reduce their lending rates to stay competitive. In current scenario, many MFIs are in nascent stage and with marginal interest rates they will not be able to sustain their operations. As they will obtain economies of scale, they can lower down the rates gradually.

Amiya Sharma, executive director of Rashtriya Gramin Vikas Nidhi (RGVN), highlights the issue of inability of MFIs to lower rates. “We need a larger scale of operation as small-sized agencies with a portfolio of less than `10 crores may not be able to price their loans cheap. In the north-east, where RGVN operates, there are only two MFIs with a loan portfolio of over `20 crores,” he said. Once a MFI expands to achieve economies of scale then only it can be possible and feasible for it to reduce its lending rates.

Finally on a concluding note, we can say that even though regulation on lending rates is important and desirable, it would adversely affect the industry which is still in its growth phase. Hence, for the time being there should be time to time guidelines from umbrella organizations like Sa-Dhan and govt. bodies like RBI and NABARD in form of passive regulation but anything too stringent is a not good for the growth of the industry and in turn not good for the poor who are getting benefitted from microfinance.

The White Tiger: A book review by a non-reader

“The White Tiger” – Heard of it only after it was awarded “The Man Booker Prize”. But then for commoners like me, it’s only after a book gets an award or a movie is based on it that we get to know about them. Similar was the case with Q&A by Vikas Swaroop and it was nothing different with The White Tiger. The hardcover edition published by Harper Collins was priced at Rs 395 (only/-  ) and that made me postpone my enthusiasm to buy the book. This postponement continued till I got the book in our college library. I got the book issued but then the kind of person I am in matters of reading, the book adorned my bookshelf for over two weeks. Then finally I found some time which could have been utilized to savor this masterpiece. The time was one hour train journey when I did nothing but to sit and gaze through the scenic beauty (if one would like to call so, I won’t) of Chennai. I thought, reading the book would be a better way to utilize the otherwise wasted time. Thus I started my journey (literally as well as figuratively) with The White Tiger to and fro from Thiruvanmiyur station to Nungambakkam station enroute to my IFMR Trust’s 10^th floor office at Kanagam Village (I am mentioning all these names just to get you acquainted with these overwhelming names).

Let’s first have a glance through the profile and life of the author which according to me helps to give a perspective to his writings. The background of an author unmistakably leaves an imprint on his creations and it might not be any different in Aravind Adiga.

About the author: Aravind Adiga

Aravind Adiga was born in Madras (now Chennai) and grew up in Mangalore where he finished his schooling by 1990. Then he emigrated to Sydney Australia. Then he studied English literature at Columbia University, New York and at Oxford. After that he was associated with Financial Times and TIME magazine as literary as well as financial reviewer. Later on he got settled in Mumbai.

Here we can see that the formative years of Aravind Adiga as an intellectual has been spent abroad, mostly in Australia and USA. Now, that the novel is based on an entrepreneur who rises from rural hinterland of India, it is debatable that what quantity of actual perspective and what amount of hearsay has been incorporated in the novel. Since the author is not a “first-person” witness of the ground realities, the reader is expected to exercise his own discretion if he/she is intending to consider this writing as an anthology on India and its people.

Content Delivery Format:

The author has opted for a rather unique writing style for the novel. It’s a mixture of soliloquy and first person narrative. It’s in the format of a letter written to the Chinese Premier Wen Jiabao by an Indian who was a servant coming from rural India but now is a successful entrepreneur settled in Bangalore.

The novel’s beginning catches the nerve of its reader and is held tight till the end. The beginning goes as follows:

For the Desk of:

His Excellency Wen Jiabao,

The Premier’s office

Beijing,

Capital of Freedom Loving Nation of China

From the Desk of:

‘The White Tiger’

A Thinking Man

And an entrepreneur

Living in the world’s centre of technology and outsourcing

Electronic City Phase I (just off Hosur Main Road),

Banglore, India

This is the kind of writing which helps the protagonist of the story with its readers in the best possible way and Aravind Adiga has been indeed been successful in his attempt.

The story in short:

It’s a story of a successful entrepreneur settled in IT capital of the nation who comes from from remote interior of Gaya district in Bihar where he spent his childhood then went to coal city of Dhanbad and then to nation’s capital. The protagonist, Balram Halwai describes in his own words his exploits as a child in the village where he belonged to an ultra poor family and his father was a rikshaw-puller. Then he goes to city of Dhanbad famous for its coal mining activities where he gets the job of car driver at a rich man’s house incidentally who belongs to the village of Balram himself. As the story progresses, he migrates to Delhi alongwith his employer where he for the first time gets the feel of a metro and the life there. Then Balram tell the Chinese premier in his letter, how he murdered his master and ran away with huge booty to set up his own business.

Review

No doubt, the mood of the novel is very catchy and keeps the reader hooked to the book for all part of it. Having said that, it poses a big risk – a big risk of misunderstanding India, the real India. The book claims to depict the real picture of India, the India which lies behind the shiny glass offices and multi-storied buildings standing tall in the urban centres. But does it indeed show the real picture. This so called introspective treatise on India comes from an individual who though claims to know and understand India inside-out, has himself spent most of his life in high rise buildings of Sydney and New York. He just does nothing more than to extend the image of India that “it is the land of elephants and snake charmers” first made by E M Forster in his novel A Passage to India. That’s the glass through which west has been looking India from generations but Adiga being Indian was expected to dig dipper into truth (at least modern day truth) rather than endorse the image created by Forster.

Arvind Once said that his novel had been the fruit of his labours as a reporter in India. He had travelled to various parts of the country, including places whose backwardness had shocked his sensibility. The White Tiger was his rebuke of the cheerful, and false, notion of a new, transformed India. But what he delivers in his novel hardly substantiates his he has ground level knowledge of Indian villages.

What’s more disturbing is that the book is being consider a treatise on India (it is remotely so in reality) and it paints a picture which is not just metamorphically extreme but also far from truth in many cases.  The protagonist, Balram Halwai, was from the State of Bihar, where I myself was born and brought up, and which Halwai in the course of the entire book calls by the name Darkness. Though backwardness of the area is a reality which we can’t shy away from but the extremes depicted are certainly not the real picture. The lead characters are funny and melodramatic who will fit the bill perfectly ass bollywood heroes but what I found worse that his presentation of ordinary people is not only trite but also offensive. Here is his description of the migrant Bihari workers returning to their villages after their hard labour in the cities:

A month before the rains, the men came back from Dhanbad and Delhi and Calcutta, leaner, darker, angrier, but with money in their pockets. The women were waiting for them. They hid behind the door, and as soon as the men walked in, they pounced, like wildcats on a slab of flesh. They were fighting and wailing and shrieking. My uncles would resist, and managed to keep some of their money, but my father got peeled and skinned every time. ‘I survived the city, but I couldn’t survive the women in my home,’ he would say, sunk into a corner of the room. The women would feed him after they fed the buffalo.

I, who belongs to the land Adiga is referring to (Bihar) have happened to witness many such men, coming back to their village homes countless times. The novelist seemed to know next to nothing about either the love or the despair of the people he was writing about. And yet, my objection wasn’t simply that I found Adiga’s scenario implausible. Rather, I wanted to know if others, who might never have visited Bihar, read the last line of the paragraph quoted above and recognized how wrong it was.

For a person like me who is a big fan of Rusdie or Jhumpa Lahiri, realism is the most important aspect of novel which intends to depict India because such novels always run the risk of being lapped up by the West as an insight into India. Rusdie or Lahiri has never let go of realism amidst all the melodrama.

In some parts, there is uncanny sarcasm which makes the book an interesting read e.g. in the first page itself, China is referred to as “Freedom Loving Nation of China”. There is an another sarcastic quote:  “the future of the world lies with the yellow man and the brown man” because “our erstwhile master, the white-skinned man, has wasted himself through buggery, mobile phone usage, and drug abuse.” The book is a good satire in parts which indeed forces introspection and it is only for those who are capable of taking a joke on self. It’s not meant for people who might get offended by some harsh hard hitting realities. But then in the most part of the novel it is overstatement and exaggeration which needs to be taken with a pinch of salt. This novel has been lapped up by the entire world and that’s not at all unexpected. Anything that depicts the misery and poverty of India has been hailed by the world for long. Hasn’t the case been same with movies like Mother India to Lagan and from Salaam Bombay to Slumdog Millionaire. Its characteristic of the west to find such Indian stories fascinating because for them India is still a land of elephants, yogis and of course snake charmers and Aravind Adiga has done nothing but aided that notion.

Final Verdict:

The White Tiger is undoubtly a very interesting read and its difficult to put the book down once you start but it may hurt a few sentimentalities. And please don’t mistake it to be an insight into India. It’s far from that.  Reviews of the book in mainstream publications, including The Economist present it as glimpse into “real India”. Whose India is real, Adiga’s or mine?

Quick Chips

“it takes 72 muscles of your face to frown, it takes 12 muscles of your face to smile ….. but it only takes 4 muscles of your hand to slap the idiot who irritated you in the first place … “

So your take.. How much pain are going to give your body in order to save someone else from pains..

Microfinance

MICROFINANCE : The Basics

Microfinance is one big decisive step towards financial inclusion and catering to the needs of bottom of the pyramid. It serves to that segment which has been marginalized by the mainstream banking system. Initially regarded as infeasible, MFIs have achieved unprecedented growth curve and is continuing to grow. MFIs have set precedence as well by achieving virtually hundred percent loan recoveries which is usually unheard of in commercial banking sector. The sector is constantly growing and needs more capital to sustain its growth for which venturing into equity is a possible option to explore

MicroFinance : A step toward Financial Inclusion

“Microcredit, or microfinance, is banking the unbankables, bringing credit, savings and other essential financial services within the reach of millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. In general, banks are for people with money, not for people without.” The term Microfinance refers to small-scale financial services- both credit & savings, provided to the poor in rural, semi-urban & urban areas. The service providers in this space are banks, insurance companies, agricultural & dairy co-operatives & MFIs (Micro Finance Institutions) etc.

The Development & Regulation bill 2007 defines Microfinance loans as loans with amount not exceeding Rs 50,000 in aggregate per individual/enterprise. However, in practice most micro-loans are in the range of Rs 5000- Rs 20,000.

Lending models for MicroFinance:

MFIs according to their lending model can broadly be classified under two heads- The ones lending as per the SHG (Self Help Groups) model & the ones lending as per the JLG( Joint Liability group) model. What is the primary difference between these two models?

Speaking first of the SHG model MFIs or banks render financial services to a group of 10-20 people (essentially women in Indian context) and the loan taken is collective liability of the entire group. Even if one member of the group defaults, the entire group is deemed to have defaulted. Under the SHG-bank linkage model, an NGO promotes a group and gets banks to extend loans to the group. SHGs are usually assisted by NGOs in initial periods to make them aware of the entire process. Many times NGOs and MFIs also train the women in the group in some cottage industry so that they can self sustain themselves in better way and can generate good returns on the loans they are availing. The SHG model is the one which is widespread in use all over India.

The second operating model which is widely used is the JLG model. In this model also the loans are lent to people who are the part of a group but unlike SHG model, here the liability rests with the individual who has taken the loan and not with the group as a whole. The most important example of MFI using JLG model is noble prize winning Grameen Bank of Bangladesh

One of the very important aspects of microfinance lending is the interest rates charged by these MFIs. MFIs following the JLG model charge flat interest rates of 12 to 18% on their loans, while MFIs following the SHG model charge 18 to 24% per annum based on the reducing balance method. In addition to interest rates, some MFIs also charge a processing fee comprising a certain proportion of the loan amount sanctioned, at the time of disbursement. The interest rates are definitely very high for the poor people whom the services are directed to, especially when we compare that with the 10-14 percent loan rates of commercial banks. But then the cost of loan disbursements in the case of MFIs is much higher than of a bank, also the risk involved (as no collaterals) is also on the higher side.

Advantage of MFIs over Rural banks:

MFIs have been highly successful in their objective where Rural and Co-operative banks have failed miserably. Currently in India it is growing at compounded growth rate of 45% annually despite of outrageously high interest rates charged by MFIs. This has become possible because of the way in which the MFIs are managed. They are run professionally by efficient managers and their work culture is more corporate in nature whereas the Co-operative banks were lacking in proper management as well as intent. The reach of MFIs is also much deeper in rural India in comparison to the banks. Secondly, MFIs also train SHGs on how to properly utilize the loans so that they be able to repay them later. They keep track of all the loans on a regular basis.

High loan recovery rate:

Where even big corporate banks have high default rate despite of the collaterals they have on loans outstanding, the microfinance institutes have achieved this rare feat of virtually complete loan recovery even when they don’t ask for collaterals. Moreover such recovery rate is achieved after lending out to people who have considered non-creditworthy by mainstream banks.

The reason for such unprecedented success is that the loans are lent to a group as a whole in SHG model where even if one member defaults, the entire group will be deemed to have defaulted. In that case the entire group has to face the consequences of one persons fault. So it is the peer pressure that deters an individual from defaulting.

One more reason for high recovery is that the loans are given to poor households (women) who have no other means except for the particular MFI to resort to in case they default. If they default they will be left with no other option left for them to get financial aid in case they might be in need later on.

Current Scenario of MicroFinance in India:

The microfinance sector and MFIs in India are estimated to have outstanding total  loans of Rs.16,000 crores to Rs.17,500 crores and Rs.11,000 crores to Rs.12,000 crores  respectively, as  on  March  31,  2009.  The microfinance sector in India is fragmented - there are more than 3,000 MFIs, NGOs, and NGO-MFIs, of which about 400 have active lending programs. However the good thing is that the top 10 MFIs account for about 74% of the total outstanding.

In the past the microfinance industry in India has witnessed astounding growth. One of the measures- the total loan amount outstanding has grown from Rs 1600 crores in March’06 to an impressive Rs 11,400 crores by March’09.

MicroFinance going forward:

Taking SKS as the flag bearer of the industry (it account for about 25% of loans outstanding alone) – it’s cost-of-capital stands at 9.58%(sep’08), charges 23.6% in Andhra & 28% in other states. It has a very healthy margin to operate in. Most if not all the MFIs are highly leveraged. The MFIs in India are operating at a very high gearing ratio, some have gearing ratio of more than 15( 11 out of the top 50 MFIs have gearing ratio more than 15).The average gearing ratio of the top 50 MFIs in India is 7.2 . This highly leveraged structure has forced the MFIs to look for fresh equity infusion. As they themselves are not entirely capable of doing that many of them have taken the private placement route. We have seen many of them doing private placements in the recent past.

Going forward the next stage would be these MFIs approaching the public for equity. This will be possible once they attain a good size for that. As reported SKS microfinance is planning to come up with an IPO soon. Now once SKS goes public for funds (which it plans to do in the current year) it will be able to de-leverage its financials considerably, bringing down the cost-of-capital. A reduction in cost of capital keeping other factors constant will surely provide the company a cushion in operations and profitability. This seems to be the next big change in the industry when they will have access to funds at a lower cost, we can expect them to pass a part of   this reduction to the consumer by reducing the interest charged.

NOTE : This post has major contributions from my dear friend DP and even some blatant plagiarism from his writings. Thanks DP.