Advice worth taking note of!

This is the best advice you will ever receive.

Written By Regina Brett, 90 years old, of The Plain Dealer, Cleveland, Ohio

"To celebrate growing older, I once wrote the 45 lessons life taught me.
It is the most-requested column I've ever written. My odometer rolled over to 90 in August, so here is the column once more:

1. Life isn't fair, but it's still good.

2. When in doubt, just take the next small step.

3. Life is too short to waste time hating anyone...

4. Your job won't take care of you when you are sick.
Your friends and parents will. Stay in touch.

5. Pay off your credit cards every month.

6. You don't have to win every argument. Agree to disagree.

7. Cry with someone. It's more healing than crying alone.

8. It's OK to get angry with God.. He can take it.

9. Save for retirement starting with your first pay cheque.

10.When it comes to chocolate, resistance is futile.

11. Make peace with your past so it won't screw up the present.

12. It's OK to let your children see you cry.

13. Don't compare your life to others. You have no idea what their journey is all about.

14. If a relationship has to be a secret, you shouldn't be in it.

15. Everything can change in the blink of an eye. But don't worry; God never blinks.

16.Take a deep breath. It calms the mind.

17. Get rid of anything that isn't useful, beautiful or joyful.

18. Whatever doesn't kill you really does make you stronger.

19. It's never too late to have a happy childhood. But the second one is up to you and no one else.

20. When it comes to going after what you love in life, don't take no for an answer.

21. Burn the candles, use the nice sheets, wear the fancy lingerie. Don't save it for a special occasion, Today is special.

22. Over prepare, then go with the flow.

23. Be eccentric now. Don't wait for old age to wear purple.

24. No one is in charge of your happiness but you.

25. Frame every so-called disaster with these words 'In five years, will this matter?'

26. Always choose life.

27. Forgive everyone and everything.

28. What other people think of you is none of your business.

30. Time heals almost everything.. Give it time.

31. However good or bad a situation is, it will change.

32. Don't take yourself so seriously. No one else does.

33. Believe in miracles.

34. God loves you because of who God is, not because of anything you did or didn't do.

35. Don't audit life. Show up and make the most of it now.

36. Growing old beats the alternative -- dying young.

37. Your children get only one childhood.

38. All that truly matters in the end is that you loved.

39. Get outside every day. Miracles are waiting everywhere.

40. If we all threw our problems in a pile and saw everyone else's, we'd grab ours back.

41. Envy is a waste of time. You already have all you need.

42.The best is yet to come.

43. No matter how you feel, get up, dress up and show up.

44. Yield.

45. Life isn't tied with a bow, but it's still a gift."

Sustainable microfinance requires sound client relationship management

While the microfinance sector has grown at a rapid pace, concerns have been raised about the qualitative aspects of this growth. There have been a few instances in Andhra Pradesh, Karnataka and Uttar Pradesh which have led to questions being asked on microfinance business models and their ability to sustain client relationships in the long run. The areas that have been particularly in focus are client over-indebtedness, coping strategies in case of crisis, transparency in loan pricing and overall client protection. There has been a lot of deliberation on how MFIs should deal with these issues, it is difficult to say whether MFIs have been effective in addressing them.

MFIs have to cope with the growth expectations that lenders and investors have of them and operate in an increasingly competitive environment. In addition, the nature of credit operations requires regular follow-up with clients in order to ensure prompt repayments. At times, this is construed to be coercive and leaves MFIs vulnerable to accusations of malpractices.

Practicing client protection principles requires MFIs to treat every client interaction as a relationship exercise. MFIs need to view this as an opportunity to build a sustainable and sound business.

There is a heaven after all, as there is a hell!

Of all the strange thoughts one has one sometimes wonders how it would be like to experience death. The research on Near Death Experiences (NDEs) is an interesting one. This research gives us a window into the largely unknown realm of death. The most common NDEs are associated with feelings of calmness. NDEs include experiencing intense “pure bright light”, out of body experiences and communication with the divine, and a review of life. All these experiences are becalming and soothing. On the other hand, research suggests, some people (a minority) going through NDEs do not experience feelings of peace, nor do they visit Heaven or meet friendly spirits. Instead, they feel terrified and are accosted by demons or malicious imps. They may visit places that fit Biblical descriptions of Hell, including lakes of fire, tormented souls and a general feeling of oppressive heat.

A Gollop and Proctor research in 1982, which formed the basis of their book - Adventures in Immortality: A look beyond the threshold of death, found out that 15% of Americans who had been in near death situations had NDEs and only 1% had negative NDEs. However, there is little evidence that could suggest what could be the cause of a positive NDE or a negative one. What is clear though is that those who have a positive NDE very nearly experience something that is close to the common conceptualization of heaven, while those who have a negative NDE get close to hell.

Sustainable microenterprises

We had a very interesting debate on microenterprises and the conditions that are necessary for their long term sustenance. There was a consensus that for microenterprises to sustain, they would have to follow one of the following paths:

1. Scale-up using commercial capital – small startups have opportunities in nascent industries. They also often bring innovations and may be able to attract capital that can allow them to scale-up and compete against larger players.

2. Have captive markets – microenterprises can also survive if they have access to captive or assured markets. Dairy cooperative societies are an example. While the societies are themselves small they cater to the demand of larger processing plants. Auto ancillary companies are another example, though they may not entirely classify as microenterprises. Autonomous R&D organizations performing research for larger clients are another example.

While it is possible to have an overlap for SMEs that operate on commercial motives, for community based social businesses that cannot reward (and therefore cannot attract) capital, the latter appears to be the only real possibility.

Microfinance: Good or Bad

The problem with case studies is that they can powerfully portray certain things that are exceptions rather than being the general fact. That makes it important for any critic to study evidence that can be called “significant” in the statistical sense. Documentaries like the one on france24 (http://www.france24.com/en/20080404-bangladesh-burden-microcredit-caring-grameen-bank-mohammed-yunnus) may serve political constituencies, but are of little help as far as advancing facts is concerned.

The concept of lending involves taking money back which in itself may be construed as coercive. Let me explain - even if a lender charges no interest, she still has to collect the principal. She is likely to apply some pressure such as sending reminders that repayments have become due, making visits etc. If there was absolutely no pressure on borrowers to repay, I suspect a vast majority of them would be intelligent enough not to repay. A look at the performance of numerous development credit programs which did not have a system of adequate follow-up on disbursed loans will reveal that they could not be sustained and their outcomes were mixed at best.

Having said this, I believe information asymmetry and a lack of transparency in a capitalistic setting results in exploitation of poor clients. This happens even when the law of the land seeks to protect the poor.

Here is an example:

In the Indian context, there are strict restrictions on Non Banking Financial Companies (NBFC) taking savings from the public. Many NBFC-MFIs sought to get around this little problem by forming private trusts which were used to take members contributions. These contributions were then invested in the equity of the NBFC MFI. I wonder how many MFIs told their clients of the risks involved in such investments. I also wonder how many of them would share/have shared the upside that may translate on such investments?

In a lighter vein

Its not often that one senses unambiguous accomplishment. I had this feeling today – I felt I had conquered the final frontier. I had successfully prepared my own breakfast.

Well, almost. The credit goes to my cook who incidentally is on leave. I hope the leave does him some good. He showers me with great respect and makes me feel like an unleashed alsatian with his reactions.

Cooking, though, is not rocket science. Its closer in complexity to conditional probabilities.

Archimedes discovered buoyancy in the bath tub. Have you ever wondered where Murphy figured out his law? I am quite convinced he did it in his kitchen.

Hans Rosling: No more boring data

This one is for those who find statistics or development talk boring. AWESOME!!

Hans Rosling was born 1948 in Uppsala, Sweden. He is a Professor of International Health at Karolinska Institutet and Director of the Gapminder Foundation, which developed the Trendalyzer software system, used in the presentation above. Some components of the Trendalyzer software, particularly the Flash-based Motion Chart gadget, have become available for public use as part of the Google Visualizations. Try the spreadsheet application in Google docs. Its fun.

Rosling has studied statistics and medicine at Uppsala University, and public health at St John's Medical College, Bangalore.

Useful links:

http://www.gapminder.org/

http://www.roslingsblogger.blogspot.com/

http://en.wikipedia.org/wiki/Hans_Rosling

http://twitter.com/hansro

Accessing wlefare programs of the Government

When I see a beggar in Delhi, what do I do? Am I aware of all the recourses this poor person has to be reasonably sure that begging in her/his case is a choice? In case it is a question of access to opportunities that may enable her/him to live a more dignified life, how can I help her/him? These are some of the questions that keep cropping up in my head and have got me to explore the headline welfare programs of the government. While I will post my observations gradually, I intend to follow the following framework:

1. Program details and origin

2. Agencies involved

3. Eligibility and conditions

4. Processes involved

a. Enrollment

b. Participation

c. Payment, remittance

5. Risks and mitigation

6. Recommendations

7. Present status

8. How can I help a poor person benefit from this program?

I welcome any suggestion on this framework.

Government Sponsored Rural Development Programmes in India

The headline rural development programmes in India are:

1. National Rural Employment Guarantee Act (NREGA) – Wage employment
2. Swarnjayanti Gram Swarozgar Yojana (SGSY) – Rural self employment
3. National Social Assistance Programme (NSAP) – Social security for the poor
4. Bharat Nirmaan – Rural infrastructure such as drinking water, electricity, housing, irrigation and road
5. Council for Advancement of People’s Action and Rural Technology (CAPART) – Skill building
6. Prime Minister Gram Sadak Yojna (PMGSY) – Rural roads

Tracing the evolution these programmes is an interesting study of the emerging development paradigm in India.

Steve Jobs' 2005 Stanford Commencement Address

Inspiring stuff! It helps to remember that we live the choices we make.

Just to complete Steve's story, Apple granted him ESOPs in 2001. These options apparently were granted at a strike price lower than what the price should have been. If this is true, Steve Jobs would have under-reported his income. An internal Apple investigation has cleared Jobs of the charges reporting that he had returned his options without exercising them in 2003. Apple's board remains under investigation for alleged securities fraud.

Source:

http://en.wikipedia.org/wiki/Steve_Jobs

“Who would ever think that so much went on in the soul of a young girl?” Anne Frank Quotes

The quotes attributed to Anne Frank are intelligent and kind. They are also relevant to the world we live in – a world full of uncertainties. These quotes have an amazing healing effect. Their most remarkable property is that they are extremely positive, despite all that Anne had to go through in her brief life. An honest assessment will tell you that it’s a lot easier to be vengeful and unforgiving. Therefore these quotes are also sobering. Anne Frank will forever remain a “pole” star for those who feel lost in trying to figure out the right from the wrong.

The Quotes:

“I keep my ideals, because in spite of everything I still believe that people are really good at heart.”

“And finally I twist my heart round again, so that the bad is on the outside and the good is on the inside, and keep on trying to find a way of becoming what I would so like to be, and could be, if there weren't any other people living in the world.”

“Everyone has inside of him a piece of good news. The good news is that you don't know how great you can be! How much you can love! What you can accomplish! And what your potential is!”

“How wonderful it is that nobody need wait a single moment before starting to improve the world.”

“I live in a crazy time.”

“I must uphold my ideals, for perhaps the time will come when I shall be able to carry them out.”

“I soothe my conscience now with the thought that it is better for hard words to be on paper than that Mummy should carry them in her heart.”

“If I read a book that impresses me, I have to take myself firmly by the hand, before I mix with other people; otherwise they would think my mind rather queer.”

“It's really a wonder that I haven't dropped all my ideals, because they seem so absurd and impossible to carry out. Yet I keep them, because in spite of everything I still believe that people are really good at heart.”

“Laziness may appear attractive, but work gives satisfaction.”

“Boys will be boys. And even that wouldn't matter if only we could prevent girls from being girls.”

“No one has ever become poor by giving.”

“The best remedy for those who are afraid, lonely or unhappy is to go outside, somewhere where they can be quiet, alone with the heavens, nature and God. Because only then does one feel that all is as it should be.”

“The final forming of a person's character lies in their own hands.”

“Think of all the beauty still left around you and be happy.”

 “We all live with the objective of being happy; our lives are all different and yet the same.”

“Whoever is happy will make others happy too.”

“I simply can't build my hopes on a foundation of confusion, misery and death... I think... peace and tranquillity will return again.”

 

The Value of a Promise

A private equity investment in an enterprise that does not trade in the stock market poses multiple challenges. These challenges multiply if the enterprise operates in a nascent industry that is still in its early stages of development, because there is very limited data to compare the investment deal with. 

Reaching a consensus on the value or price of equity is the first step in the equity investment process. Most often the valuation is based on the expected future returns to the equity investor. This usually involves forecasting future performance and an analysis of the business plan of the enterprise.  When the buyer and the seller agree that the forecasted performance reflects mutually acceptable and realistic expectations regarding returns, there is usually an agreement on the price of the equity share of the enterprise also.

In most cases where the equity value being asked is at a significant premium to the book value because of the future reward potential, the investor may not be comfortable in making the investment at one go. In such a case, the investor may demand a milestone linked investment schedule, spanning between six months to over two years. Till such time, the investment may rest within the enterprise as a convertible debt.

In situations where an existing equity holder sells her equity stake to an investor in an equity deal, the investor may put even more stringent conditions such as requiring that a significant part of the money being paid for the equity stake be kept in an escrow account maintained by the investor till such time that the company achieves certain pre-decided milestones particularly relating to sales and profits.

Investors view these as mechanisms to ensure that the existing owners as well as the management of the enterprise do not make exaggerated profitability forecasts in order to create a false impression of value. As most enterprises look for equity to fuel growth, they invariably project very high growth in the first few forecasted years. Given the “mystery” surrounding any early stage enterprise, it adds to investor comfort if these projections are beaten.

It would be an interesting research to examine investment terms and conditions in private equity deals in emerging economy contexts.

Crystals

Silent screams;

Deaf ears.

Escape;

Mortal fears.

Crystals of salt;

Dried tears.

Layoffs: Painful but not disgraceful

Mass layoffs are very common in industrialized economies. As a matter of fact Bureau of labour statistics of the U.S government provides data on layoff actions every month. In case of U.K, national statistics department provides data on unemployment rate and claimant count on a regular basis. It does not deserve to be a national headline there and does not create much panic either. In particular layoffs are less significant events than unemployment. Why it is so? Because labour is an input in the production process and it becomes redundant, if not worthless, as demand slackens. Let’s look at recent layoff data of U.S. In the month of August, 2008 there were around 173,955 initial claimants in 1,772 mass layoff events! A claimant means a person who has applied for unemployment insurance but is actively seeking work. An event is registered when fifty or more initial claims for unemployment insurance benefits are filed against an employer during a 5-week period. In U.K the number of claimants is far higher – more than 900 thousand in month of August.

Figure 1: Mass layoff events in U.S - Sep, 2004-Aug, 2008


Source: Bureau of labor statistics, U.S


Figure 2: Growth rate of Mass Layoffs in U.S



Source: Bureau of labor statistics, U.S

Well, for us these numbers may be incredibly high but for a matured capitalist system, at best these could be systolic and diastolic readings of the economy which do not always require an aspirin dose. Only when mass layoffs result in higher unemployment, it could solicit some fiscal or monetary interventions. In August, U.S has 6.1 percent unemployment up from 4.7 percent a year earlier. That is what makes a headline. Only when unemployment crosses the natural rate of unemployment (4 – 5 %), it raises the eyebrow. Now we are back to the first question – why it is so in a capitalist system? Let’s understand the basics.

Capitalism thrives on profits and it must fulfill the first order condition of that which is the equalization of marginal revenue and resource cost, to survive in business. But, the decision to operate is a function of shut-down price – that is the price when the firm decides not to produce as the total variable cost of producing that output exceeds the total revenue derived from selling it. While this simplistic version of profit maximization condition may not be the final condition in all market forms, the essence holds – one must earn more than one spends in a business to survive. There could be cyclical, frictional and structural unemployment in this model. The cyclical unemployment is related to the business cycle phenomena – investment rate goes down due to gloomy business environment which results in labour unemployment. The frictional unemployment is very transitory in nature and could be described as a wait unemployment or seasonal unemployment. When a person moves from a company to another company, there may be an intervening period during which he remains unemployed. Similarly someone might have opted for a seasonal work which keeps him busy during certain months in a year and free from work in the remaining months. Structural unemployment arises due to skill or location mismatch. A new software language may lead to obsolescence of the old workers and till the time they are trained in a modern language, they may remain unemployed. Similarly, there may be a reserved army of IT at Bangalore but demand for them may be more at Thiruvantpuram. The changing dynamics of an economy creates such an unemployment scenario. Therefore, unemployment in one form or other always arises in a free market economy which is in a constant endeavour to adjust and readjust with changing dynamics.

Now let’s get back to the core issue that has become headline in the Indian media. Jet had laid off 800 plus employees while several others were in the queue. It has been done with a motive to rationalize costs and keep the airline afloat. As per the audited financial results of Jet, iit has incurred a loss of Rs. 253 crores post tax in FY08. It has incurred losses of Rs. 143 crores in the first quarter of FY09. Moreover the industry traffic growth rate has fallen from 11.1 percent in Q4FY08 to 4.2 percent in Q1FY09. The ATF which is around 50 percent of airline operating costs has increased by 52 percent between February, 2008 to July, 2008. Jet with the average headcount of 13,403 between April-June, 2008 with 85 fleet has to face the brunt of spiralling costs. Its workforce has increased by 24 percent between Q1FY08 to Q1FY09. Being bewildered by the international and domestic macroeconomic developments, it has taken an unprecedented step in recent times – that of retrenching 800 plus employees. As per the news it was in the process of manpower reduction by 15%. The basic economics of business infact won’t disagree with Jet’s move. We all do cost cutting or rationalize our personal expenses (politically correct word!) when faced with a tight financial situation.

Before dealing with the post-retrenchment development, I would like to spell few words to deal with such a situation from both macro and micro perspectives. Being laid off is an unfortunate event but certainly not a disgraceful one – especially when it is due to exogenous factors. One has to accept the reality that business cycle is an integral part of the capitalist development. India can no more take respite by ascribing dismal growth to ‘act of God’ which very often we do by regressing economic growth with respect to rainfall index. We are very much in the club of capitalist countries courtesy Manmohan Singh who has just made us a member of another club – that is called nuclear power, very recently. Coming to treatment, we need a trauma care centre – unemployment insurance. When you have asked people to join rafting, you have to ensure that everyone wears a lifesaving vest. It is there in U.S, in U.K and other western European nations. Least to speak in U.K, they give you additional allowance if you have a pet and become unemployed. India has to do this before it is too late. Even in the absence of any business cycle syndrome, otherwise also, enterprise restructuring would produce some temporary jobless people for whom some sort of insurance mechanism must be put in place. Whether it would be a complete transfer of income or from a contributory premium fund at a national level would need to be explored.

At the micro level also, people coming to the job market must be prepared for it. As the wise advice goes – do not put all of your eggs in one basket. One should possess multiple skills and in really bad times, one should not hesitate to jump to the periphery, may be, till the tide get back its level. For example, if you are a software programmer, you should learn a few other languages rather than being a specialist in one as you do not know when that lnguage would get obsolete. Sometime ago, Business Standard bore a headline that there is a scarcity of Ph.D s in Economics. Even if one discounts the academic virtues of being a Ph.D, it makes sense in terms of diversifying your risk. Similarly people in the aviation industry should learn the basics of hospitality services in other areas like hotels, clubs or hospitals. While I understand the predicament of most of the poor Indians in terms of bearing the massive expenses of a single professional course, it makes sense to aspire a little more than what one can manage. Maybe one should finish a Masters degree course even if one thinks of employment after a Bachelors.

Now let’s close the story. We all know that Jet has taken back the retrenched people. It has ended as a high octane melodrama where chairman of Jet Mr. Naresh Goyal could see his daughter among the sacked employees. Considering the high emotional quotient of Indians, there is no reason for me to disbelieve Mr. Goyal’s version. The conscience of the capitalist has surpassed (rather transcended!) balance sheet calculations. However, the basic principles of capitalist system must be respected in letter and spirit that is – marginal revenue should be equal the marginal cost atleast. There is no excuse to avoiding that. After all, in a capitalist system, companies exist to maximize share-holder value.

(Views are personal)

Effects of multiple borrowings on overall indebtedness of MFI clients

The Indian microfinance sector has witnessed rapid growth during the past few years. Several new MFIs have come up, and older ones have expanded their operations geographically. There exist pockets in various states where there is a concentration of many MFIs. On the one hand competition has helped in bringing interest rates down, on the other hand there are concerns relating to overlap in clients resulting in clients borrowing from multiple MFIs and beyond their repayment capacity.

While expert opinion cautions against the adverse impacts of multiple borrowings by the clients, empirical evidence collected so far, does not establish that the recovery rates of MFIs deteriorate as a result of their clients borrowing from multiple sources. Intense competition among MFIs may lead to instances of multiple borrowings by MFI clients and clients may be tempted to enter into a situation of over indebtedness (Graham Wright). It may also lead to asymmetric information and borrowers may obtain multiple loans, which in the longer run would militate against provision of sustainable financial services (McIntosh and Wydick, 2005). However, an empirical study of the partnership clients of ICICI bank concludes that multiple borrowers have equal or better repayment records than their single borrowing peers in the same village (Krishnaswamy, 2007). The Bolivian experience in microfinance in the early years of this decade provides an example of the ill-effects of over indebtedness among microfinance clients (Rhyne). The microfinance experience was symptomatic of the problems in the macro- economy which resulted in reduced purchasing power overall.

The existing literature provides a divided view on the impact of multiple borrowings by MFI clients. A priori it does appear that while multiple borrowings may not be a problem on its own, if it leads to clients borrowing beyond their repayment capacities, problems arise. Also in case there are external shocks, client’s borrowing capacity may go down, and multiple borrowings increases the chance that the client is over-indebted.

Ravi J Mathai and Verghese Kurien

Ravi Mathai was the first full time director of IIM Ahmedabad. The IRMA library carries his name. Verghese Kurien (founder of IRMA) and Ravi Mathai are cousins. Both are a study in contrast. Kurien is as much a showman, as much as he is a relentless, resilient maverick with a cause who is unambiguously credited for establishing AMUL, NDDB and IRMA and ushering in milk revolution in India. Mathai, on the other hand, was almost an ascetic, principled, equally passionate intellectual who established the foundations of IIMA and rapidly took it to great heights.

The Economic Times carried an article on Mathai in December 2007, which is worth a read. While the author rightly suggests that people such as Mathai, Sarabhai and Talwar were great institution builders, he forgets Verghese Kurien. To quote the author's blog (ttrammohan.blogspot.com) - "In relinquishing his job, Mathai lived up to the highest traditions of self-abnegation so greatly revered in this country. In many other ways, he set almost impossible standards of conduct. He instituted a rule (since waived) that the director should not be involved in consulting. He declined to seek reimbursement of his travel and medical bills. He never projected himself, it was always the Institute that got projected. I have heard that he was rather reclusive, locking himself in his house at the end of the day and mentally reviewing the events of the day.

The great thing about people like Mathai is that not only do they create the foundations for durable success, they also set standards for those who follow. It is impossible for anybody sitting in the director's chair to escape comparison with Mathai."

This is in sharp contrast to Verghese Kurien, who never wanted to relinquish his position at IRMA. The case that dragged to courts made a public spectacle as news channels carried live coverage of the then IIMA director Bakul Dholakia protesting outside IRMA gate because he was denied entry in the Institute's campus for an important board meeting. The full story is available in a Business Line article published on April 15, 2005. Part of the article is reproduced below:

"Minutes before the IRMA board met today to confirm the award of degrees on graduating students, the security staff at the gate prevented the entry of eminent personalities whose candidature as members of the IRMA board has become the subject of an intense court battle. Prof. Bakul Dholakia (Director of the Indian Institute of Management Ahmedabad), Mr Hasmukh Shah (Chairman of the National Institute of Design) and Mr Vijay Mahajan (Chief of Basix, a Hyderabad-based non-government organisation) were prevented from entering the IRMA campus on instructions from the acting Director of the Institute, Dr L.K. Vaswani. The IRMA Director, Prof. K. Prathap Reddy, who had been sacked by Dr Kurien earlier this week, was also prevented from attending the board meeting and was seen walking out of the campus.

Prof. Dholakia, Mr Shah and Mr Mahajan tried to force their way in but had to retreat as they ran into a bunch of private security guards who were determined not to let them in even as the National Dairy Development Board Chairperson (NDDB), Dr Amrita Patel, drove in.

After the board meeting and the convocation ceremony, Dr Kurien, who at 83 is still actively involved with IRMA and Amul, repeated his standard responses about a "conspiracy" to take control of the "beautiful institute" and said that he was not willing to be pushed out of IRMA. Asked why three board members were stopped at the gates, he said: "I must manage the function. If that requires stopping somebody at the gate, I will do it."

The Business Line had carried another article, published February,26 2004, when the IIMs had taken a stand against the government to safeguard their autonomy. This article carries an interesting dialogue Ravi Mathai and Verghese Kurien apparently had once:

Then, (Verghese) Kurien went on to build IRMA, the Institute of Rural Management Anand, with inputs from his cousin Ravi Mathai, who was the Director in IIM, Ahmedabad.

Avoid mistakes that happened in IIM, Mathai instructed: "So cousin, when you build IRMA, please build a bigger house for the director than for the professors so that they will know that there is a boss."

Next, don't give too much powers to professors; this is not Harvard. For this, Kurien recounts Mathai told him: "I told a professor whom I had appointed, `You are free to go ahead and fill all the lower posts in your department.' That person went to his village, brought all his relations and appointed them. That was a terrible mistake which I made."

And, there's one more: "The third point cousin, is that you should cut down on the number of people you employ. We have so many people, and therefore, labour union problems, courts, and so on. I am tired of it all. You are a dictator, so run it as a dictator. If anyone steps out of line, sack him. I can't do that; I am not made that way.'"

Now, this is Kurienspeak: "I said, `Ravi Mathai, neither you nor any of your professors have ever managed anything."

The positive aspect of Kurien's personality is that he never bowed to the bureaucracy. His last days at IRMA were not glorious, however, this does not belittle his achievements.

Policy measures of the welfare state!

As the government interferes so much with markets, for example take the recent agri-debt waiver, imagine what else the government could do.
Sample a few thoughts:
The government can provide a minimum support level to stock market indices. Lets say there is a support for NSE Nifty at 5000, that ways, investors will not lose wealth.
The government can impose a ceiling to inflation levels at 5%, that ways prices wont rise.

Trading Social Credits

The Economic Times in an article today informs that the government is planning to ask corporate houses to be more transparent about their social spending under the head corporate social responsibility (CSR). In a post in this blog some days ago, I had posted a question – Can we have a specialized exchange to trade "social credits" in order to develop capital markets for non-profits? Large corporations have corporate social responsibility (CSR) budgets that are spent on a variety of development projects. If NGOs (and even Government agencies that are responsible for implementing developmental programmes) could quantify the social returns they generate and bundle them through instruments which I call “social credits”, these could be sold to corporate houses, donors, socially motivated investors, government agencies which can utilize their CSR/developmental budgets for purchasing such social credits. Such trades can be facilitated through social credit exchanges, which would allow NGOs to raise resources for their developmental projects. NGOs that have high social credits would be able to generate more resources. Social credits themselves would be a function of the social impacts that are generated by these organizations. The quantification of such impacts is a challenge; however, the step that the government is planning is in line with the argument presented above.

Is a DCF Valuation Pre-money or Post-money?

This question arises because of the different vocabularies of mainstream corporate finance literature and venture capital/private equity practicioners. I have seen many people believe that this is a point of negotiation between the investor and the investee. In my opinion, there is a very clear theoretical case, that the DCF approach to equity valuations yield a pre-money equity value as negative free cash flows are also discounted which reflect the impact of future dilutions in equity. Therefore no further adjustments are required.
Intuitively, though, consider what a negative free cash flow to equity implies. It indicates that the firm does not generate enough cash flows from current operations to meet its reinvestment needs. Since the free cash flow to equity is after net debt issues, the firm will have to issue new equity in years where the cash flow is negative. This expected dilution in future years will reduce the value of equity per share today. In the FCFE model, the negative free cash flows to equity in the earlier years will reduce the estimated value of equity today. Thus, the dilution effect is captured in the present value and no additional consideration is needed of new stock issues in future years and the effect on value per share today.
(Italics quoted from Aswath Damodaran - Professor of Finance at NYU-Stern, page 34-35 of the document - chapter 14, Investment Valuation, box on Negative FCFE, Equity Dilution and Value Per Share - available on www.damodaran.com).

Dispensability makes it sustainable

Experience has convinced me about my own dispensability. I have a sense of pride in the fact that I have contributed to it significantly. It also means that I can take things lightly. If you are dispensable in the social setting, it allows you to sit back, enjoy the drama, take a few liberties and have fun, as you are free from the burden of having to live up to expectations.

In an institutional setting, it is organizational competence and not concentrated skill-sets that can ensure scale and sustainability. This is especially difficult to achieve in industries that are driven by people and not by machines such as the services industry. No matter how well defined and articulated processes are, it is almost impossible to achieve perfect standardization - the “production” and “distribution” of a "service" has a considerable human interface.

BPOs in India have successfully addressed this issue by designing well crafted trainings (for example in voice and accent, or in standard operating processes) that make it possible for them to deliver services that are uniform in quality. MFIs have much to learn from BPOs.

If a service involves intellectual processing of problems, the complexity increases manifolds. To take an extreme example, the service that a good CEO provides to her/his firm would virtually be impossible to standardize. No wonder, there is a lot of discussion on how CEOs’ actions, role, compensations etc. impact a host of organizational variables and ultimately firm-value. Successful companies are very effective in delegation of responsibilities. Also, functional boards with independent directors as well as a sound system of independent internal audits help build strong organizations. In effect these measures reduce the discretion a CEO has in taking arbitrary decisions and help reduce the risk that an “indispensable” CEO could expose her/his firm to. This is another imperative for MFIs in India.

It is essential to create dispensability in order to have sustainable outcomes that live beyond an individual. Isn’t it ironical that obituaries are written for an audience!

http://www.youtube.com/watch?v=jpf5MoxWuxQ&feature=related

Restless thoughts of a sleepless night

Can we have a specialized exchange to trade "social credits" in order to develop capital markets for non-profits?
Can private sector monitoring (such as independent ratings, certified audits, transparent accounting) enhance market efficiency?
Can we think of a macroeconomic model that factors in the effects of the unaccounted economy (black economy) on national income, inflation and interest rates?

On M2i

The economic times profiled M2i in Feb 08. Though we have grown since then, it is only appropriate that the article finds a place here.

Championing Financial Inclusion: M2i founders chase a dream

(The Economic Times, 15 February 2008)

Imagine building a business plan by combining a love for travel, desire to see development in villages, financial acumen and college friendships. That’s what three students at the Institute of Rural Management, Anand (IRMA) did in 2001. Deepak Alok, B Atul and Rajeev Kumar used to discuss how market forces could aid development. One compelling area to look at was the fledgling industry of microfinance, banking for the marginal sections of the society. It was not yet mature, but had all the ingredients of any mainstream industry, they believed.

A college project on rural finance and insurance convinced them that there was a need for professional intervention to take banking to the excluded masses. Next year, Mr Alok and Mr Kumar joined a microcredit ratings agency after graduation. One of their colleagues, Rahul Bist, another MBA from the Indian Institute of Forest Management (IIFM), shared their belief on the potential for microfinance. After years of preparation, the three friends and Mr Bist quit their jobs and joined hands to pursue their financial dream.

When lending and providing insurance to villagers and low-income groups was a marginal activity, the team went one step beyond and started a microfinance advisory firm. Initially, they worked out of home. “We started with our own savings and reinvested almost all our revenues. Our start-up capital was extremely small,” says Mr Alok. Microfinance Management and Investment (M2i) Consulting came into being in March 2006 and quickly landed a client in ESAF, Thrissur. The start-up advised ESAF on capital structure and conducted training. The success of the first assignment was noted and ICICI Bank soon signed up as a customer.

Travelling to villages and interacting with local people is a perk in the job, the four seem to believe. For instance, the ICICI Bank contract involves going to a remote district in Orissa to assess the bank’s local partner. This perspective of grassroots Indian economy may not be available from most business ventures. “We have to travel a lot and that makes the job more exciting,” says Mr Bist. “It is very important for us to understand their livelihood, their income stream and their mindset to develop products or to consult MFIs.”

The company got its first international assignment from Microfinance Investment and Support Facility for Afghanistan (MISFA). M2i assessed the financials of an MFI called Parwaz, which later became its client. More projects came from southeast Asian countries and the team had to travel to places like Indonesia, Philippines and Cambodia.

Today, M2i’s client list includes Rashtriya Grameen Vikas Nidhi (RGVN), Sadhan, Development Alternatives, ESAF, Cashpor, BISWA, Nirmaan Bharati and Appropriate Technology India (ATI). M2i trains and provides support and management consultancy to MFIs. It also helps these institutions in designing products for their clients — the villagers who borrow money from these MFIs.

Microfinance institutions often find raising capital a difficult proposition, given that the rural banking mechanism is unfamiliar to most investors, including private equity and venture capital firms. Making money in microfinance is itself a challenge and providing corporate advisory services could have been even more so, but M2i navigated through the early difficulty of winning clients by leveraging the prior contacts the partners had. “Initially, we were apprehensive, we weren’t sure how it will work. But, we had the confidence that it was all that we wanted to do,” Mr Bist says.

Entrepreneurship makes you an all-rounder, feels Mr Alok. Initially, he had to do everything from writing the books of accounts to ensuring numerous regulatory compliances and most of his time was spent on them. “But, it’s only when you go through this experience that you realise how very discouraging complex regulatory requirements can be for a start-up. Thankfully we now have fairly standardised and streamlined systems.”

The team has never regretted leaving their jobs to start on their own. “It feels great to be a decision-maker. Believe me, it’s quite exciting,” says Mr Bist.

Taxation in India: FAQs

From a very interesting mail forward.

1) Qus. : What are you doing?
Ans.: Business.
Tax: PAY PROFESSIONAL TAX!

2) Qus. : What are you doing in Business?
Ans.: Selling the Goods.
Tax: PAY SALES TAX!!

3) Qus. : From where are you getting Goods?
Ans.: From other State/Abroad
Tax: PAY CENTRAL SALES TAX, CUSTOM DUTY & OCTROI!

4) Qus. : What are you getting in Selling Goods?
Ans.: Profit.
Tax: PAY INCOME TAX!

5) Qus. : Where you Manufacturing the Goods?
Ans.: Factory.
Tax: PAY EXCISE DUTY!

6) Qus. : Do you have Office / Warehouse/ Factory?
Ans.: Yes
Tax: PAY MUNICIPAL & FIRE TAX!

7) Qus. : Do you have Staff?
Ans.: Yes
Tax: PAY STAFF PROFESSIONAL TAX!

8) Qus. : Doing business in Millions?
Ans.: Yes
Tax: PAY TURNOVER TAX!

9) Qus. : Are you taking out over 25,000 Cash from Bank?
Ans.: Yes, for Salary.
Tax: PAY CASH HANDLING TAX!

10) Qus. : Where are you taking your client for Lunch & Dinner?
Ans.: Hotel
Tax: PAY FOOD & ENTERTAINMENT TAX!

11) Qus. : Are you going Out of Station for Business?
Ans.: Yes
Tax: PAY FRINGE BENEFIT TAX!

12) Qus. : Have you taken or given any Service/s?
Ans.: Yes
Tax : PAY SERVICE TAX!

13) Qus. : How come you got such a Big Amount?
Ans.: Gift on birthday.
Tax: PAY GIFT TAX!

14) Qus. : Do you have any Wealth?
Ans.: Yes
Tax: PAY WEALTH TAX!

15) Qus. : To reduce Tension, for entertainment, where are you going?
Ans.: Cinema or Resort.
Tax: PAY ENTERTAINMENT TAX!

16) Qus. : Have you purchased House?
Ans.: Yes
Tax : PAY STAMP DUTY & REGISTRATION FEE !

17) Qus. : How you Travel?
Ans.: Bus
Tax: PAY SURCHARGE!

18) Qus. : Any Additional Tax?
Ans.: Yes
Tax: PAY EDUCATIONAL, ADDITIONAL EDUCATIONAL & SURCHARGE ON ALL THE
CENTRAL GOVT.'s TAX !!!

19) Qus. : Delayed any time Paying Any Tax?
Ans.: Yes
Tax: PAY INTEREST & PENALTY!


And to add, taxes are collected in advance and you cannot offset one category of taxes against the other. Tax credits take a long time. The honesty and integrity of tax personnel - well I will leave that to the reader's imagination.

Food Price Inflation – Some Interesting Quotes

At a lecture in Singapore, the Indian Finance Minister, P Chidambaram is reported to have said “It is a sign of the lopsided priorities of certain countries that they will resort to measures that will produce fuel at a cheaper cost in order to meet the transport requirements of a section of their population". Furthermore, he said the pursuit of such policies at a time when many in the world could barely afford to eat was "outrageous and... must be condemned"[1].

On May 3, 2008, the US President George Bush in an interactive session on the American economy at Missouri said that "Worldwide there is increasing demand. There turns out to be prosperity in developing world, which is good. It's going to be good for you because you'll be selling products in the countries, you know, big countries perhaps, and it's hard to sell products into countries that aren't prosperous.

In other words, the more prosperous the world is, the more opportunity there is. It also, however, increases demand. So, for example, just as an interesting thought for you, there are 350 million people in India who are classified as middle class. That's bigger than America. Their middle class is larger than our entire population.”

"And when you start getting wealth, you start demanding better nutrition and better food, and so demand is high, and that causes the price to go up". “No question that ethanol has had a part of it. But I simply do not subscribe to the notion that it is the main cost driver for your food going up”[2]. And as expressindia puts it, - ‘The comments come close on the heels of US Secretary of State Condoleezza Rice's controversial statement that ‘apparent improvement’ in the diets of people in India and China and consequent food export caps is among the causes of the current global food crisis’.

Noble Laureate Amartya Sen (rightly) feels its government policies (across the developing and the developed worlds) that are to blame, “Much discussion is rightly devoted to the division between haves and have-nots in the global economy, but the world’s poor are themselves divided between those who are experiencing high growth and those who are not. The rapid economic expansion in countries such as China, India and Vietnam tends to sharply increase the demand for food. This is, of course, an excellent thing in itself, and if these countries could manage to reduce their unequal internal sharing of growth, even those left behind there would eat much better.

But the same growth also puts pressure on global food markets —sometimes through increased imports, but also through restrictions or bans on exports to moderate the rise in food prices at home, as has happened recently in countries such as India, China, Vietnam and Argentina. Those hit particularly hard have been the poor, especially in Africa.

There is also a high-tech version of the tale of two peoples. Agricultural crops such as corn and soya bean can be used for making ethanol for motor fuel. So the stomachs of the hungry must also compete with fuel tanks. Misdirected government policy plays a part here, too. In 2005, the US Congress began to require widespread use of ethanol in motor fuels. This law combined with a subsidy for this use has created a flourishing corn market in the US, but has also diverted agricultural resources from food to fuel. This makes it even harder for the hungry stomachs to compete. Ethanol use does little to prevent global warming and environmental deterioration, and clear-headed policy reforms could be urgently carried out, if American politics would permit it. Ethanol use could be curtailed, rather than being subsidized and enforced.” [3]

---

[1] Reported on March 26, 2008 by the BBC (http://news.bbc.co.uk/2/hi/south_asia/7315308.stm)

[2] Reported on May 3, 2008 by the ExpressIndia (http://www.expressindia.com/latest-news/Rising-food-prices-After-Rice-Bush-blames-India/304902/)

[3] Amartya Sen quoted in the daily Mint on May29, 2008. (http://www.livemint.com/2008/05/29004356/Beyond-the-usual-explanations.html)

In search of a perfect peg...

Prelude: Sa-dhan's Quick Report 2007 spells out a data of about 129 MFIs. DER of total industry assuming that there are only these 129 major MFIs, comes out to be around 12:1. Is this healthy from both lenders as well as owner's perspective? Write up below is just a penning down or playing-around with some ratios which concludes with a question, open for all bloggers of this BottomOfPyramid Blog to comment.


To calculate the return on equity using the DuPont model, multiply the three components (net profit margin, asset turnover, and equity multiplier.)

• Return on Equity = (Net Profit Margin) (Asset Turnover) (Equity Multiplier).

[Equity multiplier is calculated as Assets/Equity; Equity is Networth]

Du Pont observes that Return on Equity is a product between Profitability, Asset Efficiency and Financial Leverage.

Using Equity Multiplier, one can clearly say how much of the return has actually come out of debt.

This is how it is...

Equity Multiplier = A/E; Where A = Assets and E = Equity

Say EM = 10

==> 10 = (D+E)/E
==> 10E = D+ E
==> 9E = D
==> 9 = D/E
==> Debt-Equity Ratio = 9
This shows that if EM is n, then DER is n-1

Now, at different levels of EM, the DER, Proportion of Equity and Proportion of Debt are as follows:

EM (n)	1	2	3	5	10	20	50	100
DER (n-1)	0	1	2	4	9	19	49	99
% of Equity (1/n)	100%	50%	33%	20%	10%	5%	2%	1%
% of Debt (1-(1/n))	0%	50%	67%	80%	90%	95%	98%	99%

The above table gives some valuable insights:

1. EM is a leverage ratio
2. As EM tends to infinity, proportion of equity tends to zero.

Further, its important to understand that the EM is a multiple of ROE (as referred above) and therefore highly significant increase in EM can alarm both the creditors as well as its owners. Creditors will be worried about their own funds more at stake than owner's equity and therefore there is a likelihood of the cost of borrowings going high. Similarly, if the owners also perceive risk, they also raise their expected return, and thereby increasing the cost of equity. Overall, an increased EM will increase Average Cost of Capital and thereby reduce profitability. Sometimes, a very low EM can also be costly as expected return on equity by shareholders will be high, and thereby increase the overall cost of capital.

So my question to the reader is: When do I say EM is optimal? or, When do I say EM of an average MFI is optimal? or more precisely, What levels of DER is more optimal?