tag:blogger.com,1999:blog-7182576430045656062.post1225315365180974828..comments2024-02-25T13:47:07.003+05:30Comments on Candid Unheard Voice of Indian Microfinance: Never Waste A Crisis - Use It to Get Micro-Finance in India Back on Track: Some Proposals for Incentives As Part of A National Regulatory FrameworkRamesh S Arunachalamhttp://www.blogger.com/profile/09264606020720529040noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-7182576430045656062.post-24311656838463825402010-11-30T15:17:22.532+05:302010-11-30T15:17:22.532+05:30Dear Ramesh, this is a response from Ben Simmes, O...Dear Ramesh, this is a response from Ben Simmes, Oikocredit.<br /><br />Thanks for this constructive proposal to learn important lessons out of the present crisis. However, I still think that your proposal does not address a fundamental choice. We should ask ourselves what is basis of microfinance? To our opinion in Oikocredit the primary goal is to achieve a real social return, render financial (possibly also other) services that enable poor people to get out of poverty. This objective should be reached by building up microfinance institutes that are financially sustainable. They should indeed aim to make a profit BUT should not aim for profit maximization. We should therefore not make a distinction between pure play financial institutions and socially oriented MFIs. The objective should be that whoever is active in microfinance should always go for the double bottom line. Achievement of the double bottom line (where social return is the primary objective) is why microfinance is existing and where it shows its difference from the regular banking. Let's try with all actors to become committed to that cause: use financial resources to improve the lives of so many that have no access to financial services. Do it indeed in a professional and sustainable way. Make sufficient profit to guarantee covering of costs, guarantee continuity of operations and possibilities to expand and reach out to more and offer investors a reasonable return on investment (to justify an investment, to make it sufficient attractive to invest but never to maximize returns). If we allow for purely profit oriented MFIs we will continue to see aggressive lending, indebtedness..most of all...it will be business as usual but now with the poor as target group! Besides, socially oriented MFIs will be affected, will be forced to go along if they want to keep some market share. there will be the temptation for CEOs of socially oriented MFIs to adjust their salaries. Most of all, all MFIs will be affected if the reputation of microfinance becomes negative!<br />Kind regards, Ben Simmes, director social performance and financial analysisBen Simmeshttp://www.oikocredit.orgnoreply@blogger.comtag:blogger.com,1999:blog-7182576430045656062.post-60437994801913389362010-11-23T14:22:09.205+05:302010-11-23T14:22:09.205+05:30i also have another point to add to the new regula...i also have another point to add to the new regulatory framework that u are talking about.<br /><br /> <br /><br />The poor borrow money from 4 differnet sources viz SHG-Bank, NBFC-MFI, NGO-MFI and individual money lenders. even if any one of these 4 are careful while lending to ensure she does not end up over borrowing, but some one else may end up funding her beyond her ability to pay. hence it is important that we integrate all the people who give loan to the poor. thus there must be a credit bureau created where all the lenders to the poor are legally required to share the data so that any one who wants to lend to the poor can check the bureau and get a full detail of all her earlier borrowings from any differnt source. <br /><br /> <br /><br />How much shoudl the poor be allowed to borrow:<br /><br /> <br /><br />given the fact that all these 4 type of lenders give unsecured loans, she may tend to overborrow and end up in distress. hence the Government must undertake the exercise of determing the household income level for each of the household of the poor and register it on the ration card as well as in the credit bureau data base. all lenders, before lending money to this person, should check the total monthly outgo on instalments and only if this monthly outgo, including the outgo on the proposed loan, is less than 40% of the monthly income, the lenders should be allowed to lend. if this would exceed 40%, then no lender should be allowed to lend, as the family will never be able to pay back and land up in highly stressed situation.<br /><br /> <br /><br />i also believe there must be a strong central legislation on this but implementation should be through the State Government as well as the SHG division of the Government, using other agencies such as Nabard, Lead Banker and District Collectors/local authorities and representatives of the other 3 type of lenders should be jointly required to monitor and ensure implementaiton of the aboveP N Vasudevan, Equitasnoreply@blogger.comtag:blogger.com,1999:blog-7182576430045656062.post-59074938243995838312010-11-23T14:21:12.143+05:302010-11-23T14:21:12.143+05:303. we have a pricing philosophy wherein we dont re...3. we have a pricing philosophy wherein we dont reckon the current cost of operation to arrive at our lending rate but we assume the cost of operation which we will have when we wold have scaled up and become stabilised with about 20% annual growth. this ensures that the cost of starting and cost of scaling up is borne not by the clients but by the investors. as on date, our actual cost has still not reached this assumed level of cost on steady state basis because of which, though we have a targeted RoE of around 20% our actual RoE remains around 14-15%. we will reach around 20% only when we get into a steady state of growth and the cost of operation really comes further down<br /><br />4. I also believe there must be a cap on interest rate which is reasonable enough to ensure that there are enough suppliers of credit but prevents profiteering. Bangladesh recnelty has capped MFI lending at 27%. i believe this is a fair rate and we could also look at a lending rate cap of between 27 to 30%<br /><br />Thus, many of what u are saying resonates very strongly with our own philosophies and we would be very happy to support to improve these practices and governance issues further with further ideas.P N Vasudevan, Equitasnoreply@blogger.comtag:blogger.com,1999:blog-7182576430045656062.post-68160296904390347112010-11-23T14:20:10.954+05:302010-11-23T14:20:10.954+05:30hi Ramesh, this is Vasudevan of Equitas Micro Fina...hi Ramesh, this is Vasudevan of Equitas Micro Finance, Chennai. i am beginning to become a serious fan of your writings! the above piece you have written is an excellent piece and brings the diverse interests of stakeholders to a common platform. i totally agree with your points and in Equitas, we have many of these practices in place such as:<br /><br /> <br /><br />a. While our target RoE is around 18-20%, we have an internal policy of a cap on RoE of 25%. 25% is arrived at as most of the State owned banks in India have a RoE of between 20 and 25%<br /><br />b. we have a cap on managerial compensation at 40 times the lowest level field staff salary. thus if a field staff salary is around Rs.9000 p.m i.e Rs. 1.1 lacs p.a then the max salary that the CEO or any other management staff in the company can get is Rs. 45 lacs p.a. this ensures that we dont go overboard in doling out fat salaries or bonusses to MD/CEO or other staff. 40 times is arrived at based on an article of Narayanamurthy in Business India 29th Nov 2009 issue where this is held to be a golbal benchmark for fair compensation level.P N Vasudevan, Equitasnoreply@blogger.com