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?
Category: Finance
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!
Access to Credit: Financing Options for Farmer Producer Organisations (FPOs)
FWWB and SFAC organized a Round Table Discussion (RTD) forum on July 31st, 2012. I had the opportunity to attend the RTD and talk about the possibilities of enabling innovative market based financing solutions for Producer Organisations. Needless to say, it was one of those rare gatherings with everybody from policymakers to practitioners being present in the same room. The RTD was very well represented by Academia, FPO promoting organisations, Financial Insitutions, Donor Organisations and others.
The minutes of the meeting can be found here. (RT- Delhi – July 31 2012)
The organisers:
Small Farmers’ Agri-Business Consortium (SFAC) was set up in 1994 by the Governement of India. SFAC has emerged as a Developmental Institution with its core aims and objectives focused on increased production and productivity, value addition, provision of efficient linkages between producers and consumers. SFAC deals with agriculture in its wider connotation, including fisheries and horticulture.
Friends of Women World Banking (FWWB): In 1982, promoted by SEWA, Friends of Women’s World Banking, India (FWWB-I) was created as one of the first few affiliates of Women’s World Banking.
Why go cashless?
We want to make cashless payments to farmers, rural labourers directly to their bank accounts and hand them over a card which they can use to transact “business”.
By removing cash from the system, we have managed to remove chances of “middlemen” (our very own people handling payments) siphoning money out of the system before it reaches the farmer or the labourer.
But then, what does the farmer do with the card? Where does he get the cash? Nobody in his immediate neighbourhood accepts cards! He needs to pay cash to buy his food!
He has to go to the bank which is in the next town to draw cash from the bank. All the farmers/labourers in his area get the transfer on the same day and so on one day of the month the bank branch in the nearby town is packed with villagers looking to withdraw their cash. It is a nightmare for the bankers and the villagers because they have to wait for hours and they have spend money and one full day to go the town.
To solve the problem, we got agents who carry a small authentication device and a bag full of cash. The agent then delivers the cash to the farmers at his doorstep. What if the agent gets the authentication and then does not pay the full amount of due like the earlier “paymaster”. Off course, the agents are “recruited” by organisations and hence the villagers have an institutional “back-end” to file complaints and given that this institution is smaller than Govt, it should be more responsive compared to the big Government machinery. But, does it really happen that way?
Moreover, the agent runs the risk of being robbed/killed because of the amount of cash that he is carrying. How do you prevent that?
What is the way out? Carry on with this till the kirana shops in the villages accept cards for payments? Given that mobile is now ubiquitous, how about mobile payments? How complicated is that?
An interesting article on the PSD World Bank blog: Read
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 titled ‘Beyond the Margin: Redirecting Asia’s Capitalism’, the 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.
Avishek Gupta 