The parable of the rural town bank

IN the remote rural town, there was only one legitimate bank accessible to the farming community. It had a mixed reputation. Some had suspected illegal practices but no one could get hold of hard evidence. On the other hand, farmer clients put a lot of weight to the fact that the owner lived in their midst.
"At least we know him and he will not run away because he is from here," said a farmer depositor.
"You do not have to be from out of this town to be a swindler," countered another farmer. "The banker has many shady deals in his other business. I am sure his bank is in the same mess. We are so far away from the city, the government officers have not come to check. Do these bureaucrats care about us at all? Maybe they are in cahoots with the bank owner."
The banker did not help any with his light remarks on how he established the financial institution.
"I had nothing when I first settled in this God-forsaken place. It was just another deprived barrio. When coffee arrived as a major crop, prosperity followed suit. The need for a bank became acute. For credit and savings. So I hung a sign with the word, ‘BANK.’ Farmers came in trickles to deposit. Before I knew it, I had enough cash to give out loans. At that point I decided to deposit ten pesos of my own money. That is how I got to own a bank."
He would howl with laughter as though jeering his clientele.
One day, he announced a scheme where depositors would be given eight percent interest on their investments in the bank. The rate would be ten times the going interest rates. In laymen’s language, the banker said the money would be doubled in a year.
Farmers got out their long kept cash. Teachers and other employees trooped in. Word spread that the twelve percent interest was given on the end each month. It was easily the best investment. Even businessmen and farmers from neighboring towns came to put in their money.
It was a classical case of pyramiding. New money invested were partly used to pay the interests of earlier depositors. It was snowballing in great quantities of investments.
But in six months, the banker had disappeared. A throng of farmers milled around in front of the bank. One farmer was the most vocal in his condemnation. "He should be electrocuted in the electric chair three times. After that he should be hung by the neck to die three times. His body should be deposited in an ant hill (guyam) to be bitten until his body is one swollen mass."
"Why, how much did you invest?" inquired a distressed man beside the noisy farmer.
"None," replied the vocal one. "If I had money in this bank, do you think I would be taking it so lightly?"

Barrio Breeze Juan Flavier (http://www.mb.com.ph/OPED2004072815004.html)

The GTB - OBC Merger Notification

Date: Jul 26, 2004

Draft Scheme of GTB - OBC Amalgamation

 
Global Trust Bank Ltd., (GTB) has been placed under an Order of Moratorium on July 24, 2004 which is effective upto October 23, 2004 or an earlier date if alternate arrangements are in place. During the period of moratorium, the Reserve Bank of India has to decide the future set up of GTB.
GTB had been given time to arrange for infusion of capital as also to explore the options of raising required capital or voluntary merger with any domestic bank. GTB’s proposal for infusion of capital by a consortium of investors was not found acceptable. The bank also indicated its inability to raise required capital from domestic investors as also voluntary merger with any domestic bank. The option of voluntary merger is not available now.
The other option available with the Reserve Bank is compulsory merger under section 45 of the Banking Regulation Act, 1949. Interest has been expressed on the issue by Oriental Bank of Commerce (OBC). The Reserve Bank has also received informal enquiries from other public sector banks expressing interest in the matter. OBC’s perception on the issue has been examined by the Reserve Bank of India keeping in view its financial parameters, its retail network and its synergies as well as strategic advantages. Taking into account the interests of the millions of depositors of GTB, as well as the bank’s strengths and weaknesses, the Reserve Bank has prepared a draft scheme of amalgamation of GTB with OBC. It has been forwarded to both banks today. The banks have been given two weeks time up to August 7, 2004, to consider the draft scheme.
The draft scheme has been put in public domain and will be notified in the newspapers for suggestions and comments which have to be received by the banks and the Reserve Bank by Saturday, August 7, 2004. The Reserve Bank will take a view soon thereafter.
P.V.SadanandanManager

Can GTB episode repeat in mF?

The reasons for RBI's action against GTB are:

• the bank had a very poor capital adequacy record;
• it had huge NPAs, and it's networth had turned negative;
• a revival with huge capital infusion did not seem likely.

The point to ponder is that if this can happen in banking which is heavily regulated, what could happen in the mF sector? Is it a timebomb about to explode?

Some enlightening views:
Anonymous said...
The risks of mF sector emerge from the following reasons

a. Lack of adequate systems in most MFIs whose genesis lies in Non Government Organisations.
b. Inadequacy of capital in a few fast growing MFIs.
c. Lack of on-site and off-site monitoring.

We must remember that RBI conducted annual inspection of GTB. IT was aware of the impending danger. The merger with UTI bank was objected to by the regulator, the auditors were questioned and a continuous off-site monitoring was done unedr RBI's OSMOS programme.The industry leaders need to take an immediate review. The informal group report is out. The sector needs to understand that regulation by an independent agency serves public good. Self regulation can at best complement independent regulation.We must remember that the regulator did protect the depositors money and the employees have given 2 yrs salary protection under the upcoming merger plan with Oriental Bank of Commerce.It is really a wake-up call for mF sector. Take a leaf out of Pakistan where the State Bank of Pakistan has taken steps to regulate the MFIs. Remember regulation would be a major step towards mainstreaming.

2:05 PM
Anand said...
I would like to add on what OSMOS is:Under 'OSMOS' Banks have been advised by RBI to submit returns relating to a. assets and liabilitiesb. large exposuresc. Non Performing Assets d. Connected lendinge. Operational results f. Structural liquidity g. Interest rate sensitivityh. Capital adequacyi. Forex businessj. Working of subsidiariesk. Overseas operations, etc. These returns are submitted on quarterly basis which are critically analysed by OSMOS cell at RBI. The purpose of OSMOS is to supplement the inputs from on site examinations, pick up early warning signals relating to individual banks and/or the system as a whole and take remedial measures whenever necessary.

4:48 PM
Anand said...
I would like to add on Reserve Bank of India's approach:
1. Under OSMOS Banks have been advised to submit returns relating to assets and liabilities, large exposures,NPAs, connected lending, operational results, structural liquidity and interest rate sensitivity, capital adequacy, forex business, working of subsidiaries, overseas operations, etc. The returns are submitted on quarterly basis which are critically analysed by OSMOS cell at RBI. The purpose of OSMOS is to supplement the inputsfrom on site examinations, pick up early warning signals relating to individual banks and/or the system as a whole and take remedial measures whenever necessary.

2. The RBI is moving towards Risk Based Supervision (RBS) to increase the efficiency of application of supervisory resources. RBS enhances supervisory standards and practices in alignment with international best practices. The RBS model consists of:

(i) a formal risk assessment of the bank by producing a detailed risk profile
(ii) developing a unique supervisory action plan for each bank based on the risk profile
(iii) defining the scope and extent of supervision
(iv) setting up quality assurance and enforcement functions to maintain objectivity.

The RBS approach results in allocation of supervisory resources in accordance with the risk profile of the bank as the frequency of supervisory inspection is in inverse proportion to the the risk profile of the bank. The implementation of RBS calls for setting up comprehensive risk management systems, switching to risk based audit, compliance units, skill development, etc. RBS is being implemented for a few banks in the first pahse since 2003.

3. Prompt Corrective Action(PCA): The responsibility to identify problem banks at an early stage and to monitor the behaviour of the troubled banks in an attempt to prevent failure or to limit losses or contagion, the upervisory authorities have formulated a system of PCA with various trigger points and mandatory and discretionary responses. The key indicators for PCA will be CRAR, NPA level and Return on Assets. The responsibility to identify problem banks at an early stage and to monitor the behaviour of the troubled banks in an attempt to prevent failure or to limit losses or contagion, the upervisory authorities have formulated a system of PCA with various trigger points and mandatory and discretionary responses. The key indicators for PCA are CRAR, NPA level and Return on Assets. Thus, the action taken in respect of Global Trust Bank is an outcome of a well researched regulatory approach adopted by the Central Bank of the country 

Issues in Microfinance

That microfinance can be a sustainable means of providing financial services to the poor is proven, still issues remain:

Conflict and microfinance;
Microfinance among nomadic communities;
Accounting standards for microfinance ;
Microfinance and suicides in rural India ;
Microfinance and capital markets;
Partnership between corporate houses and MFIs;
Using technology to reduce transaction costs in mF delivery;
Regulation and supervision for microfinance;
Group promotion and cost recovery;
Microfinance and self sufficiency of MFIs ;
Microfinance-promises and performance;
2005-UN designated year for microfinance.

I invite visitors to this blog to share their views on these topics.

 

Fabindia

Fabindia: An introduction
Fabindia was set up in 1960 by John Bissell, an American, who came to India to explore the possibility of sourcing Indian Handloom textiles for export. It started as an export house in New Delhi. Over the years the focus of Fabindia's marketing has shifted to the local Indian retail market. While Fabindia started as an export house, it has today become a successful retail business presenting Indian textiles in diverse natural fibers. Fabindia combines handloom processes with varied techniques of weaving, printing, dyeing and embellishing. Its mission has been to work with village-based artisans across India employing their regional textile skills and competencies. It is committed to preserving the traditional crafts of India and creating employment opportunities in rural areas in the process.

The beneficiary group
Artisans in Indian villages represent a huge set of skills. But as they lack access to market information, often, their understanding of preferred color themes, designs, modern outlook, national and international is limited. Neither are they aware of the commercial value of their own products. As a result these artisans and craftsmen are poorly paid and end up getting exploited by middle men. Fabindia overcomes this value chain deficiency as it offers marketing and design support to these artisans.

Products and Services
The Fabindia product range includes ready-to-wear garments and accessories for men, women and children; bed, bath, table and kitchen linen; floor covering, upholstery fabric and curtains. The basic fibers used are cotton, silk, wool, grass, linen and jute. A recent addition to its product range has been non-textile (hard goods) merchandise.

Fabindia tries to maximize the handmade proportion in its products, using hand-woven, hand block-printed fabrics and vegetable dyes as far as possible. The handloom process and techniques of production gives the textile a unique character. In addition, handloom fabrics breathe well, are cool in summer and retain body warmth in the winter. However, if a fabric which has been made using a power loom is used, it is decorated using hand processes such as block printing, embroidery, or embellishing.

Business Linkages – Strategy
Fabindia has defined a Company Policy regarding distribution and institutional business. Fabindia believes in full control and management of its operations at all locations, by its own people. The Company maintains a policy of neither franchising its brand name nor appointing any franchisees for running its operations. However it has a few select customers who stock its products under the Fabindia name at their own stores. Fabindia also participates in a number of international shows.

In the context of backward linkages, Fabindia has made a profitable business by finding remote craftsmen and designing commercially appealing products that harness their skills. This has also enabled it to generate meaningful employment for these artisans.

Fabindia: Outreach and Potential
Fabindia now has 12-thousand crafts-people across the country, mostly in rural areas, supplying both its domestic chain of stores and its growing export business. It has been posting huge sales, with $13 million dollars (Rs58.5 crores) in revenues in FY02-30, up from $10 million (Rs45 crores) in the year before that and provides another example of India’s growing small business sector.

Investment and Costs
Fabindia maintains its own product outlets. Within India, it merchandises and distributes its products through company owned stores. A new store requires leased or purchased property with a carpet area of 800-1500 sq ft. For a sustainable level of business, Fabindia chooses locations with over ten lacs population for its stores. Fabindia also has a few selected stockists who are allowed to use its brand-name.

Private – Public partnership opportunities
Presently, Fabindia employs over 9,000 master craftspeople and has a global network of retail distributors who sell the distinctive hand woven home textiles under the general management of William Bissell, John Bissel's son. Having always emphasized upon the importance of handicraft, and having an appreciation of the handmade, everything that Fabindia sells is hand woven and handcrafted, with a clear imprint of the human hand. The company continues to succeed by balancing the desire to develop new products that cater to international customers while supporting age-old textile traditions of India's craftspeople. As quantitative restrictions on textiles come down in the near future in American and European markets, there is a scope of further improving export sales.

However, the important area of caution for Fabindia is the lack of consistent quality parameters for its products, which has a negative effect on its international marketability.

Contact Addresses
Fabindia
ILFord House, No.3,
Woods Road,
Chennai-600002
Phone: +91 -44 -8570365
E Mail: mailus@fabindia.com

Skills Training for Employment

Introduction to the corporate entity
Rural Development & Self-Employment Training Institutes (RUDSETI) are jointly sponsored by financial institutions such as Canara Bank, Syndicate Bank and Non-Government initiatives like Sri Dharmasthala Manjunatheswara Educational Trust. The first RUDSETI was set at Ujire in 1982 by Sh Veerendra Heggade, This program with the active support of Syndicate Bank and Canara Bank chalked out an innovative approach to help the rural youth stand gain employment or secure other means of livelihoods such as small enterprises. RUDSETI identifies opportunity avenues, trains participants in developing the desired skills and assists them in their entrepreneurial activity.

Methodology and the beneficiary group
The institutes aim at equipping the unemployed with livelihood skills. Candidates are selected through a scientific assessment of their abilities. The selected candidates are then given lectures on motivation, conviction and entrepreneurial competence to instill confidence in them so that they can face the challenges that the real world has to offer. These sessions help in pushing the students a little harder than their actual ability so that they are in a position to comprehend and overcome any obstacle they might face in the future.

Apart from this, the training provides technical skill and know-how in the field that the candidates have chosen. The training also familiarizes them with the steps needed to set up their own businesses. The final phase covers several aspects of management dealing with human resources, material and finance, which is important for any organization to succeed. At the end of this particular program, the students are all geared up to begin their entrepreneurial journey brimming with the confidence that success is theirs in the field of their choice.

Products and Services
Some of the typical Entrepreneurship Development Programs (EDP) for first generation entrepreneurs is:
• Agricultural EDPs Agricultural and allied activity, Dairy management, Sheep rearing, Poultry, Bee-keeping, Horticulture, Mushroom cultivation, etc.
• Product EDPs Dress designing for men and women, Rexin based utility articles, Agarbatti manufacturing, Woolen knitting, Bag making, Fabricating cane furniture, Bakery products, etc.
• Process EDPs Repairs of two-wheelers, Pump sets, Radio and TV , etc, Motor rewinding, Multi-purpose mechanic, Beautician course, Photography and Videography techniques, Screen printing and photo lamination, Watch repair, Repair of domestic electrical appliances, Computer and Desk Top Publishing, etc.

Some of the other offerings are:
• Programs for established entrepreneurs: Skill up-gradation and Growth
• Rural Development & Human Resource Development Training programs. E.g. Trainings of Self-Help Group management
• Technology Transfer programs E.g. Short duration training programs through demonstration, slides, Lectures.

Business Strategy
As the union government and many state governments have a policy to encourage micro enterprises in rural and backward areas RUDSTI have been set up in many parts of the country. The Management of these institutions is sourced largely through private initiative to meet the needs of local industry. Thus, RUDSETI represents a unique government and private sector partnership to meet the needs of the local industries, and also employment generation.


RUDSETI: Outreach and Potential
RUDSETI has developed into a highly successful training program that is followed by 19 locations around the country. With small beginnings at Ujire, there are now RUDSETI programs in 11 states and over 1,10,000 participants have benefited from it.

The most astonishing fact is that over 65% of the students who attended and took maximum interest have all successfully established entrepreneurial ventures, a spectacular and realistic result that no organization on similar grounds has been able to achieve so far.

Sources of finance
The first RUDSETI received investments from Canara Bank and Syndicate Bank. The success and potential of RUDSETI has resulted in institutions such as NABARD, SIDBI and other government developmental institutions providing support.

Opportunities for private partnership and associated risks
Unemployment is the foremost problem any economy has to grapple with. RUDSETI and similar initiatives present an opportunity for the industrial sector to build in relevant skills and generate a resource pool. Also, this can, in the long run create subcontracting opportunities for the industrial sector.

Contact Addresses
The Executive Director
Rural Development & Self-Employment
Training Institutes (RUDSETIs)
Central Secretariat
Siddavana
Ujire - 574 240
E-Mail : rudsetics@vsnl.com

The Case of Pratham: An Initiative in The Field of Education

Introduction
Pratham was started in 1994 with the support of UNICEF. A Public Charitable Trust was accordingly formed by the Commissioner of the Municipal Corporation of Greater Mumbai together with the association of several prominent citizens of the city. UNICEF continued to play a parental role till 1997, when ICICI bank took over from UNICEF. The Pratham Movement has evolved into an inspiring coalition between community members (who are the grass-root workers, mainly women, and who form the real engines of this movement), corporate leaders, academics, members of the local and central governments, NRIs and qualified professionals from the corporate and non-profit world. Pratham operates with the goal that by 2010, “Every child in India is in school……and learning well.
• In an environment that is mentally stimulating and physically attractive.
• With teachers who are committed, dedicated, skilled and happy and are able to teach children not only the essentials of reading, writing and arithmetic but also good living habits including personal hygiene, clean and healthy environment and respect for other people, their beliefs and their properties.
• Within a community that cherishes children and provides its best to children's care and development.”

Beneficiary Group
India has made rapid strides in tertiary education, with state of art technical, managerial, scientific and liberal art institutions, however, the state of affairs in basic primary school education leaves much to be desired. Various estimates indicate that, in the primary school age group, there are about 70-80 million children (which is more than 50% of all Indian children in this age group), who are either not enrolled in schools or are in school but are not learning. Even though, it is now enshrined as a fundamental right, in reality the state of elementary education continues to remain dismal in India. Pratham has as its target, children in the school going age group, who are denied the opportunity of good education.

Products and Services
Pratham has been serving underprivileged Indian children through five main programs.
• Balwadi Pre-School Program for 3-4 year olds from low-income families.
• Balsakhi Remedial Education Program that provides support for the weaker municipal primary school children.
• Bridge Course targeting children who have never been to school or dropped out. Objective being to enroll them in schools.
• Outreach Program for working children, child labor and children in conflict with the law. Objective again being to get them enrolled in schools.
• Computer Assisted Learning Program that strives to familiarize municipal school children with computers.
These programs are for underprivileged children, mainly in slum areas. Each program unit has an average of around 20 children and instructors are young women from the local community, who are at least educated till Std X. Space is provided by the community and classes are held either in municipal school, community space or teacher’s home.

Business Linkages – Strategy
Pratham follows the strategy of working in collaboration with the local government to improve access to schools and the quality of learning in them. While Pratham does not itself build schools, it strives to strengthen existing government school system. It seeks to build a working partnership in the field of education between the people and the government. Its programs are meant to supplement the municipal school system, and not replacing it. Pratham also strives to make governance of education more effective through people's democratic participation. It aims at a private-public partnership to address issues related to education and arrive at solutions to be put into practice.

Outreach
Pratham’s initiatives are estimated to have reached over a million children since inception. Pratham is presently operating in 13 states. Given its goal, Pratham has a long way to go before it can sufficiently impact elementary education as present estimates of children in the age group 8-14 years who don’t have access to good education is nearly 40 million.

Investment Cost
The Pratham model is simple to implement and easily replicable. No immovable assets are acquired unless a donor specifically requests and the need is clearly established. Administrative costs are kept low. Every attempt is made to reduce overheads as much as possible. Pratham is a cost sufficient initiative and it requires only Rs500.00 per child per year to meet its educational expenses.

Benefits derived
There are several important benefits derived from Pratham’s program. It proves it is possible to mobilize a community to create sustainable solutions. It also shows that government and the community can successfully cooperate. Moreover, given the extensive network of Pratham in the slum areas, it is easy to layer other services (health, computer education) at a minimum additional cost of delivery.

Contact
Pratham Mumbai Education Initiative, Gen J Bhosale Marg, Nariman Point,
Mumbai 400021 Phone: (022) 2886975 E-mail: mumbai@pratham.org