chotaLOAN

The concept of rural & marginalized financing popularly known as Micro-Finance has taken deep roots in the developing world after the successful experiment by Dr. Yunus in Bangladesh. The latest case of exemplary performance by one such institution SKS Microfinance has created waves in India. Primarily, conceptualized as a non-profit organization the company was among the first movers who tried to replicate Yunus’s model in India. Boosted by moderately high interest rates and excellent recovery rates over the past few years, the model has not only sustained the culture of small loans but also yielded profits for the company. It was recently listed and the stock shot up by more than 30% within a few days.  It is this listing that has opened Pandora’s box. Discussions today surround the suitability of the so called non-profit institutions being governed by the profit motive, the trend towards money laundering (rather than money lending) and the potential move towards the exploitative practices as already exist in form of the traditional money lenders. Not only this, there had been talks of capping the interest rates charged for these chotaLOANS.

Before going into the policy perspective regarding these institutions, lets first try to find out - Why such institutions are so successful? The answer is actually very simple. In countries like India where more than half of the population lives below a meagre income of $2 per day and where daily wage is the means of livelihood for most; millions of people in rural and urban areas need cash for their extremely small enterprises on a daily frequency. Consider your mohalla’s vegetable vendor or the sunrise doodhwaala, these people need amounts as small as Rs. 500-1000 to buy the items which they can sell to earn profits. These small profits sustain their livelihood. The problem arises when they are not able to finance these tiny amounts (less than what a movie & popcorns in the interval costs us!) and it is here that these micro finance institutions come into picture. If a vegetable vendor can get Rs. 500 in the morning and after day’s work if he is able to sell his quota for a net profit of Rs. 100, he would be more than willing to part with a fraction of the profit - a rupee or so. But if he does not have access to Rs. 500 in the morning he will sleep hungry that night. The rupee paid in return of Rs. 500 for the day doesn’t seems too costly - does it?. But if you look at it in terms of interest rate the annual interest rate turns out to be a whopping 73%. It is here where things have started getting hot -

Most of the micro finance organizations are involved in lending sums between Rs. 100 − 10,000 for short term loans. The rates charged vary from 20% to 50% depending on the kind and term of loans. The protagonists who champion the idea of regulating these interest rates put forward two main arguments - 

1. The comparative argument between the banking rates vis a vis micro finance rates to point out the colossal gap between the two. An agreed cap of ~24% is being favored for a policy decision. 
2. Secondly, they advocate that the noble activity of helping out the farmers and other marginalized sections of the society will soon turn into an insensitive profit churning machine if such institutions are allowed to retain profits and worse if they are allowed to distribute it to share holders.

There might be some grain of truth in the concerns but before taking up the task of regulation we have to look at  the other perspective as well.

As rallied and paraded by the protagonists - “Are the high rates of interest really high?” Consider this - Firstly,  a majority of these loans are unsecured unlike the commercial banking or the traditional money lenders. Secondly, while a customer representative in a commercial bank can cover 100 clients a day, most of these loans are offered through door to door marketing and the collection also takes place in a similar manner. Simply saying the distribution and collection costs are high.

Now coming to the second objection about making profits. Is making money so bad? I wouldn’t agree - While most of these organizations are making money today due to high recovery rates there is a lot of uncertainty. When the prime borrowers can default (as the crises of 2008 has shown), the probability of these marginalized borrowers defaulting is exponentially high. Their incomes are totally dependent on agricultural fortunes (most of the borrowers are directly or indirectly linked to agriculture) and the year the monsoons go bad, there will no end to their miseries forget about payment of debt. The point I am trying to make is that the profits earned by these organizations today can act as a buffer to continue financing tomorrow when the conditions might not be right but the need grave.

It is imperative that the policy makers look at the problem from the perspective of the poor who are getting benefitted from the organizations in question. Rather than limiting the role of these organizations in economic prosperity they should be incentivized to enhance their role in economic development. Along with lending even the process of small savings can be initiated (since they have a well established network and a deeper reach) to free the weaker sections from fraudulent lalas who have for centuries gulped their hard earned pennies. What we need policy for, is the innovation to stimulate entry of new players in the arena and expand competition. It is not only a question of right thing to do but also a question of right way of doing the right thing.

9/15

Imagine - 30,000 depressed / anxious employees packing up from the offices across the globe, as the fourth largest investment bank in the world has just filed for bankruptcy and a bunch of 20-30 people in an office of that bank celebrating a birthday, with cakes in their mouths and birthday song on their lips. Sounds weird? - That was my 23rd Birthday and I am talking about no other bank but Lehman Brothers.

To make the story more interesting, lets go back in time - 

1. It is September 13, 2008 and a group of 3 have arrived at IIT Kanpur to take a lecture on "The Changing World Economy - A Journey through Bubbles and Busts". As per the schedule, they lecture on various aspects of the world economy, the events preceding the Asian Crises and the Russian default, the IT Bubble of 2000-01 and  the march upto the  current mortgage crises covering Bear Sterns etc. They also delve into the details about the genesis of the current crises and give reasons as to why banks are going down causing turmoil across the seas.
2. Next day i.e. September 14, 2008 when they were scheduled for an informal session of Q & A on finance,  after the session one of the speakers on being asked casually to share his perspective on Lehman replies - "Who knows? - may be even Lehman can go down tomorrow".
3. On September 15, 2007 early morning when that speaker boards the flight back to Mumbai, he receives a call from his friend who tells him that Lehman has filed bankruptcy. 

Now, that speaker was none other than ME and the celebrations which I have described in the first para take place after I reach the office (of course, I was a Lehman employee) a few hours later. 

I know what I have described above looks like a movie plot but it is true that it happened for real and that was my 23rd birthday. Probably, the most eventful birthday I ever had. So, yesterday when I received calls from friends who are still in the office (now Nomura), most of them wished me for the second anniversary and told that as soon as they read the date in the morning newspaper they remembered the day, the events and my birthday :).

North . East . West . South

Since the times of Narad Muni hopping from one god to another in Swarga-lok, to Julius Reuters flying pigeons carrying stock quotes between London and Paris, to today's lightning fast electronic media; news has traversed an interesting journey. The only thing that has remained constant during this journey is the importance that it commands (rather that too has increased! ). It wouldn't be a hyperbole to say that news can make or break empires.

We as the children of LPG (Liberalization, Privatization and Globalization, not the one used in kitchen! ) have been a witness to the shrinking world and the ever increasing necessity of news in our lives. Where once it was enough to know "what's happening next door", today events across seven seas can effect the way we live. I particularly remember that till the late nineties, news for me meant, a half an hour bulletin broadcasted by Doordarshan at 8:30 p.m. Often, before the bulletin began there was this digital clock, with seconds ticking, displayed over the TV screen which was a mode of matching our clocks. Of course times have changes and 24X7 hour news channels have taken over. The process I guess started with the Gulf War of the nineties when some charismatic news reporters reported live from the battle ground showing exemplary courage. The world wide publicity combined with a well-connected world (thanks to LPG again) paved the way for all time & all season news channels.  It was a welcome phenomenon, since one could switch on the television set at any time to be abreast with the world. Even it came to be argued that the news-papers will die a slow death. Thankfully that has not happened and they have survived the times of change by adapting beautifully.

But not everything has been beautiful ever since. As they say excess of everything is bad, the presence of several players in the news industry has triggered a dog eat dog kind of competition and levels of honest reporting have gone down drastically. The race against resources to maintain the viewership has forced news channels to present concocted news and the phenomenon of paid-news has taken deep roots. In some cases the ethics have been completely pushed aside in favor of what has come to be known as masala-news. Many channels have stooped down to pitiable levels whereby they tend to increase TRP's by creating (yes,  i mean creating) scintillating and panic driven news such as that of end-of-the-world and aliens'-visits. However, people have learnt to take such news in a lighter vein but then who knows if we will face the same fate as the boy who cried wolf. 

Recently, when I read that in UP and Bihar convicted criminals (with a few murders each and prize money on their heads) bought full page news-paper advertisement to convey Independence day greetings (they might be looking at the elections around the corner! Already, a few of their brethren are negotiating with the political leaders), I was literally appalled. The immediate solution that came to mind was about some kind of regulation but then I myself rejected the idea as it breaches the sacredness of the freedom of press. More heinous crimes have been committed in countries where the press is bound (watch "Lives of others" - an interesting movie regarding freedom of press). So, what is the way out  - well that's a million dollar question, probably, an attitudinal transformation is the need of the hour or may be the right kind of public participation or may be something else. There are no easy answers to this question but atleast we must start thinking about it. Many a times societal values / thought have brought about a revolution, here in this case we need much less!