Money comes full circle (?)

(Ramblings below. Just thinking out aloud. Any guidance helpful.)

Currency evolved as a means of exchange of value, an improvement over the barter system. The barter system was in itself an exchange of value but it was not standardised and secondly, because the items exchanged varied from people to people, the barter system did not have the ability to duplicate/compare the value in two separate transactions. It could not “store” value  beyond one transaction. If you duplicated the same transaction in another situation with another set of people it may/may not have the same worth or value. It was each specific transactions that decided the worth of the exchange. The value of a transaction changed with the type of item exchanged and with the demand and supply situation of that item exchanged.

Commodity based currencies were the first to evolve, I guess, gold drops, silver coins, bronze coins. All created by nature and shaped into some form by men and introduced into transactions by a royal order. Standardisation arrived. Now, instead of the individuals deciding the worth of the exchange, the royal authority did.

Then came Central Banks and paper currency backed by gold, silver, etc. Now, instead of a small local kingdom, the value of a transaction was set decided by a Government. It created currency and assigned values based on gold stock available.Then the currency was de-linked from gold.

The Government or Central Bank now controlled the circulation and creation of more currency and hence had complete control over the value assigned to the currency.

With BitCoins, the creation of currency is decentralised to individuals instead of Central Banks or Governments. BitCoins interestingly do not represent a currency but a transaction . The worth of  a specific transaction is decided by individuals in that specific transaction. Its value goes up and down with the demand/supply. Is BitCoin a standardised Barter System with a central register where all transactions are authorised?

Whose responsibility is it to make one “job-ready”?

The industry cribs all the time that Indian education doesn’t produce enough job-ready people. I wonder, is it the responsibility of the schools/colleges to make one job ready by training them on specific tasks? Or is it the school/college’s responsibility to provide the students with the general tools and knowledge of theories and practices that will help when they take up a job. No school/college ever knows what job each of its students will take up. So, it is not possible to train the students on specific tasks! It is fair that they impart training that is general in nature. And, it is obvious that such general training may not be useful for specific employers.

The employers have all the specific processes and equipments that can be used for demonstration and making the new entrant job-ready for that specific job. Only employers can provide this customised training required to make the best job fit. So,  shouldn’t the employers be training them? Are the employers shirking responsibilities? Do all the employers in our country today have customised training for their new recruits/staff?

Standard Reply: The employers fear that whoever they train will soon escape to some other employer and so they don’t want to invest. Really? So, the alternate solution is you crib and take in half trained people and use them immediately to deliver services and products which are equally half baked?

Is trainee/apprenticeship period for training new recruits and making them job ready? Or is it a few months when the new recruit is like any other experienced employee, expected to deliver but at a lower cost and with the flexibility to be fired at short notice?

(Views of an outsider who is very much a part of the story.)

Will the on-demand economy lead to skewed availability of essential services?

a little bit ofOn- demand economy businesses (like say über, Elance, etc) do the great thing of connecting idle resources with those who need them, whenever they need them and all of this at a reduced or nil search cost.  So, on-demand economy platforms/marketplaces enable better utilisation of resources and improve overall efficiencies.

While most people normally prize certainty of income more than “freedom” from fixed long-term contract, there are some who do not want to be tied up in a fixed long-term contract. They prefer to take up a short-term engagement to provide their services as per the opportunity given to them by the on-demand business platform and continue to earn without having to bother getting the fixed long-term contract. Unfortunately, such elite groups are few in this planet and are usually comprised of people whose basic needs are already met from some other source. Such people stand to gain from the on-demand economy as well.

This means that the on-demand business model essentially leverages the marginal cost concept to make service available on a marginal cost basis instead of the marginal plus fixed cost that a user would typically incur when taking services from a service provider organisation that employs people under long term  contracts to provide the services. So, not  unusually, the services provided by on-demand service providers is often cheaper.

However, the benefit of the on-demand economy is when an “idle” resource is utilized. Meaning that, somebody who is otherwise employed with a full time employer (an employer that pays for his employee benefits and social security) is interested in offering his services in his free time to earn additional money to support his needs. The additional earning is expected to satisfy only incremental needs because basic needs and social security are already taken care of by the full time employer. Hence, he is able to offer his services at a cheaper cost than what his normal hourly rate would be with his employer.

Now, if this on-demand business platform works efficiently, his employer, who is currently paying for his social security as well as his marginal cost of services, might wonder if they should cut costs and take the services of somebody from the on demand business platform at a lower cost where the employer will just be paying for the services and not be paying for the social security.

Imagine a world where all employers or all people who need services think that  on-demand is cheaper and more efficient and hence they should all go the on demand way for all types of services.

Two situations can arise because of everybody moving to on-demand service platforms for getting things done:

Situation 1: Since there is nobody to pay their social security, the on-demand service providers will hike their charges per service to meet their social security needs and since they are now not sure of getting the next order/request for service, they will charge an additional premium to safeguard themselves. Which means the cost of each service will go up and the people who were earlier able to afford the on-demand service because it was cheap are now unable to get the service. Moreover since, everybody has moved on to provide on-demand service, there is nobody who can provide service even at the earlier affordable cost provided by the full time employers. Only the rich few can now afford a service which was affordable to many.

Situation 2: The competition keeps on increasing and on-demand service providers are unable to hike their charges because there is always more people ready to offer their services than there is demand. Hence, nobody pays for their social security.

Both situations are extreme and dangerous. But, both situations are possible in pockets depending upon local market conditions. The world is not perfect, it has a knack of amplifying the negatives in any good thing and so it will amplify the negatives in the on-demand model as well. Till we have a perfect world (!), we need to take caution to avoid the situations mentioned above but let us not stop walking. We need to appreciate the shortcomings of on-demand from the perspective of a more balanced world and take appropriate measures. Is the Govt listening?

On-demand economy businesses is great thing but we must find a way to avoid a situation where the entire world/ or a majority shifts to on-demand ways. We will then have a world full of informally employed where income is never guaranteed but is highly variable. Not everybody can handle the variability. Not every situation (say illness) a person faces can withstand the variability and that is why we value certainty of a job more than informal income. That is why we value full time employment more than contractual labour. That is why we value affordability of basic services.

Fact is,  on-demand services are a stylised version of contractual labour which has seen its share of criticisms because of the uncertainty that it brings to the lives of those who provide services and the lack of responsibility that it lets organisations live with. It creates a dis-balance in the garb of increased efficiency.  Contractual labour had negatively affected the lives of those providing the services. Unrestrained growth of On-demand in its current form threatens to affect both service providers and the customers of the service, unless a counterbalancing innovation/policy is found.

Credit Scoring Vs Personalised Lending

In India, all banks have internal credit scoring models and it has not helped them in lending to SMEs.

Two key reasons why banks (formal lending institutions) do not lend to SMEs in India are
a.) Lack of information on actual profitability/cash flows. No official documented evidence of income can be found. This is primarily in keeping with practice of dealing in cash, belief in oral contracts and mostly absence of contracts (sale/purchase) altogether. In addition, the myopic tendency to avoid taxes leads to minimal documentation or under-reporting of incomes. If no concrete data is found, what do the bank feed into their credit scoring models?

b.) Small ticket size and hence high operating expense per loan. Ideally a credit scoring model reduces the high opex of small loans by taking an automated call on whether to do a loan or not without having a credit person go through the case in detail as he is expected to do in larger loan ticket sizes. But, then, for these kind of small loans with no concrete data, what does one feed into the credit scoring model? Subjective evaluations of the credit appraising officer?

It is undisputed that the effectiveness of a credit scoring model is dependent upon the quality of data being fed. However, since the quality/reliability of data that is available to be fed into the credit scoring model is poor and subjective, especially in case of SMEs in India, how does one use a credit scoring model? In fact, due to high level of subjectivity, the data being fed into the credit scoring model can jeopardise the credit scoring techniques.

Credit scoring models can speed up process but they can not replace personalized diligence based lending till the time good data is available. There is barely any electronic footprint left by SMEs that can be dug up for credit analysis. The bank account (if available) details wouldn’t show enough balance, their transactions would be fairly thin. Understood that visiting the customers for a small ticket size loan results in high opex but in the case of SMEs where transactions are primarily cash based, expecting to lend to customers in the SME segment without meeting the customers, suppliers, buyers of the SME and without visiting the location is a recipe for disaster.

A few new age lenders are depending upon use of surrogates/proxies for assessment of actual cash flows, followed by close monitoring of loans. They depend exceedingly on customer visits. Their portfolios have performed well but yes, it is too early. While it is not free of subjectivity, this approach seems to be better than that of large banks who use an inflexible credit scoring model based on documented data. I agree that the rate of growth in such kind of specialized lending may not be as fast as mainstream financial institutions till the time sufficient electronic footprint is generated by the target SMEs. Meanwhile, using some form of credit scoring models in parallel can add a layer of check over the existing rigorous personalized appraisal procedure. This helps in reducing the impact of subjectivity in the personalized lending processes.

Credit scoring models are needed. The critical question that we need to answer today is, how do we improve the quality of data available to be fed into credit scoring models? If not immediately, how do we build the right data backend that provides high quality data in the future?

According to me, this kind of data backend will have two components, one that deals with general data points which can be used for bench marking and two that deals with individual specific data points that further become a part of the general database:

a.) Benchmarking: A good data backend can actually be a like a platform where location specific details on various businesses and margins are fed by staff of lenders. Over a period of time and volume, these numbers will give adequate guidance on the claims of margins/profitability made by the potential borrowers. Once the coverage of data collection efforts improve with time credit scoring models can play a better role.

b.) For individual evaluation: Individual credit/liability histories need to be pushed into this data back-end. Electricity bills, mobile phone bills, credit bureau details, need to be automatically fed or fed based on requests. The question is will the respective companies share data? Will a mobile company share prepaid recharge data of a customer?

Once this is done over a period of time, I believe a credit scoring model will start making more sense for SME lending in India. However, ditching personalized lending altogether, would continue being a distant dream for a fairly long time, if not for ever.

The approach can not be Credit Scoring VS personalized lending. The approach instead has to be Credit Scoring AND personalized lending.

Food Wastage: Challenges for India

A FAO study throws up interesting numbers on food wastage across the world and splits up food wastage per capita into supply chain losses and consumer level losses. For developed countries, consumer level wastage is alarming but for countries like India, the supply chain level wastage is alarming because of the volume of food losses given the country’s size and the scale of its farm output. India is not unique in the level of its losses. According to the FAO,42 per cent of fruit and vegetables grown in the Asia-Pacific region, and up to 20 per cent of the grain, never reaches consumers because of poor post-harvest handling.

I think there are two key reasons why it is practically more difficult to reduce wastage in India, compared to the developed countries.

a.) Structural Challenge : It is important to note that supply chain issues (for agricultural produce) in India is much more complicated and difficult to sort out compared to North America and Europe, primarily because of structural differences in production. Indian agriculture is primarily small holder agriculture and hence disaggregated by nature. However, it is also said that the milk supply chain has done comparatively better than vegetables when it comes to reducing wastage. One of the key reasons behind that is structural “innovations” at the farmer level for aggregation i.e. pockets of successful co-operative institutions. While investments in cold chain infrastructure is key, India has to find ways of improving aggregation at the farmer levels and unless that is in place we will not find people making extensive investments in cold chain infrastructure even after the policy situation has improved.

b.) Political Intent: A closely linked reality behind “private” sector not being able to do much in setting up efficient procurement back-ends (and marketing linkages in general till date), is that the farmers are a “constituency” of the politicians and to ensure that politicians continue to get votes,it is critical to ensure that farmers continue to depend upon politicians or continue to have expectations from politicians for critical needs. If the politicians enable the cold storage investment environment too much in favour of private entities, the private enterprises, which have historically shown better effectiveness, might make a dent on the dependence of farmers on politicians. This is not a happy state for the vote hungry political class. To put things in perspective, the politicians (as lawmakers) have the tough task of ensuring that policies do not breed exploitation of the weak by the strong and they do need to be sure of the intent of the people who look at investment in procurement infrastructure from a return on investments perspective. However, an equally pertinent question is if “partial” socialism helps us in the long run.

While I wanted to cover this in a separate post, I thought I might as well place it here to give a complete picture of the complications around deciding upon policies and the seriousness around that.

A few years ago, a nation-wide study on assessment of harvest and post-harvest losses for 46 different agricultural commodities was carried out in 106 randomly selected districts. The study was carried out by CIPHET, Ludhiana and the figures of wastage are much lower than any estimate we get from other reports or what we hear from even the policymakers. The wastage levels as per that report is given below.

Cereals 3.9 – 6.0 per cent, Pulses 4.3-6.1 per cent, Oil seeds 2.8-10.1 per cent, Fruits & Vegetables 5.8-18.0 per cent, Milk 0.8 per cent, Fisheries (Inland) 6.9 per cent,Fisheries (Marine) 2.9 per cent, Meat 2.3 per cent, Poultry 3.7 per cent.

These numbers have been used as a justification to stop FDI in market linkage in India with the argument that the level of losses in India is not much. Well! that is how complicated policy making is.

(Also published on LinkedIn.)

Will de-listing of Fruits & Vegetables from APMC Act affect price?

Recently, the Indian Central Government requested all State Governments to delist fruits and vegetables from the Agriculture Produce Market Committees Act (APMC Act). This was to address rising price in fruits and vegetables. I was trying to understand how this would affect things going forward. A basic analysis of what I think is going to happen is given below.

Currently, the APMC Act makes it mandatory for farmers to sell their produce only to licensed merchants at mandis set up by state agriculture marketing boards. So, it is being said that delisting will eliminate these licensed merchants or middlemen who set up a cartel and raise the prices for super normal profits. So, farmers will now be able to sell directly to retailers or food processors and hence the buyers will get fruits and vegetables at a lower price.

In addition, commissions earned by the agents, mandi tax, octroi, VAT or sales tax and inter-state movement charges add to the price of fruits and vegetables. Delisting from APMC Act would enable sale of fruits and vegetables to happen without payment of commissions, mandi tax/cess. This means that delisting would certainly wipe out state revenues from mandi tax/cess and potentially reduce price but will it enable farmers to sell directly to consumers/buyers and avoid traders/commission agents?

Does the farmer sell at the APMC market even today? The Planning Commission says that 75% of farmers sell their produce at the farmgate to traders, aggregators and sometimes contract buyers. In earlier initiatives taken in Bihar or even Andhra Pradesh and a few other states, doing away with APMC Act restrictions or setting up of Farmer Markets have not been able to eliminate middle men completely and that is due to practical issues. It is mostly the aggregators or agents who take farmer certificate and sell under their name in the farmer market. For the sake of convenience, a group of farmers generally find somebody from the village and sell their produce to him and he gets a license to operate in this market as a “farmer”. This is to arrive at a commercially viable and practical aggregation volume for transportation and time saving.

This means that under current situation, farmers are not reaching the APMC mandi anyways because of practical difficulties. How will they reach the consumer directly now when the fruits and vegetables have been delisted?They will need intermediaries or they will need consumers to reach out to them directly. Consumers will not be able to reach farmers directly. Fact is, they will need intermediaries, be it the local aggregators or the corporate retailers/buyers.

Question is, how do you ensure that the intermediaries do not form a cartel that jacks up prices for buyers once again? Will this deregulation reduce strength of cartels or lead to an increase in their power? In the past, states have delisted fruits and vegetables but haven’t succeeded in breaking cartels. So it is unlikely that cartels will get demolished just by delisting. The cartel will weaken only when alternate channels are built to enable competition. Delisting enables corporate buyers to buy directly without having to depend upon intermediaries or having to enroll at the mandi and having to pay mandi cess. So, this will increase competition (at the cost of state revenues) but how will they reach farmers immediately? It is obvious that It is not going to immediately cool off the prices and it needs long term efforts in addition to just delisting. Unless multiple mutually independent market players enter the market, the pains of having to deal with high price will continue.

Another key component of the high price is spoilage that happens due to lack of appropriate cold chain facilities and change of multiple hands. So, it is important that this delisting initiative is followed by building physical infrastructure and competitive markets.

Such infrastructure has to be built by both private and public resources. Through policy stability and direction, large corporate buyers will now be encouraged to set up procurement networks deep into producing locations. It is also important that the state continues to provides alternate channels to farmers by building cold chain and storage facilities and supporting development of multiple options of storage and sale. Unless this is done, the corporate buyer may form one more cartel.

Let’s face it. Farmers will not reach retailers or consumers directly. We will need intermediaries, be it local aggregators or corporate buyers. We have to take steps to improve efficiency in movement of fruits and vegetables through these intermediary channels to ensure quality at the right price.

It is easier said than done. Delisting of fruits and vegetables is the first, easy to implement step (though politically difficult). It must be followed by a series of difficult to implement steps that promote appropriate infrastructure to improve efficiency and ensure availability of fruits and vegetables at the right price. Hopefully, after paying the appropriate mandi taxes. 

What do you think?

Payments in remote locations

Payments to dairy farmers in residing in rural remote locations is made primarily in cash across India. Every week/fortnight, the milk collection van brings in a cash box and pays the farmers the price of milk bought since the last payday. In some cases, the payment is daily.

Experience revealed that in making payments to farmers through this route, the cashier handing over the cash often held back some amount of money as a “commission” or out of plain rowdyism. The cashier/ accountant would in a lot of cases be the favourite man of the secretary of the collection centre (society) or the secretary himself. The helpless farmer would then have to part with a fraction of the money due to him to make sure s/he doesn’t rub the powerful cashier the wrong way.

Some milk buying companies thought of a novel way of eliminating this problem. They started paying the money directly to the bank account of the farmer. The bank account was especially opened for this purpose. So, the cashier is no longer able to play foul. But, on every payday, the farmer has to abandon work (which means loss of a day’s wage or agriculture) and go to the bank branch which would be in a “nearby” town, some 15-20 kms away. He incurs travel expenses as well. The money has to be drawn out immediately because the farmer needs the cash to buy daily items like groceries, medicines, etc. There is no other source of cash income that is as regular/frequent as dairy. Moreover, much to the disgust of the bank manager in the town, there would be a long queue of dairy farmers waiting to draw their money on every payday leading to a tremendous rush in an otherwise quiet (and understaffed) bank branch.

The innovative milk buying companies understood this problem as well and figured out a solution. They handed over bio-metric cards to the dairy farmers for each bank account and got an “agent” tied to a third-party payments company to hand deliver the cash at the doorstep of the farmer. The agent carried bags of cash to the village and after bio-metric authentication hands the cash over to the farmer at the doorstep. But then, after a few months the agent starts charging commission, lesser than the cashier/secretary in the first situation but charges some amount. The bio-metric account reads that the farmer has drawn the entire amount of money. Though this agent works with a “private” company with greater accountability, the farmer agrees to let go of the amount because otherwise he will have to travel all the way to the bank.

We are back to square one and possibly in an even worse situation. In the earlier case, the cash was sent to the remote village in a milk truck with at least two persons on board. Not an ideal situation but it was better than what we see in this system. In this system, the “agent” typically hops on to a motorcycle with the bag of cash picked from a local bank branch and rides all the way to the villages. A few agents get robbed on the way. In fact carrying a few lakhs of cash does not turn out to be a safe thing to do. But there is no other way. Cash in transit insurance saves the day for some milk buying companies but some agents get killed.

Where does this end? “Mobile money” some people say. However, till the time the local grocery shops start accepting payments through mobile phones, how will mobile money transfer be of any use?

How have these risks been handled in India and outside? What are the examples of payments in remote locations seen in other parts of the world? What kind of supporting infrastructure is required to enable a safer payments situation?

(Also published on LinkedIn.)


Elevators permitted increases in height of buildings. In other words, density of people living per square km could go up because elevator permitted multiple floors and hence more people.

More people per square km means that a much larger number of people are using the same available space of roads to move around. Congestion.

What do you do?

a.) Wish that elevators were not invented and instead of vertical growth, the cities would grow horizontally and that instead of pockets of highly developed cities you had continuous stretches of several small cities with mid sized buildings and less congestion on the road due to lower population density.

b.) Wish that somebody invents private-individual flying cars quickly and the somebody also builds lanes of air traffic with different lanes for different levels (heights) paying different charges.