Can Vikram Akula do a Yunus...

Microfinance... Can India create another Grameen !!!


Recently I finished reading one of the best books which can or has emphasized the much talked about financial inclusion. More in so, with a narrowed focus towards the Emerging countries like India and Brazil."The Bottom of the Pyramid" by the late CK Prahalad. His idea of looking into things (business) is a visionary one.

The next target segment of the markets will be the one where technology would not come for a price but still would be an indispensable part of the growing system, just like the Internet boomed trading and the style of doing business with ebusiness,take any service- none are untouched or unaffected by the internet.

In the same way lending would evolve where ‘tiny amounts of money to people with tinier assets’ (as The Economist magazine put it in an article published in 2006) will seem to be an obvious way of doing business with what is potentially the largest driver for markets- consumption.

Of late my tryst with the state has grown and thus have been hearing the suicide cases of the borrowers in Andhra Pradesh, which has bought this much talked and expected about business under the microscopic scanner of intellectuals in India.

Media reports about high interest rates charged on loans made to people who appear to be ill-equipped to pay such large sums — and thus the suicides, allegedly — have raised eyebrows, even as other stories have reflected on the crores of rupees in stock options that company executives of microfinance companies appear to have benefited from. The seemingly high interest rates charged by microfinance institutions (MFIs) stem from transaction costs, which is why banks have not been very successful in microfinance. Even in the era of priority- sector lending, the banking system had tended to lose a lot of money on loan defaults — apart from the subsidised interest rates prevalent then. In other words, the banks’ failure lay in their inability to see microfinance as a sustainable business, and more as a social obligation.

The fire had not yet subsided from the issue, SKS Microfinance's CEO,Suresh Gurumani was sacked without citing any specific reason. His 5-year contract was to expire on 2014 March. Interestingly, Ashish Lakhanpal, an Independent Director, is also relieved from his duties. The first company in its category to go public and raise 16.5 billion ruppees from the market, a lot more than the money are at stake with the company.

The industry runs on three types of costs which matter: the cost of funds, the cost of associated risk (of defaults) and administrative costs, all of which are integrated into deriving the final interest rate charged to borrowers. Microfinance depends heavily on personal contact, limiting loan officers’ reach to a small number of borrowers, unlike banks that rely on technology for credit scoring (almost all microfinance lending is cash based, and collections take up significant personnel time).The most critical factor in simpler terms is the administrative costs, which incidentally are not proportional to the loan size. The transaction costs of making a single loan of Rs 1 crore by a bank are significantly lower than the costs of making 500 loans of Rs 20,000 each (a typical microfinance loan). Loans by banks are repaid quarterly; microfinance loans are collected with greater periodicity, perhaps or actually every week.

Dealing with barely literate borrowers with no collateral and credit bureau records, requires time-consuming personal interaction, all of which drive up costs high enough that can only be covered by high interest rates. It is a simple principle of business that if you cannot cover costs, you will not stay in business. If there is one area that microfinance institutions need to focus their energies on, it is building technology platforms that will reduce their high administrative costs. A lot of light on the other side of the tunnel comes from the interest being seen in exploring, researching aspects of Mobile Banking and Electronic transfer.

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The battle between a Capitalist Ego and a Communist Strategy...

Communism has known to be the direct opposite of the capitalists and the very concept of communist ownership of a business in a capitalist economy is irrelevant. In reality, it creates a controversy and clash of policies and actions. There has been a wave of takeover, some hostile and some amicable, of American companies by Japanese firms in the 1980s. Since the acquisition of Germany based Mannesmann by Vodafone in 2000 to the recent plethora of increasing private equity and venture capital firms and their acquisitions have often irked the social fabric of national pride and anxiety of superpowers.

Social and Business Economists have highlighted the concerns which will not be easy to slide under the carpet and definitely will intensify over the next decade, as the BRIC countries and specifically Chinese state owned firms keep themselves active on the inorganic activity growth radar. Chinese companies have surpassed record numbers in terms of foreign M&A in 2010. They have been bidding for everything ranging from gas (Americas), oil (US) and electricity (Brazil) to cars (Swedish Volvo).
The very idea of communists buying the companies of capitalist is a disparity as far as economic theory of liberties is concerned. This is what has been irking the Republics and the Democrats alike. Take a 2009 story, where the National Energy Administration (US) agreed to establish a special fund for China's state-owned companies to buy oil and gas firms overseas. The beneficiaries being the Petrochina, Sinopec and CNOOC, which enabled benefit in terms of low interest loans and direct capital injections.

Chinese companies were seen as an example and epitome of state capitalism. Economic factors like emerging world's non credit culture and the huge reserves of public saving, their resource wealth and the collapse of free market model led to a hailing of state capitalism. The value of the globe’s emerging stock markets have risen fivefold ($80,000 billion from $14,000 billion), taking the emerging market share of global equity markets from 31 % to 55 %.

The so called ‘first world ‘has coped up with countries such as South Korea and Singapore, who have been on an acquiring spree of companies outside their countries. The developed world has the experience of tackling the rise of mercantile economies but China stands apart, it is already the world’s second biggest economy, and in another two decades is rightly poised to overtake America. Chinese firms, till the outbreak of recessionary times, have looked inwards. The rising oil prices and the recessionary pressures on the US have made them potential targets for their vast resources abroad. Nothing could be more apt then the case of Unocal.

China stands fifth in outbound investments globally. Unearthing the pages of history shows that both Britain and America had shares of about 50%, in 1914 and 1967 respectively at their prime of supremacy. The biggest weight on the scales will be the Chinese rate of government investments powered by the per capita savings of the people. These monies today are invested in government bonds and treasuries of the first world counties; tomorrow this will serve a pool which can be used to buy companies and insulate the Chinese people against the first world countries currency devaluations and financial defaults.

Taking a cue from the chapter of globalization, very similar to the old way of annexation of countries, a company (country) tries to inorganically for primarily three reasons: secure raw materials for future production, acquire better technical know how and the most important, to gain access to foreign markets.
In a normal situation, private companies around the atlas, find and allocate their resources towards the attainment of perfecting its strategy to maximize its customer’s base. These are governed by market and economic logic. So far so good, now the idea that a communist government might dominate the realms of global capitalism scenario is unappealing. The very idea of shift in the control of global resources to a body which would not be market driven but official driven, an establishment principled on politics (principle, if you please) and not profit are the real concerns. Developed countries like Australia and Canada, which were once open for takeovers from the foreign countries, are now escalating the barriers for Chinese, especially in the arena of exhaustible resources like oil and gas.

China has been most active in deal making for the natural resources, yet its way off the needed quantities to control the rigging capacity of the markets for such commodities. The Americas, Australasia and the Europe should consider subsidized capital of the Chinese. The major focus in these terms should be dealt with strengthening and plugging the loopholes in the competition law rather than trying to stop the investment flow, thus constraining the movement of capital around.
Taking the example of Geely, the new owners of Volvo. It made complete mutual sense for both the parties. Geely had been trying to launch itself into European markets but was losing on the pricing factor and Volvo was in deep crisis since it could not find distribution partners in Asia to sell its cars. Volvo's existence was threatened due to its inability to sell more care in Asia.

The Chinese firm, CNOOC was one of the greatest finds of Warren Buffet n the last century. Chinese firms are believed to come with a lot of perks such as lower operational costs and access to newer and fresh markets to otherwise flagging companies in the saturated markets. In BRIC, Indian and Brazilian firms have the maximum advantage of being the free and open market policy adopters. But China is catching up fast . . . really really fast.