MICROFINANCE AND ITS INDIAN SCENARIO

MICROFINANCE AND ITS INDIAN SCENARIO

Microfinance is usually understood as providing financial services to micro-entrepreneurs and small businesses, which lack or have very limited access to banking and related services due to the high transaction costs associated with serving these client categories. The two main mechanisms for the delivery of financial services to such clients are (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group. Microfinance means providing the banking and finance facilities to the poor or the nearly-poor people. This term is often confused with ‘Microcredit’. Microcredit, however, stands for providing credit facilities like loans to the poor or the nearly-poor.

Traditionally, banks have not provided financial services, such as loans, to clients with little or no cash income. Banks incur substantial costs to manage a client account, regardless of how small the sums of money involved. There is a break-even point in providing loans or deposits below which banks lose money on each transaction they make. Poor people usually fall below that breakeven point. Hence there is a general unwillingness on the part of most of the financial institutions to provide credit to such people.

The Origin

Microfinance sector has grown rapidly over the past few decades. Nobel Laureate Muhammad Yunus is credited with laying the foundation of the modern MFIs with establishment of Grameen Bank, Bangladesh in 1976. Today it has evolved into a vibrant industry exhibiting a variety of business models. Close to 7 million people use the services to Grameen Bank to access the financial sector.

Microfinance in India

Microfinance in India can trace its origins back to the early 1970s when the Self Employed Women’s Association (“SEWA”) of the state of Gujarat formed an urban cooperative bank, called the Shri Mahila SEWA Sahakari Bank, with the objective of providing banking services to poor women employed in the unorganised sector in Ahmedabad City, Gujarat.  The microfinance sector went on to evolve in the 1980s around the concept of Self Help Groups (SHGs), informal bodies that would provide their clients with much-needed savings and credit services. From humble beginnings, the sector has grown significantly over the years to become a multi-billion dollar industry, with bodies such as the Small Industries Development Bank of India and the National Bank for Agriculture and Rural Development devoting significant financial resources to microfinance. Today, the top five private sector MFIs reach more than 20 million clients in nearly every state in India and many Indian MFIs have been recognized as global leaders in the industry.

Microfinance Institutions (MFIs) in India exist as NGOs (registered as societies or trusts), Section 25 companies and Non-Banking Financial Companies (NBFCs). Commercial Banks, Regional Rural Banks (RRBs), cooperative societies and other large lenders have played an important role in providing refinance facility to MFIs. Banks have also leveraged the Self-Help Group (SHGs) channel to provide direct credit to group borrowers.

According to the latest research done by the World Bank, India is home to almost one third of the world’s poor (surviving on an equivalent of one dollar a day). Though many central government and state government poverty alleviation programs are currently active in India, microfinance plays a major contributor to financial inclusion. In the past few decades it has helped out remarkably in eradicating poverty. Reports show that people who have taken microfinance have been able to increase their income and hence the standard of living. These institutions not only offer micro credit but they also provide other financial services like savings, insurance, remittance and non-financial services like individual counselling, training and support to start own business and the most importantly in a convenient way. The borrower receives all these services at her/his door step and in most cases with a repayment schedule of borrower’s convenience. But all this comes at a cost and the interest rates charged by these institutions are higher than commercial banks and vary widely from 10 to 30 percent. Globally the average interest rate charged on microfinance loan is 37%.

This high interest rate is seemingly the problem for most of the microfinance borrowers.

Channels of Micro Finance
In India microfinance operates through two channels:

1. SHG – Bank Linkage Programme (SBLP)

2. Micro Finance Institutions (MFIs)

SHG – Bank Linkage Programme

This is the bank-led microfinance channel which was initiated by NABARD in 1992. Under the SHG model the members, usually women in villages are encouraged to form groups of around 10-15. The members contribute their savings in the group periodically and from these savings small loans are provided to the members. In the later period these SHGs are provided with bank loans generally for income generation purpose. The group’s members meet periodically when the new savings come in, recovery of past loans are made from the members and also new loans are disbursed. This model has been very much successful in the past and with time it is becoming more popular. The SHGs are self-sustaining and once the group becomes stable it starts working on its own with some support from NGOs and institutions like NABARD and SIDBI

Sl. No.	Type of MFI	Number	Legal Registration
Not-for Profit MFIs
1	NGOs	400-500	Society Registration Act, 1860 Indian Trust Act, 1882
2	Non-Profit companies	20	Section-25 of Indian Companies Act, 1956
Mutual Benefit MFIs
3	Mutual benefit MFIs – Mutually Aided Cooperative Societies (MACS)	200-250	Mutually Aided Co-operative societies, Act enacted by State Governments
For Profit MFIs
4	Non-Banking Financial Companies (NBFCs)	45	Indian companies Act, 1956 Reserve Bank of India Act, 1934

Micro Finance Insitutions 

Those institutions which have microfinance as their main operation are known as micro finance institutions. A number of organizations with varied size and legal forms offer microfinance service. These institutions lend through the concept of Joint Liability Group (JLG). A JLG is an informal group comprising of 5 to 10 individual members who come together for the purpose of availing bank loans either individually or through the group mechanism against a mutual guarantee. The reason for existence of separate institutions i.e. MFIs for offering microfinance are as follows:

· High transaction cost – generally micro credits fall below the break-even point of providing loans by banks

· Absence of collaterals – the poor usually are not in a state to offer collaterals to secure the credit

· Loans are generally taken for very short duration periods

· Higher frequency of repayment of installments and higher rate of Default

Non-Banking Financial Companies (NBFCs), Co-operative societies, Section-25 companies, Societies and Trusts, all such institutions operating in microfinance sector constitute MFIs and together they account for about 42 percent of the microfinance sector in terms of loan portfolio. The MFI channel is dominated by NBFCs which cover more than 80 percent of the total loan portfolio through the MFI channel.

Women and groups comprise almost 95% of the microfinance credit in India.

Microfinance crisis in India:

Andhra Pradesh witnessed a huge problem in terms of Microfinance. Some people committed suicides and other protested against MFI and Govt. policies through rallies, at times violent.

Andhra Pradesh accounted for almost 70% of Indian Microcredit. However, due to huge interest rates most of the people were not able to repay the loans with interest.

This was followed by coercive practices to collect the funds from the borrowers.  The most shocking part here is that the same MFIs used their polished sales people to lure the poor to avail loan which was normally beyond the poor person’s capacity and then the same organization coerced the people to pay.

The problem may have arisen because of several reasons:

Lack of proper monitoring: Most of the organizations did not monitor as to where the funds were used after being given as a loan. The poor often used to spend it on personal work rather than using it generate income as it was originally envisaged for.

Multiple credits: The poor often used to take another microcredit to repay the previous one and the chain used to continue. At times loans were taken on names of the different members of the same family and the problem of repayment only increased with that.

High interest rates: Critics argue that at times interest rates from private MFIs were as high as 30-35%. Very high considering the clients to whom it was charged.

The Current Scenario:

To regulate the Microfinance industry in a better manner and to ensure that incidences like that of Andhra Pradesh are not repeated, the Government proposed a regulatory body to control the Microfinance sector of India and accordingly The Reserve Bank of India is to be entrusted with the task.

The Cabinet has approved a bill aimed to bring microlenders under the Reserve Bank of India’s purview. The Microfinance Institutions (Development and Regulation) Bill needs Parliament’s approval to become a law.

India’s once-thriving microfinance sector was devastated by a crackdown more than a year ago by the government of Andhra Pradesh, which was the industry hub and largest market. The state rules resulted in a drop-off in loan collections and a drying up of funding for microlenders.

However, the much-needed amendments suggested by industry experts and states like Andhra Pradesh seem to have gone unheard.

The Andhra Pradesh government, for instance, had objected to the description of the MFIs as extended arms of the banks, considering the pure-play money lending activities of the MFIs.

Though the MFIs have been welcoming the bill since it is expected to allow them to expand their business, the Andhra Pradesh government had also raised an objection to the free hand given to the MFIs to collect thrift from the MFI customers.

Though it was largely agreed that a central legislation, unlike the one promulgated by the AP government, would bring the much required discipline in the microlending sector, official sources are sceptical about the actual implementation of the legislation since it is the RBI that has responsibility of the regulation.

However, the bill also empowers the RBI to penalise the erring MFIs with a penalty extending up to Rs5 lakh. The bill has gone soft on the issue of interest rates charged by the MFIs though the MFI sceptics were expecting the capping of the rates.

To conclude, we can say that after the intervention of the Government and subsequent control of the Microfinance sector by the RBI we can expect that the Indian Microfinance will change for sure, and it will change the good, much for the actual upliftment of the poor.

(This article is meant for academic purpose only. With inputs from NABARD report on MFI, Wall Street Journal, Times of India, The Hindu, IIM K Journal and the web)

An analysis of the demand for new states in India

Does more states mean better administration or is it just 

another jingoistic call?

The Home Ministry, Government of India, has got approximately 10 applications for the creation of new states out of the existing one! Huge number indeed considering the fact that at 28 states at present, the demand for 10 new ones means almost a number that is one-third of existing states will be added to the count of Indian states!

Let us have a look at the some of the prominent ones:

- Bodoland from Assam

- Gorkhaland from West Bengal

- Mithila from Bihar

- Purvanchal from Uttar Pradesh

- Telangana from Andhra Pradesh

- Vidharbha from Maharashtra

- Vindhya Pradesh from Madhya Pradesh

- Saurashtra from Gujarat

- Harit Pradesh from Uttar Pradesh

- Kosal from Orissa

amongst others.

A map which gives a clear idea about the demand for the creation of "new states" is being presented here.

Most of us wonder why are people demanding new states? Aren't we having some other important issues on our platter that we are supposed to address these? Some of us wonder that aren't the issues related to China and Pakistan not enough to give the Indian Government some sleepless nights? Whatever the case may be, the demand for new states is still prominent and time and again resurfaces.

The Reasons for:

The major reasons for the demand are:

- Linguistic and Religion/ Communal Preferences

Fuelled by linguistic and religion/ communal preferences, many are asking for new states. Some glaring examples are Bodoland, Gorkhaland, Telangana, etc. 

- Sense of economic and regional deprivation

Most of the people demanding new states reason that they are being sidelined by their state.

- Creation of new a breed of politicians and bureaucrats

New states will mean a new state government and definitely a new breed of politicians having more power will come up. A new state also means new administrative machinery and jobs. Definitely those in search of power will go for a new state rather than sticking to an old one wherein their power is limited.

- Access to larger share of national funds for states

Every state has a share in the Central Government's fund for development. By having a new state, the state will have access to more funds than it would have got if it were just a region.

- Creation of "new cities"  to fuel growth in the region

Creation of cities (because the state will have a new capital and major cities will come up too) will improve the infrastructure facilities in the state too. This will help in getting employment too.

- Better administration (if the current region of the state is too large at present)

A large state (in terms of land area) is difficult to manage, the promoters of the new states theory say. Smaller states will mean effective management as the span of control reduces and the size of the machinery managing it increases.

The Reasons Against:

- Technology

With the help of technology we can easily reach out to most of areas. Dividing the states into smaller parts will not necessarily help.

- Infrastructure

New state may find itself lacking in infrastructure and other facilities, atleast for the initial few years. History shows us that it takes almost 10 years for a new state to get into momentum. The cost of doing all these things is also high.

- Better administration

Better administration, development of cities, development of infrastructure and other such things can be made by making strong regional centres within the states. It does not necessarily call for new state.

- Power politics

Smaller states will also mean more pressure to the central government as most of the Governments these days are "Coalition Governments". Smaller states may affect the stability of the Central Government.

- Pluralistic Society

A more open society rather than one based on religion and language will be beneficial to India. We should not forget that the essence of India is "democracy".

A careful analysis should be done before giving in to the demand of the creation of a new state. Possibly a second State Reorganisation Commission can be formed and the issue can be addressed. 

However, looking at the current state of Indian economy, the demands do not look justifiable. We need to focus on economical issues that the country faces rather than focussing on such regional ones. The jingoistic elements within a person may sit quietly for some time for the larger interest of the nation.

(This article is for academic purpose only. With inputs from the Times of India, The Hindu, Wikipedia, Business Standard and Business Today)

FDI in Indian Retail

FDI in Indian Retail

The Indian Government has finally approved the FDI in the Indian Retail Sector. A lot has been said about the decision. Obviously, as with most of the decisions, this one too comes with bouquets and brickbats. Before we analyse the scenario, let us have a look at the Indian market.

The decision: The Indian Government has approved 100% FDI in Single-brand retailing (which was 51% earlier) and 51% FDI in Multi-brand retailing (which was not allowed earlier). For more details about single-brand and multi-brand retailing, please visit http://invinciblehardik.blogspot.in/2011/12/fdi-in-indian-retail-much-to-be-done.html

Many of the critics argue that the decision will destroy the local market and the local grocery store owners too! However, the multinational retail giants (like Walmart, Tesco, et al) themselves are also not much ecstatic about the decision taken by the Indian Government inspite of the fact that the decision was arrived at after continuous lobbying by these very giants. The reasons why these giants are not gung-ho about the decision are the “conditions” attached.

* The Famous Asterisk *

We have been habituated to see this now-famous asterisk (*) mark on almost every offer, which normally reads further as “Conditions Apply”. The FDI gate has opened in India*, * - Conditions Apply.

 
1) Investment related: Foreign multi-brand retailers must invest at least $100 million over a period of three years and half that amount must be ploughed into back-end infrastructure in rural areas.

   2) Decision: State governments will decide if they want foreign players or not. Moreover, stores will be permitted only in cities of at least 1 million people.                                   3) Sourcing:  Retailers must also source 30% of the value of goods purchased from small- and mid-sized domestic suppliers.

Why the Giants worry?

Sourcing the goods from India and that too from MSMEs (Micro, Small and Medium Scale Enterprises) is a cause of worry. Most of these giants are quite finicky about their quality. The big question is whether their quality standards will be maintained by these MSMEs or not! The giants claim that they can uplift the standards of these MSMEs but it will take time. Till that time, to source the goods from these MSMEs does not sound to be so feasible.

How can we forget China?

Most of us compare India with China in almost every aspect and so is in this case too. China allowed FDI without much of restrictions. However, China benefited out of it because China already has a very good manufacturing set up. The Chinese invite to foreign retail was a boon because the companies were already sourcing majority of the products (sold) from the country and they invested money in improving infrastructure. The result was that the country used the resources and know-how of foreign players. This is not the case with India. India has a reasonably good manufacturing base, but, not comparable to China’s. Companies like Tesco, Walmart, IKEA, etc. do source from India, but mostly imports comprise of items like textiles and not items in which quality is of supreme importance.

The Pros and cons:

The Advantages:

The benefits that would be reaped are:

1)    It will improve supply chain logistics, including cold storage, and broadly bring India further in tune with 21st century western style market economy.

2)     It will save the 30 per cent wastage of perishables that we have been moaning about for 30 years.

3)   Initially, It will provide better prices and returns to farmers through better yields, productivity, and distribution.

4)    It could also offer more choice, better quality, greater uniformity, improved display and packaging.

The Disadvantages:

The possible disadvantages are:

1)  The small and marginal farmers might be edged out and might be having no option but to work for some giant.

2)   The food produce especially, may be of poor quality, as most of the giants in order to improve the yield use genetically modified versions of the crop.

3)    The local market and the local goods might be out of the market, if these MNCs are not controlled.

Considering the overall scenario, the current policy with its all terms and conditions seem to be workable for the benefit of India and the Indian Market. We should also note that the State Government has been given the power to take decision in such cases. The interests of the farmers and the local vendors have been mostly accounted for. Hope it works out! Let India rise further!

(This article is meant for academic purpose. With inputs from the web, especially from The Economic Times and The Hindu)

India has a change of "Religion" and so does "Branding"..

India has a change of "Religion" and so does "Branding"..

"Cricket" as they say is or rather WAS considered a religion in India. The performance of the team has varied over a period of time and so has the fate of the "religion". The followers of the "religion" increase if the performance of the Indian Cricket Team peaks and decreases otherwise.

In a recent conversation with the media, a well-known ad-maker of India, Mr. Piyush Pandey said, "Cricket is like stock market. If the team performs well in the forthcoming ODI series, people will forget the bitter memories of the Tests". So here is the cue for marketers! Is the "religion" still followed with the same fervour as it was being followed say 10 years back? Possibly the the Indian junta is more inclined towards the victorious performances now rather than the game itself. However, the point to be noted is that inspite of all these things, India is still considered the superpower of cricket. The best proof of the increasing dominance of the Asian region can be ascertained from the fact that ICC headquarters were shifted to Dubai from London-the traditional headquarters of the ICC. Asian countries like India, Pakistan, Sri Lanka and Bangladesh have a large following of the sport even today. But the problem for Indian marketers "are the huge swings in the followers, it completely follows the performance of the team now," a sport-journalist was quoted saying. So does it still remain a value-for-money proposition? But yes, before we go ahead with the further analysis, I think would be apt to mention that India still accounts for approximately 60-70% of the cricketing world's revenues! As said, let us have a look at a few indicators..marketing trends possibly..

A few indicators:

- By paying $612 million Nimbus Communications clinched the biggest deal in cricket history—for the TV rights to Indian cricket for four years. This was in 2005. A sign of the increasing importance of Indian cricket. This price was 11 times higher than the previous deal. The amount of the deal said it all! - Religion was expanding its roots.

- Come 2009, Nimbus Communications steals the deal with a staggering Rs. 2000 crore!

However, things changed  and that was much against the marketers' liking. The viewership dipped. The fewer spectators, both on and off the field, left the marketers in a state of worry and not to forget Nimbus Communications too. As a result of which it failed to honour the payment of Rs. 305 crores to BCCI! The result-BCCI terminated the contract with Nimbus.

Marketers takes and responses:

- Brand endorsements by the cricketers suddenly saw a decline. The last endorsement deal being heard of was the one for Gulf Oil by M S Dhoni in September last! Ain't it too long? Many would agree to be so.

- Brand experts said the recent defeat in Australia will erode  cricketers’ endorsement fees by about 20%. 

- “Companies have started reconsidering the extension and renewal of agreements for further endorsements,” said Navin Khemka, vice-president, ZenithOptimedia, an advertising and media-buying firm that manages Toshiba, a brand endorsed by Sachin Tendulkar.

- “The brands that were contemplating signing new contracts will go easy,” said Sam Balsara, chairman, Madison World, an advertising agency and brand management firm.

- Most of the companies/ brand managers are possibly shying away from the sport itself!

- Cricket, as one of the brand manager was quoted saying in a report, "has become highly dramatic. We cannot purely rely on it for consistent results."

The above statements are shocking especially keeping in mind the fact this is the country in which the said sport is considered as a "religion" having a huge fan following and is a sport that unites people with high diversity!

Do we have an option?

That is the question running in the minds of one and all. If not cricket, then? We have got a few hints already. Let's shift the gears..literally and contextually both.

Formula One - the sport for the elite?

- Airtel walked away from the Champions League Twenty20 to tie up with the inaugural Indian Formula One Grand Prix in October. Although Nokia stepped in as title sponsor, the Airtel pullout suggested the wind had changed direction; that cricket may not be seen as the end of the world by big-ticket corporate houses,” reported Hindustan Times.

- “The fan following in Bangalore is much more than at the British Grand Prix. They are not as passionate as this,” said a beaming Lewis Hamilton. Those words from the McLaren Mercedes Formula One driver summed up the fan following that he saw for the sport in India.

- The huge attendance at the Buddha International Circuit (BIC), Gurgaon for the inaugural Indian Grand Prix was the one to notice. A proof enough to say the sport is gaining popularity, not only amongst the elite, but the amongst the Great Indian Middle Class too.

One thing we can infer is that people in India have turned towards newer sports. The following for events such as F1, EPL, Grand Slams, et al is on the rise. 

Indians are on search of a new religion. The options are many and one should not forget that ONCE UPON A TIME WE HAD A RELIGION CALLED HOCKEY..THEN CAME CRICKET AND THEN..

PHILOSOPHY OF LIFE

Philosophy of Life A boat is docked in a tiny Mexican fishing village. A tourist complimented the local fishermen on the quality of their fish and asked how long it took to catch them.  "Not very long." they answered in unison. "Why didn't you stay out longer and catch more?" The fishermen explained that their small catches were sufficient to meet their needs and those of their families.  "But what do you do with the rest of your time?"  "We sleep late, fish a little, play with our children, and take siestas with our wives.  In the evenings, we go into the village to see our friends, have a few drinks, play the guitar, and sing a few songs.  We have a full life." The tourist interrupted,  "I have an MBA from Harvard and I can help you! You should start by fishing longer every day. You can then sell the extra fish you catch. With the extra revenue, you can buy a bigger boat."  "And after that?" "With the extra money the larger boat will bring, you can buy a second one and a third one and so on until you have an entire fleet of trawlers. Instead of selling your fish to a middle man, you can then negotiate directly with the processing plants and maybe even open your own plant.  You can then leave this little village and move to  Mexico City , Los Angeles , or even  New York City !  From there you can direct your huge new enterprise."  "How long would that take?"    "Twenty, perhaps twenty-five years." replied the tourist.    "And after that?"    "Afterwards?  Well my friend, that's when it gets really interesting," answered the tourist, laughing.  "When your business gets really big, you can start buying and selling stocks and make millions!"   "Millions?  Really?  And after that?" asked the fishermen.  "After that you'll be able to retire, live in a tiny village near the coast, sleep late, play with your children, catch a few fish, take a siesta with your wife and spend your evenings drinking and enjoying your friends." "With all due respect sir, but that's exactly what we are doing now.  So what's the point wasting twenty-five years?" asked the Mexicans. And the moral of this story is:  Know where you're going in life, you may already be there!  Many times in life, money is not everything. “Live your life before life becomes lifeless”

AN INTERESTING E-MAIL WHICH I RECEIVED AND THOUGHT ITS WORTH SHARING.

ENJOY LIFE FOLKS..

The BEST INDIAN AD CAMPAIGN for the year 2011

The BEST INDIAN AD CAMPAIGN for the year 2011

Its a clutter out there! Think of advertising and you think of....Airtel "Har ek friend", Vodafone "ZooZoo", Coke "Happiness" campaign..eh..wasn't the Pepsi campaign better? Lays wasn't too bad either! Clutter..isn't it?

Every brand eyeing for those precious eyeballs!

Every single penny..sorry..if it is the mad ad world..Every single eyeball counts!

However, with the increasing impact of social-networking media and television becoming all the more pervasive..advertisers can't miss it. Especially, if yours happens to be a brand for masses.

Child vs. Youth

The big debate, I remember, we used to have a few years back was "Is it ethical to use children in the advertisements?". Thankfully, the debate has subsided. Reason, the media is back to the youth. So the focus again shifts to the youth. Be it Maruti, Ford, Hero or any other company, youth is the key! The Indian youth, backed by huge spending power (some funded by family and some by the call centres) are making the marketers merry. And the result is many ads and marketing campaigns targeting the youth. Amongst all the ad campaigns, I believe, one did the job fantastically.

The selected one

"Har ek friend zaroori hota hai" was the jingle on everybody's lips. 

The Facebooks and the  Twitters were full of "Har ek friend zaroori hota hai"..you had jokes on them, you had tees on them and what not! Possibly it did give some competition to Indian superstar Rajnikant, I guess!! It was something that touched the life of everybody, especially the youth, in India. The campaign designed in Hindi (used a mix of Hindi and English) was a runaway success. And the creative team at Taproot (The agency behind the campaign) was basking in all the glory. And why not? Truly deserved. In a report, Mr. Agnello Dias, co-founder and chief creative officer, Taproot India, said “The attempt was to reach out to a younger audience. There could have been no better way to do it than through friendship - something youngsters recognise and understand well”. The campaign also attempts to take Airtel’s positioning - Dil Jo Chahe, Paas Laye (Getting you close to what you love) - to the next level by playing up the friendship angle among youngsters. Must say, Airtel, the brand which is known for its creativity and aggressive marketing campaigns, once again lived upto its expectations and delivered the goods. 

Waiting for the airtel-wonder of 2012!


P.S. Let's have a look at India's Top Advertising Agencies:
1) Ogilvy & Mather - (www.ogilvy.com)
2) Ignite Mudra (Mudra Communication) - (www.mudra.com)
3) FCB Ulka - (www.draftfcb.com)
4) Rediffusion DY & R - (www.rediffusionyr.com)
5) RK Swamy BBDO - (www.rkswamybbdo.com)
6) Grey Worldwide - (www.grey.com/India)
7) Leo Burnett India - (www.leoburnett.com)
8) J Walter Thompson (JWT) - (www.jwt.com)

9) McCann Erickson India - (www.mccannworldgroup.com)

10) Contract Advertising India - (www.contractadvertising.com)