Saturday, May 31, 2008

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.

Friday, May 30, 2008

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.

Wednesday, May 28, 2008

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)

Saturday, May 03, 2008

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 23 5
10
20
50
100
DER (n-1)
01
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?

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