Interest Rates

When the interest rates are high, the manufacturing industries slow down capital investment to avoid bearing high cost of investments and hence lead to flattening of long term growth.
When the interest rates are low, the manufacturing industries intensify capital investments, leading to higher levels of automation and hence leading to increased levels of unemployment in the long term.
Off course, it is much more complicated than that but what is the right interest rate to have?

Insights from G2012 Mexico Financial Inclusion Twitter Conference

On 25th July, 2012 I was invited to participate in the G2012 Twitter Conference on Financial Inclusion organised by Ashoka Changemakers and G2012 Mexico. There were three back to back sessions over six hours focused on technology and financial inclusion, financing livelihoods, and the future of financial inclusion innovation. I participated in the Session on Livelihoods Financing. Overall, it was quite an interesting conversation. Here is a blog post on the conference summarizing the key discussion points.

Interestingly, the blog says ” The Twitter conference gathered more than 150 experts, thought leaders, social entrepreneurs, and innovators from different parts of the world. It reached almost half a million Twitter accounts and involved simultaneous conversations in English, Spanish, and Portuguese.” That is huge!

Margin contribution

What is the logic behind asking for a margin contribution from a debtor before you give a loan?

I can hear/think of three potential reasons:

1.) Skin in the game/deterrent: “I am ready to risk my little amount of hard earned money to get this big amount of money from you. If I do not repay to you, it means I have not done well to get my hard earned money back either.”

2.) Seriousness of purpose: “I am serious enough regarding the usage of the debt and have appropriate plans for utilisation that is good enough to give me the confidence to risk my own money.”

3.) Indication of ability to repay the loan

What is the difference in terms of risk that a lender is exposed to in the following cases?

a.) the lender gives a INR 10 lakh loan and takes a margin contribution of INR 2 lakhs.

b.) the lender gives a INR 8 lakh loan and no margin contribution.

If you have these two options which case will you lend to? Say everything else is the same.


How much equity and when?

When you judge a promoter on his interest in the business in terms of equity contribution brought into the business, what would you consider more sensible?

A. bringing in equity capital in phases

All start-ups are prone to initial setbacks but some of them can recover if further capital is pumped in to the changed business model (pivot). If the promoter spends all his money in the first attempt/business model, he would never have money to implement the pivot.

B. Bringing in equity capital in one go right at the beginning

If the promoter has brought in all his money into the business right at the beginning, it shows his dedication and indicates that come what may, he will make his business work.

From an investor perspective:

  • How do you determine which level of capital brought in is enough to prove seriousness of the promoter in the business?
  • Would the amount of personal equity brought in, indicating dedication to the business, vary from industry to industry? (My sense is yes. Tell me if I am wrong)

How would the assessment vary between the first equity investor and the first debt “investor”?

Beyond the Margin: Redirecting Asia’s Capitalism

On August 24, 2011 Avantage Ventures released a report titledBeyond the Margin: Redirecting Asia’s Capitalismthe first to analyse the Asian social finance market.

I had the opportunity share some of my insight thoughts with the Avantage Ventures staff during the preparation of this report. The report has, for the first time, made an attempt to give a number to the estimated size of the Asian Social Investments market. The report highlights six key social sectors that would benefit most from impact investments, these include:

  • Affordable housing
  • Sustainable agriculture and agribusiness
  • Water and sanitation facilities
  • Primary and special needs education
  • Rural and elderly healthcare
  • Rural access to energy

Of these, affordable housing, primary education and rural and elderly healthcare represent the three sectors with the greatest market opportunity. The report also estimates the potential market size that can be captured through impact investing in Developing Asia to be between USD52 to USD158 billion by 2020.

The report Beyond the Margin  can be found here. or here av_report_final_full_screen_version

Who can you lend money to?

What I have assimilated in the last few months:  bunch of things may be considered to decide upon who is “creditworthy”.

1.) Does the borrower have an intention to repay

  • Whether he has a past track record of taking loans and what does that track record look like. If he doesn’t have a track record you can’t tell whether he is a good borrower or a bad borrower. In other words, some history of borrowing is better than no history of borrowing when it comes to credit scoring.
  • What do people known to him say? Would he make a good borrower?
  • What does his historical track record of income and expenditure show? Is he financially cautious? Does he save money? Does he educate his children? Has he built assets over time from his income like savings, FD, property, gold, insurance, chit fund?
  • Has he repaid both secured and unsecured loans?

2.) Does the borrower have an ability to repay.

  • How much does he earn? How much is his expenditure? Does he have documented evidence? If not, what is the estimated income for somebody with similar profession in that particular geography? What do his suppliers say? What do his customers say? What do people who pay him say?
  • What do people, who know him, say his earnings are? What kind of a locality does he stay in? How are his living conditions?
  • Do the assets accumulated by him over the last 3-5 years reflect the income that he claims he has?
  • What is the maximum and minimum earning possible per month?
  • What is the residual amount of money left for the family after repayment of installment if the loan is given? Reduce loan amount or increase tenure if very little is left for the family.

Human Resource: Could be a complete drain on resources

One out of the three first employees that I recruited, turned out to be a rogue! He forged reimbursement bills, made issues about the work that he was supposed to do, tried to “poison” other team members. The fact that we are start-up, complicated things a bit more for us. I was ready to take his fussy attitude in my stride because these three people were amongst the first few in the entire history of their college to join a private sector job. Understandably, the change in attitude required would take some time. They were freshers.

Well, frankly speaking that reasoning is just a superficial reasoning. The real reason is that these youngsters have an academic qualification which is a basic legal requirement for our work and they were in short supply! The Govt seemed to offer jobs to all of them and let them have a job where pay was guaranteed but without any serious expectation of work!

It had taken us about 6 months to locate people, with the required academic qualification, who could be ready to join a non-Govt job! Once they did join, I was ready to treat them like kings. We had a great business model to operationalise and it was necessary that they  co-operate.

However, within no time I found out that this candidate was more than fussy. Much against the “rules” of a startup, I continued to “tolerate” this person for close to about a month. Incidentally, other than the difficulty of finding another replacement, the worry was that if he is chucked out, the academic institution will see my organisation as a  perfect example of the big bad private sector where people are chucked out at will and that would have killed the organisation because of the basic requirement of the academic qualification. Moreover, since our work was in the rural areas, students from one state could not be placed into another state due to language issues.

I started hoping that he leaves on his own. But when?

After a month of his being with us, he seemed to have been offered a job at another “private” organisation and at double the salary. It was a ridiculous amount. I somehow remebered those times when he was bothered about even the smallest of components in his salary. I had initially taken them as the widely held apprehensions in India about the “private” sector but later I realised that it is slightly more.

Anyhow, he decided to leave but not before claiming that a senior consultant, who was working with us, knew nothing. Moreover, he had rudely spoke to our HR person. Interestingly the consultant had had operational experience of 25 years including the top job at a semi-govt organisation and the HR person was possibly was one of the friendliest sort that I have ever seen.

The story does not end here because one of my worst fears became a reality 15 days later. More about that in the next post.

Learning: If your gut feel says that somebody is a bad guy, in all possibility he IS a bad guy.  Addendum to this learning in the next post.

How to “serve the BoP”?

I have come to a few conclusions based on three years of my personal experience of building businesses for the last mile remote rural customer. The segment that I have been looking at is similar in a lot of ways to the segment referred to as BoP in popular development literature. I, do, however, feel that the term BoP business model is a misnomer because I am increasingly being made to believe out of my experience that such business models do not exist. Even if they do, they are not sustainable. That might be a big statement given the new found belief across circles about the viability of BoP of business models. My experience is limited to a few states in India and limited to the following supply chains like dairy, clean energy, rural tourism, agri, drinking water, etc.

Here are my “learnings”:

1.)I think that instead of segmenting customers into BoP and non-BoP, it is much more useful for companies (those companies who want to reach out to the excluded categories) to segment the customer base in terms of a.)who can be reached easily and b.)who can NOT be reached easily. This is what I call the distribution channel lens of segmenting.

For eg:In a remote rural location there might be both a BoP/low income household as well as a slightly well off household. Similarly so in urban locations. If we design  business to serve only the low income household in remote rural locations I doubt if the business can ever be viable. (I will be very happy to be proved wrong.) In other words, I think the business models should be designed in such a way that “Access” is provided to both the low income as well as the high income customers in a particular geographical area. This, according to me, makes more sense in terms of distribution channels AND company viability.

2.) Good intentions ONLY are not sufficient for designing business models. My personal experience with the dairy healthcare backed on the spot cattle insurance product told me that though we assumed that there is a need for the product and that the customers were ready for it, we realised that the ground situation was quite different. No doubt, there is a need for the product but the inertia against a paid service when a free service is available (no matter how bad that quality is)is so huge that it is difficult to ensure that customers pay to buy some product or services. I had a similar experience with smokeless stoves. I think the solution to this type of problem requires a more involved approach which I discussed in an earlier post.

I think any model looking at reaching out to the excluded groups (or BoP) has to involve iterations to come to a final product based on “extreme” customer understanding. Lot of work is needed there. Anybody who says that “BoP” businesses can be low touch is not talking about the BoP market at all.

3.) The distribution channels has to have a very local nature and in all possibility they can not be owned by ONE “company”. They would essentially be multi product channels but similar products flowing through a particular channel. Eg: White goods/capital goods like stoves may pass through a different distribution channel and fast moving goods has to flow through a completely different channel. The channels have to ensure that the last mile customer facing people are a part of the local community AND they are well conversant with the product/service features AND are capable of basic troubleshooting. This most certainly requires a lot of standardised training. Again, a reason why I said these efforts would be high touch. (You might ask, who takes the initiative to build these localised channels? My answer is professional NGOs. They can use some of their “low cost or no cost” money to make an angel investment in the local “distribution companies”)

4.) A big reason why products do not reach the last mile is because there is no one to fund the inventory! Something has to be worked out at the small town levels or the cluster levels to ensure that banks/financial institutions lend to small distributors. I think the big companies should work with banks to promote financing of inventories and building ware-houses in the small sub-sub taluka towns. This will free up tremendous scale. The financing has to target small distributors and NOT purchasers or retailers as has been tried through some MFI and SHG backed models.

Now comes the difficult part. To make sure that the banks lend to small distributors in the small sub-sub taluka towns,the companies might need to give some kind of a guarantee to the banks to start with.  (And this is extremely difficult given the corruption ridden last mile banking system in our country. But I think the big companies should be able to manage this.)  My assumption also is that the companies will need to bear the cost of doing proper due dilligence in identifying their local area distributors. This is a one time cost. The local banks can then finance the inventory. This reduces the extent of monetary loss in case the distributor identified by one company is poached by another.

5.) There is a good reason to leverage public/Govt infrastructure or funding wherever available: We leveraged govt universities, facility centres, staff in our work. We identified what they were good at and left it to them. It saves a lot of money.

6.)There is no harm in starting with selling a product or service that gives good returns or working a high gross profit pricing model. This would help in ensuring that the business model is sustainable and can fund itself in future when you need to get into the lower margin products. Starting with a difficult aim of making the business sustainable with low margin product/service could end up killing the effort all together. Eg: when you are looking at building a procurement network you might as well start off with a cash crop that gives higher margin, rather than a food crop. You can then start with other types of crops. We had started with castor in our work. It helped!

I say again, instead of a BoP/ non-BoP segmentation, I think it is the distribution channel lens that is a better way of segmenting customers. Given the fact that the unit margins in serving the BoP segment of customers is thin, it is necessary to have huge scale and huge scale is possible only if the distribution model is robust, sustainable and adequately financed.

What do you think?