Sunday, March 04, 2018

Skillful, Marketable but Constrained

The economically underprivileged, in many cases, possess unique skills that are highly marketable. However, their livelihoods are impeded by a set of constraints. Roadside food vendors serve as an illustration - while the juices or paani-puris or sweets they sell taste extremely nice, one is never sure whether they are hygienic. Also, these vendors are at the mercy of law enforcers.

An indicative list of constraints faced by workers has been presented in the table below.

Non-Farm Sector Constraints
Farm Sector Constraints
      Inability to interact constructively with local government agencies
      Lack of identification documents for business activity
      Lack of basic legal and tax compliance
      Lack of compliance with quality standards
      Issues related to reliability and timeliness
      Safety, security and mobility issues (particularly among those who do street vending)
      Limited capacity for design, presentation and promotion
      Lack of access to major markets

      Small agricultural land holdings
      Low productivity - suboptimal use of inputs
      Low investment capabilities
      Adverse terms of trade for farmers - high cost of raw materials and poor price realization on produce
      Very high vulnerability to weather related risks
      Limited access to formal financial services (common constraint for farm and non-farm)
      Low financial literacy (common constraint for farm and non-farm)
      Limited branding and marketing capabilities (common constraint for farm and non-farm)

Wednesday, January 31, 2018

Our track-record: We have always delivered

Thursday, September 14, 2017

Thought for the day!

Ancient Indians were a hero,
They discovered symbol for the zero;
Modern Indians are not half as scient;
Keep talking about advances, really ancient.

(This thought has been provoked by this headline news:

Sunday, August 13, 2017

Financial Awareness

Tuesday, July 18, 2017

Farmer Producer Organizations: Contrasting Views

Governance in Farmer Producer Companies (FPCs)

Wednesday, August 17, 2016

Snippet - Gandhi's Champaran Satyagraha

So often one sees the "Shylock" connotation for money lenders. How many know that Raj Kumar Shukla who made Gandhiji aware of the plight of Champaran indigo farmers was a money lender! His social intervention though may as well have been on account of business interests.

Sunday, July 24, 2016

The New Middle

The research referred to, in this article says, "India's middle class has seen new entrants. Pani puri vendors, dosa sellers, carpenters, welders, launderers, drivers and cable TV technicians have all pulled themselves out of the clutches of poverty and leapt into a section of the middle class — the bedrock of the economy." I am instantly reminded of the kind of occupations we come across when we go for our COCA or Portfolio Audit exercises. When people continue to remain in their occupations and their economic status improves, there is strong evidence that the "K or Finance" as a factor of production has played its intended role.

New entrants in India's middle class: Drivers, carpenters, pani puri vendors

Wednesday, September 16, 2015

Way Ahead for Small MFIs

Prelogue: The RBI has granted approval for setting up small finance banks to ten organizations. Eight of these are MFIs.

The microfinance sector in India has grown impressively over the previous ten years. This has ensured that millions of Indians now have access to institutional credit. The sector has traditionally been characterized by a diversity of institutional forms as well as operating models. Even in 2015, we have MFIs of diverse sizes as well as institutional forms who are providing financial services to the economically underprivileged.
MFIs that have reached a minimum scale and are in a position to generate surpluses, are well positioned to take advantage of the opportunities that have emerged in recent times[1]. However, for MFIs which are small – with a clientele of less than 50,000, the opportunities have also brought several challenges. Well capitalized MFIs which have the size and form to attract funding will be in a position to scale up their operations rapidly, sometime at the cost of small MFIs. Given this landscape, it is important to explore critical factors that will determine the sustainability of small MFIs and hence are factors that should guide their future roadmaps.

Critical Factors Framework
This note takes a look at some of the critical factors building a case that factors such as Value Proposition and Promoter’s Commitment etc. are basic and are like foundation, upon which higher order factors such as Continued Access to Funds can be built up, leading to institutional sustainability.

Value Proposition: A small MFI which stands out on account of its unique value proposition for its clients has a high likelihood of success. Pricing efficiency leading to low cost credit to clients, innovative products and processes for a client segment which is still excluded, use of innovative technology that leads to value addition for clients are all examples of value propositions which MFIs may offer to clients. It is important here that the value proposition is not a mere idea and the MFI has demonstrated early success with it.
Promoter’s commitment and interest: The commitment of promoters as well as their experience is another important foundation factor. In case of for-profit MFIs, the capital invested by the promoter himself/herself is an important determinant of his/her commitment and interest. In case of not-for-profit MFIs, the conviction, tenacity and reputation of the promoters towards their institutional cause become much more important.
Compliance: MFIs should be in a position to comply with regulations including those related to priority sector assets, code of conduct, as well as capitalization and capital adequacy. They need to have products and processes that ensure that they comply with existing regulations.

Small MFIs that have a strong foundation have a high likelihood that they will do well on “access” – to capital, onlending funds, technology and human resource.
Capital: Capital is required in order to meet investments related to start-up or operational expansion. It is also required to attract debt funding. Even under the BC model, MFIs are required to place a First Loss Default Guarantee (FLDG), which must come from its capital – the exception being guarantee arrangements which some institutional sponsors of not-for-profit MFIs provide. A small MFI needs to have sufficient capital to meet its investment and expenditure needs till it starts to accrue surpluses internally.
A not-for-profit MFI has to depend on grants to meet its capital requirements. Being strong on the “foundation” factors is especially important in order to generate donor interest given that donors do not expect financial returns on their investments.
A for-profit MFI may approach equity investors in order to augment its capital base. It needs to carefully select its investors so that there is an alignment between the MFI’s objectives and the investors objectives. Also, the promoters need to be willing to reduce their stakes in favour of the investors. The experience in the sector so far has been in favour of those promoters who have not chased very high valuations and those investors who have given equal importance to risk management and growth.
Cooperative organizations can access member contributions as capital. However, they lack the ability to attract equity capital from private sources. While cooperatives which enjoy sound reputation have been able to successfully obtain grants, their ability to get grants too is constrained because of their for-profit nature.
On-lending funds: Small MFIs largely depend on funds from financial institutions to build their portfolio. The availability of on-lending funds for MFIs has increased with funding available under the BC model complementing funds from term loans and cash credit extended by banks against hypothecation of book debts. The launch of MUDRA ensures that more on lending funds will be available for MFIs.
The ability to leverage on-lending funds largely depends on the capital base. MFIs that are constrained for capital may seek guarantees against which they may be able to access on-lending funds. It needs to be mentioned here that continuing access to onlending funds is important for smooth functioning of MFIs. This requires that MFIs maintain cordial relations with their lenders and fulfil terms and conditions that are laid down in the agreements they have with the lenders. In particular, lenders may need diverse data regarding their portfolios and MFIs should be able to provide such information in order to generate comfort among their lenders.
Cooperative organizations may be in a position to access savings of their shareholding-members and use these to provide loans to their members. There are several credit cooperative societies which have been running small scale microfinance programs and recovering their costs. However, the potential to scale up as a cooperative is limited given that equity capital is a constraint in cooperatives. There is also a high level of regulatory scrutiny on cooperatives. For this reason, banks and financial institutions are apprehensive of taking debt exposures in cooperatives (See Box below)[2].
Credit Cooperative Societies face Scrutiny
The Central Registrar of Cooperative Societies had in 2014, written to the Registrar, Co-operative Societies of all states informing that RBI is of the view that acceptance of deposits from nominal members by credit co-operative societies may have to be construed as accepting deposits from public and carrying out banking activity. In February 2015, the RBI asked the Orissa government to take steps for stopping collection of deposits from the public on a larges cale by chit fund companies in the guise of multi-state credit cooperative societies. Also, in May 2015, a Supreme Court bench of Justices A K Sikri and Uday U Lalit restrained co-operative societies in Rajasthan from carrying out any ‘banking activity,’ as defined under the Banking Regulations Act, and further imposed restrictions on accepting deposits from general public. The court noted that several such societies accepted deposits from nominal members as well as from public without obtaining a license for a banking business from the Reserve Bank of India.

Human Resource and Technology: It is important for MFIs to have competent human resource in order to build sound operations. The staff members need to be motivated and adequately trained on technical as well as soft issues. Similarly the falling cost of technology gives small MFIs the opportunity to utilize technology to improve their service delivery.

Beyond access, MFIs need to prepare for surprises that may affect their sustainability. For this on the one hand, they need to have sound risk management system, and on the other, they need to reasonably meet the expectations of their stakeholders.
Risk management: Risk management in MFIs is determined by their capacity to avoid, mitigate, control, tolerate and treat risks. Sound governance with oversight from competent directors, well defined institutional roles for Directors as well as managers, documented and disseminated processes are qualities that help organizations in developing sound understanding of their risk environment which in turn helps them avoid, mitigate and control risks. Additionally, for a given scale of operations, MFIs should target a capital base which gives them the capacity to tolerate the materialization of serious risk events.
Stakeholder expectations: MFIs have diverse stakeholders such as clients, the elected government, regulators, promoters, investors, lenders, managers, and operational employees. These stakeholders have diverse expectations from the MFI. If the MFI is able to align its operations with the expectations of its stakeholders and can manage its relationships with various stakeholders well, it can be reasonably sure that it will receive continued patronage, loyalty and support from them.

Bandhan in many ways is the most successful MFI in the country today. Starting modestly as an NGO in 2003, Bandhan has been able to establish a bank in 2015. Bandhan’s microfinance methodology was different than the standard joint liability group methodology. While it gave loans to women who had to form into groups, it did not have a culture of assertive enforcement of joint liability. Further, it discouraged involvement of informal rent seeking agents right since its initial days. This allowed it to develop sound relationship with its clients. It proactively reduced its interest rates and its repayment terms ensured that clients were never put under undue stress. In order to scale up, Bandhan formed an NBFC and received equity support from SDIBI and IFC. Gradually it also adopted technology and ensured that its risk management systems could cope up with the expansion in its operational scale. Finally, it has been able to reasonably meet the expectations of its various stakeholders – the fact that it received a banking license provides sufficient evidence in favour of this.

Cashpor started its operations in the late nineties in eastern UP. This area was considered a tough terrain for any type of enterprise. In its initial days it suffered setbacks as its application for the grant of NBFC license was refused by the RBI. However, the commitment of its founder to the cause of serving the underprivileged in some of the poorest parts of the country ensured that it received grant support from institutional sources as well as high net worth individuals, ensuring in turn, that it had sufficient capital to reach a sustainable operational scale. Even as Cashpor continues to operate as a not-for-profit, it has enjoyed continued access to onlending funds both for the portfolio it carries on its balance sheet as well as portfolio under the BC model.
Both Bandhan and Cashpor illustrate that if small MFIs build their operations on a strong foundation they can continue to serve their clientele in a meaningful and sustainable manner.

[1] In the emerging scenario, there is clarity in the regulatory environment for MFIs. The RBI has issued directions regarding priority sector classification of loans originated by MFIs. It has also created a specialised category of MFIs called NBFC-MFIs. The more recent Micro Units Development & Refinance Agency (MUDRA) set up by the Government of India, identifies MFIs as an important channel to disburse credit to microenterprises. Under the Business Correspondent model, banks are increasingly looking at MFIs to act as BCs to reach the unbanked. Overall also, the funding environment for MFIs has improved with investors and lenders taking a favourable view of the microfinance sector.


Wednesday, August 05, 2015

How Well are Not for Profit MFIs served by Existing Ratings?

Specialized institutional ratings developed for MFIs in 1999. These ratings were distinct from conventional credit ratings. As Ledgerwood etc. state in the New Microfinance Handbook, these were adapted to MFIs in that they did not automatically take a negative view of the relatively small size of MFIs compared to mainstream financial institutions and their uncollateralized loan portfolios[1]. These ratings played an important role in ensuring that MFIs had access to funds – starting from development banks such as SIDBI and subsequently by all commercial banks – during the previous decade.
Gradually as MFIs gained access to commercial funds, many also transformed into larger entities which had commercial objectives. Such MFIs started accessing funds from financial markets and microfinance institutional ratings also started assuming characteristics of standard credit ratings.

At the same time many MFIs have retained their non-profit character – MFIs who are organized as Not for Profit or NPO-MFIs. The two main reasons behind this are:
1.       MFIs have chosen to remain not-for-profit to focus exclusively on their social mission or,
2.       MFIs have not been able to attract funds from mainstream funders given the fact that challenges in their operational area militate against their potential to scale up commercially.

The underlying fact still remains that these organizations serve those clients who are largely ignored by mainstream financial institutions including banks and formal MFIs, because of cost concerns. As these organizations do not have access to commercial capital and generate little to no surpluses, their capital adequacy and financial performance ratios remain weak. This also adversely impacts their ratings. However, many among such MFIs have strong systems, processes and capacity to competently serve those who face exclusion from formal financial institutions. Therefore, there is clearly a need to re-look and design institutional ratings that can help us identify such organizations which can play an important role in financial inclusion.

Contours of Rating of NPO-MFIs

Risk management in MFIs is determined by their capacity to avoid, mitigate, control, tolerate and treat risks. Institutional ratings assess MFIs on these aspects. Sound governance with oversight from competent directors, well defined institutional roles for Directors as well as managers, documented and disseminated processes are qualities that help organizations in developing sound understanding of their risk environment which in turn helps them avoid, mitigate and control risks.

While the capacity of financial organizations to tolerate and treat risks is also served well by the aforementioned attributes, the primary defence they have to tolerate and treat risks is their capital base. The Basel committee recommendations focus on allocation of capital against major risk categories.

The need to have sound governance, systems and processes is important for all financial organizations including NPO-MFIs. However, as stated earlier in this note, the area where NPO-MFIs are at a disadvantage is the level of their capital adequacy. The primary concerns for an NPO-MFI of a given size are:
1.       Ability to sustain operations
2.       Capacity to tolerate materialization of serious risks given that it may be constrained for capital.

Risk Rating of NPO-MFIs may assess whether an institution possesses alternative means to sustain and grow operations as per its business plan and to withstand serious risk events. For example, as Business Correspondents of commercial banks NPOs may be able to achieve their business plan targets. Also, if they have access to formal guarantees against risk related losses from donors or institutional sponsors, they will have a degree of resilience against serious risk events. Institutional ratings for NPO-MFIs should be able to account for these and similar factors. This is a topic that deserves serious deliberations and rigorous analysis.

[1]Joanna Ledgerwood, Julie Earne and Candace Nelson, The New Microfinance Handbook: A Financial Market System Perspective, The World Bank 2013

Thursday, May 21, 2015

Genervon's small sample clinical trial

Amyotrophic lateral sclerosis (ALS) is a deadly motor neuron disease which causes death of neurons and ultimately wasting of muscles. The average survival after onset is less than four years, although 10% of those diagnosed live for more than 10 years. The famous Physicist Stephen Hawking is perhaps the best known long term survivor of the disease. More recently ALS was in news for the ice bucket challenge.

Genervon, a privately held drug development company, has conducted Phase 2 clinical trials on 12 ALS patients over a period of 12 weeks with its drug GM 604. They have performed small sample statistical tests to argue in favour of the drug’s effectiveness – see box below (source: (Forced Vital Capacity or FVC is a measurement that assesses respiratory compromise in ALS patient).

Critics have panned this evidence because of the small sample size. Genervon on the contrary argues that small sample tests have limited power and the fact that significant differences have appeared with such a small sample is all the more remarkable. The ubiquitous t-distribution is quite at the centre stage in this debate.

There is a petition with over 536,000 signatures requesting the US-FDA to rapidly approve GM604. It will be interesting to follow the course FDA takes given the evidence in favour of the drug comes from such a small sample. More importantly though, an effective drug that halts ALS will be a really welcome breakthrough.

Friday, April 17, 2015

Impact of Code of Conduct Assessments

Between 2010 and 2014, over 100 Code of Conduct Assessments have been carried out by several agencies including M2i. The COCAs commissioned by SIDBI have been published on its website. Since these reports are in the public domain, there is increased focus on the part of MFIs to improve their operational practices. These reports also provide a repository of desirable and undesirable practices.

M2i’s COCA reports highlight best practices of MFIs on code of conduct dimensions. It also highlights undesirable consequences of undesirable operational practices such as indiscriminate application of joint liability and disproportionate staff incentives on disbursement of new loans.

Code of conduct assessments have led to significant improvement in operational practices of MFIs. Many MFIs have undertaken comprehensive review of their policies and intensive training of their field staff after undergoing Code of Conduct of Assessment.

Bandhan’s view on Code of Conduct Assessments

The first ever Code of Conduct Assessment was performed on Bandhan by M2i in 2010. M2i again performed a Code of Conduct Assessment of Bandhan in 2012.

Mr CS Ghosh, CEO of Bandhan, as quoted in Microfinance India: Social Performance Report 2013, says:

"Third party CoC assessment establishes out good practice guidelines that better enable MFIs to face challenges of accessing long-term finance. The report benefits funders, investors, customers, owners, regulators and partner organizations. Investors use such evaluations as a second independent opinion for their investment decision– making processes. The CoCA helped us to judge (a) Extent to which policies and systems had been adopted and implemented in letter and spirit, (b) real status at the field, across several issues, (c) extent of client education efforts and whether results were commensurate, (d) unbiased view of staff performance and several operational aspects, which enhanced our confidence in our policies and systems."

Tuesday, December 30, 2014

Challenge of Governance in Financial Organizations

Financial Organizations (FOs) have businesses which involve assets comprising primarily of financial rights obtained through lending, financial investments or related contracts. The quality of these assets is determined by the strength of these rights, which in turn depends on the kind of diligence that has been performed at the time of originating these assets. Microfinance Institutions (MFIs), being niche financial organizations, have assets comprising primarily of loans given to low income clients. An important factor that the quality of these assets depends on is the quality of loan appraisals, and importantly lending based on accurate of assessment of cashflows of potential clients to service debt. 
The liabilities of FOs, similar to any other organization, comprise of borrowings, notes, debentures. Most often these organizations enjoy very high leverage. Thus, on the one hand their assets are exposed to financial risks, on the other the leverage they enjoy leads to a situation where a major proportion of their assets are funded by borrowings from a variety of sources, including public money.

Consequently it becomes important that decision making at the highest levels of such organizations ensure that asset origination practices are prudent and in line with the long term interest of all stakeholders, particularly those who do not have a say in the organization’s management. Given that there are many stakeholders with diverse interests, the challenge of Governance in FOs is to find optimal balance, taking into account the expectations and concerns of all stake holders. 

Wednesday, June 25, 2014

On Gandhi

Here at M2i we often discuss Gandhi. We mock him for his economic model – never mind we have only come to understand it (or so we think) from the editorial interpretations of the pink papers, we disagree with many of his views on material pursuits and markets, but we remain perennially in awe of his intellect and genius. But for these, how else he could have captured the imagination of the entire world.
The fact that he was foremost a politician does not scare us. His persona and legacy ensure that you can be critical of him without fearing retribution. Contrast this to what happens when one criticises any barely there “leader” on social media. To us, Gandhi is our own. Even after 66 years of his death he is more accessible to us than anybody else.
Gandhi represents the best of human endeavours. To those who see him thus, he will always be an inspiration. But Gandhi will also always amaze those that wear more critical lenses.

Thursday, June 12, 2014

High Time that MFIs Focus on their Operational Employees

The good news for the microfinance sector in India is the robust growth it has displayed during 2013. When the going is good, we tend to get complacent. Growth needs to be applauded, no doubt.  But we must also critically analyze what has made this possible. Better availability of on-lending funds as well as risk capital, definitely is important.

Given that M2i’s institutional mandate is to contribute to sustainable markets, we focus on the asset side and keep looking at factors other than capital – the ones that allow capital to play its intended role. Lately, our lens has been on issues that concern operational employees of MFIs.

Let me present some facts through two tables (data from MFIN’s micrometer – issue 09, 31 March 2014):

Table 1: Staff productivity

Clients (mn)
Glp (Rs bn)
Glp per employee (Rs mn)
Clients per employee

Table 2: Improvement in staff productivity during 2013-14 measured by % change

Glp per employee (Rs mn)
Clients per employee

Over the last one year, the amount of outstanding loan being handled by MFI employees on an average has gone up by 23%. The client per employee by 9%. This is a happy fact, however, we also need to apply our critical lens and ask whether the productivity gains are sustainable, given that higher staff productivity also means higher expectations from them.

Let me quote this box from Satin and M2i’s paper on - “Drive to Perform” of Operational Employees of MFIs - to give you an idea of the work environment of operational employees of MFIs.

How the days of the Operational Employees of Satin look like?

Customer Service Officer (CSO):  Satin’s loan officers are called CSOs.  A typical CSO may spend well up-to eight hours in the field performing the following activities
                    Collection meetings
                    Training of new clients
                    Verifying “Know Your Client” or KYC documents of clients
                    Verifying loan eligibility of potential clients
                     Follow-up on delinquent clients
                    Village surveys for new area identification

At the branch office, the CSO needs to deposit the cash collected during the meetings, prepare files for disbursements planned during the day, update MIS, and complete documentation for those loan applications that are in process.

Branch Manager (BM): A Branch Manager is responsible for the operations of a branch and has a team of between 4 and 6 CSOs to support him. His day also involves extensive field work as well as office work. In a day he may have to do the following activities:
                   Monitoring visits to collection meetings
                   Conducting Pre-Group recognition tests
                   Support to CSOs who are faced with delayed payments
                   Follow up on delinquent clients
                   Projection meetings in a new village for expanding operations
                   Handling HR issues involving branch staff as well as clients
                   Loan disbursements at the branch
                   Performing banking transactions which include depositing loan repayments collected in banks,     withdrawing money from bank for disbursements
                    Ensuring end of day procedures such as update of MIS, reconciliation of cash etc

Operational employees, particularly loan officers and branch managers, are critical cogs which keep microfinance moving. The issues that concern their motivation have not received adequate attention. It is high time that we seek answers to the following questions:
1.       What is it that operational employees of MFIs like about their jobs?
2.       What are the perceptions of the operational employees of MFIs regarding their primary job-objectives?
3.       What are the sources of anxiety for operational employees of MFIs?