Thursday, October 6, 2011

microfinance coulds - a kiva example

Sunday, October 2, 2011

India’s self-help movement — The International

India’s self-help movement — The International

Wednesday, March 23, 2011

Recapitalising RRBs : Green capital – an opportunity for DEVELOPMENT FINANCE INSTITUTIONS!!

The Finance Minister in the Budget presentation (2009-10) while commenting on the status of the RRBs mentioned that after the process of amalgamation, the recapitalization of RRBs with negative networth would be a priority area for the Government. This is particularly true as RRBs are expected to be the key players for enabling greater financial inclusion and permitting a range of experimentation in financial inclusion like Business Correspondents, franchisees with technology usage in rural hinterlands. These elucidations are also backed by government action asking RRBs to undertake an aggressive branch expansion programme and open at least one branch in 80 uncovered districts of the country as also the GoI setting up a Committee to look into aspects concerning the capitalization of weak RRBs (particularly) and also suggesting a roadmap to raise the CRAR of RRBs to nine per cent by March 2012.
With the amalgamation process on-stream in the last four years, 196 RRBs have now been merged into 82 RRBs. The monetary policy of RBI (oct, 2009) states that the process of recapitalization has since been completed with 27 RRBs fully recapitalized with an amount of Rs 1,796 crore as on 31 July 2009[1]. The available information as on 31 March 2009 also suggests that 22 RRBs have registered losses with accumulated losses to the tune of Rs 2325 crore as on 31 March 2009[2].
The newspaper reports also inform of GoI intending to infuse Rs.2000 crore towards recapitalisation of RRBs. However, capitalising the RRBs through tier 1 capital has connected issues, viz; concomitant contributions by the sponsor banks and the State Governments; with the later often delaying contributions or showing reluctance for the same. It is in this context that an option of enlarging the Tier II capital of RRBs has been viewed in this brief paper. Rejigging the Tier II capital is also equally (or perhaps the second best) measure of a bank's financial strength  from a regulators stand point. With forms of banking capital largely standardised by the Basel committee, and countries (regulators) accepting this with marginal modifications and suitable legislations, expansion of Tier II capital in RRBs looks a possibility, though limited.
2        Enhancing Tier II capital:
While tier 1 capital is considered as the core and more reliable form of capital, expansion of Tier II capital also brings efficiency gains to the organization by enhancing its leveraging capabilities. In the existing literature, there are several classifications of Tier II capital viz; undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated term debt. Normally, supplementary capital is considered as Tier II capital up to an amount equal to that of the core capital[3]. Subordinated debt / debenture or subordinated loan is a chief component of the Tier II capital in banks; its a debt which ranks after other debts should a company fall into receivership or be closed. Thus, subordinated debt has a lower priority than other bonds of the issuer in case of liquidation during bankruptcy. Because subordinated debt is repayable after other debts have been paid, they are more risky for the lender of the money3. It is normally unsecured and has lesser priority than that of an additional debt claim on the same asset.
As a measure to enhance Tier II capital in RRBs through subordinated debt, DEVELOPMENT FINANCE INSTITUTION could consider subscribing to the subordinated debts/ or subordinated debenture issued by interested RRB. These subordinated debts or debentures could be customized with a clause restricting their end use of the proceeds to “Green initiatives” which is broadly defined by NABARD. Alternatively, the subscription to the subordinated debt / debenture floated by RRBs could be made after ensuring that the amounts so sought has already been used for funding green initiatives only (please see illustration).

Recapitalising RRBs through issue of Green Capital

Option 1
Funds clean technology Investments …
Or Environment 
Supportive ventures like forestation, green construction, carbon ventures etc

Option 2
RRB uses the funds mobilised for clean technology Investments …
Or Environment 
Supportive ventures …… etc

3        The Green initiatives
Environment and climate change has been concern which has been fiercely debated world over. While many of the projects being supported or funded by banks do possess less polluting solutions or mandatory pollution control mechanisms or devices, these should not qualify for coverage under this proactive venture for green capital support. These initiatives should be on its own be environmentally friendly or introduce new venture permitting Zero Emission technologies. These projects will have to be clearly defined viz; 

  1. Clean technology investments[4] 
  2. Green construction projects, Waste recycling etc
  3. Wasteland development projects- Land reclamation, sand-dune stabilisation etc
  4. Forestation projects
  5. Plantation and Horticulture projects
  6. Approved Carbon ventures, energy efficiency projects viz; solar pumps, solar energy

4        Some features of the suggested subordinated debt instrument[5]
Ø      How much of subordinated debt:

The amount eligible for inclusion in Tier II capital as subordinated debt will be subject to a maximum ceiling of 50% of the Tier I capital. Further as per extant instructions (for foreign banks) (ref: RBI circular no: DBOD. No. IBS. BC. 65/23.10.015/2001-02 February 14, 2002), the total of Tier II capital should not exceed 100% of Tier I Capital.

Ø      Features of the product:

Subordinated debt eligible to be considered as Tier II capital must:
1)     Have an original maturity of at least five years.
2)     Be subordinated to the claims of depositors
3)     Be unsecured
4)     The subordinated debt is not redeemable before maturity without prior approval of regulator.

Ø      Description of the terms of issuance of subordinated debt

The RRB may not be required to obtain shareholder approval for the issuance or for prepayment of subordinated debt. However, if Reserve Bank of India agrees to issuance of such capital[6], then such borrowings made by RRBs in compliance with the guidelines, would not require prior approval of RBI.

However, RRB may be required to obtain the RBI (regulators) prior approval to issue subordinated debt only if it has a negative networth regardless of whether the subordinated debt is intended to count as capital. Therefore, in such cases the RRB would be required to seek approval to issue or prepay subordinated debt.

Ø      Documentation:

The RRB should obtain a letter from the subscriber (DEVELOPMENT FINANCE INSTITUTION in the instant case) agreeing to give the loan for supplementing the capital base. The loan documentation should confirm that the loan given by subscriber would be subordinated to the claims of all other creditors of the bank. The loan agreement will be governed by, and construed in accordance with the law. Prior approval of the RBI should be obtained in case of any material changes in the original terms of issue

Ø      Redeeming subordinated debt:

Once any scheduled payments of principal begin, all payments shall be made at least annually. The amount of subordinated debt eligible for inclusion as Tier II capital is reduced by 20 percent of the original amount of the instrument (net of any redemptions) at the beginning of each of the last five years of the instrument’s life. Thus, subordinated debt with less than one year to maturity is not normally included in Tier II capital

Ø      Reserve requirements:

The total amount of RRB’s borrowings (under subordinated debt) is to be reckoned as liability for the calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, will attract CRR/SLR requirements
5        Who benefits? 
This initiative could be considered as a win-win proposition for both the participating institutions viz; DEVELOPMENT FINANCE INSTUTITION and RRBs.

The twin objectives of DEVELOPMENT FINANCE INSTITUTION viz; Business and institutional development could be clubbed to address environmental concerns through green-capital or pro-environment investments. Further, with subordinated debts typically carrying a higher rate of risk and for longer durations normally differentially priced. Accordingly, contributors of subordinated debt (like DEVELOPMENT FINANCE INSTITITION in the instant case) could seek a higher compensation for the extra risk and longer duration.


Thus, the “green capital” could be priced in such a way that the price is profitable to DEVELOPMENT FINANCE INSTITUTION as also beneficial to the issuing RRB.  The pricing could be such to incentive the receiver Bank to commit its capital to a specified field of activities that would also earn at market related rates. With such enticements, there could be a compulsion for the RRB to diversify their lending activity and also address the concerns of funding environmental friendly projects and meeting the mission of sustainable development. 

[1] RBI: second quarter review of Monetary Policy 2009-10
[2] IDD, NABARD-HO, Mumbai
[3] Ref:   accessed on 13 Dec2009
[4]  Example : livestock is said to account for more than 20% of all carbon emissions.  Mootral is a new feed additive for ruminants, biotechnologically extracted from garlic, that helps animals reduce their methane emissions. 
[5] Could be very similar to the RBI instructions issued to foreign banks - RBI circular no : DBOD. No. IBS. BC. 65/23.10.015/2001-02 February 14, 2002
[6] if a suggestion is made by the Chakravorty Committee after weighing the pros and cons of the suggestion

Wednesday, February 9, 2011

Malegam Committee : A dampner or an enabler ? - some thoughts !!

The committee deserves all appreciation for the swift action and studied assessment of the sector. The quick report did bring back a bit of sanity to the sector, which has been battling all odds, including the media with many informed and uninformed comments. The Committee also deserves admiration for bringing the focus of microFinance back to its clients as also a grievance redressal and protection system, which was earlier, largely neglected with excessive focus on institutional sustainability.  Having been associated with the sector and also being an ardent follower and independent enthusiast, I wish to place a few points for due consideration of RBI – some pertaining to the aspects already covered in the report and a few which could be suitably considered for inclusion by RBI. Further, it may also be added that some of the recommendations of the Committee do not seem to be in-sync with the microFinance sector and its accepted practices and a few recommendations could likely stifle fledgling microFinance institutions, making it near impossible to operate:

MY Observations
A net worth requirement of Rs 15 Cr for mFIs
·        The minimum Rs 2 cr networth requirements prescribed as of now needs to be restored orelse many of the start-ups NBFC-mFIs could be forced to close down. This recommendation would favour larger existing mFIs. Therefore, the recommendation of mF Task Force (1999) of Rs 2cr may be considered or restored. 

·        Most of the equity funding that has been done under the NABARD’s mFDEF equity funding support / other equity providers covers many start up organizations with low equity base.  

·        Further, the present RBI instructions stipulate a mere Rs 5 cr equity requirement for establishing LABs under the BR Act which also accesses public deposit(even though no new licenses are being issued at present). Thus mFI’s requirements stipulated by the Committee for non-deposit taking NBFC seem too indomitable

A limit on annual family income of Rs.50,000/- for clients to be serviced by mFIs
·        While it would be desirable to bring greater focus at the poor clients being serviced, however, the practical selection process would be difficult not for mFIs, but also for the supervisor or regulator to cross check.

·        Therefore, it would be better for the mFI to clearly specify the basis or norms for client selection / identification viz; casphor housing index, landless people, not more 0.5 ac of un-irrigated land owners etc or the 9 risk parameters identified by clients in the UN project in kerala, as these are easily identifiable, verifiable and implementable.

·        If such easily identifiable risk parameters are chosen and declared by the mFI, this could also be effortlessly verified by any independent body or the regulator.
Individual ceiling on loans to a single borrower to be restricted to Rs.25,000/-
·        The recommendation appears restrictive, especially when the existing definition allows loans upto Rs 50,000 to be classified as microCredit with a special clause for housing loans. Thus, reducing the limit by half after a span of 7-8 years after the present limit is fixed would be viewed restrictive and could limited debt / borrowing possibilities even from a client’s perspective.

·        A limit of Rs 25,000 would not enable a poor HH to buy a two milch animal unit, which is often considered as a minimum economic unit in the dairy sector. This limit would be very restraining to poor HH to pursue many such common livelihood supportive activities.

·        This, monetary restriction would also limit progressive financing of clients by mFIs who tend to accept or take higher loans after establishing a credit history. Thus, there is a need for enhance the limit to atleast to Rs 50,000 or restore the existing limits.

Not less than 75% of the loans given by the MFI should be for income-generating purposes
·        This clause pertaining to 75 % of the loans being for IGA looks limiting, as in the start up financing by mFIs and initial stages there is every likelihood of institutions serving the consumption needs; which often is very predominant.

·        This approach could question the very basis of micro finance. The approach somehow also highlights the committees bias towards microCredit /credit (as the only / major financial service needed by client) and not micro Finance service to be provided by these institutions.   
Margin cap of 10 % for mFIs with a loan outstanding of Rs 100 cr and 12 % for smaller mFIs & an individual loan cap of 24 % p.a.
·        Large no. of factors influence interest pricing, however, the approach of margin cap is welcome instead of a interest cap.
·        However, the interest cap is to be pegged with a reference rate say viz; base rate or an average cost of funds of an mFI  - as these vary substantially for small / fledgling organizations / start up and established mFIs.

·        Studies by experts on computing APR and EIR have clearly shown that the “Devil is in the dates”. ie; to say that by manipulating a few dates and collection systems, how the EIR and APR could be manipulated, while keeping the caps at 10 % or 12 % margin.  

The NBFC-MFI will hold not less than 90% of its total assets (other than cash and bank balances and money market instruments) in the form of qualifying assets
·        The 90 % qualifying asset requirement stipulated by the Committee seems rather high. Assessments have shown that even willing and well functioning mFIs normally have loan portfolios, which on itself forms around 65-75 % of the asset base only.

·        With high and quick turnover of funds in mFIs it could perforce hasten the processes of credit dispensation, which could result in inadequate client education and client supportive activities – especially in good functioning and client supportive mFIs.

·        Its desirable that the ceilings could be prescribed on investments retained (< 20 %) to total assets only instead of ceilings on qualifying asset – as these prescriptions are more intended for creditors of mFIs like banks for their mandated lending.
Restriction on Loan tenure and collection frequency being specified
·        Often among poor clients there could be multiple loan requirements, which also include debts for very short periods like 15 days – 2 months. These requirements enable poor HH to set up small trading stalls during exhibitions and local hatts for very short durations, or meet school fees of children or small medical requirements, which are very shorter term, finance requirements. Restricting lending operations to minimum 12-18 months etc may not reflect the actual requirements of poor HH. Absence of these accommodation could revert poor HH to get back to informal sector

·        Studies on cash flow gaps / funding requirements done on poor HH using financial dairy techniques, suggest need for very short-term requirements. (Eg ref:.  The Deluge of Debt: Under-standing the Financial Needs of Poor Households by B.S Suran and D.Narayana, Centre for Development Studies: July 2009: Working paper 412- : )

Issues not mentioned in the report, but, could be considered by RBI

MFIS not allowed to mobilize savings / No space for thrift?
·        The studies by different agencies have clearly brought out the fact that in the hierarchy of financial services needs of the poor HH, the position of thrift precedes credit or other financial services. For poor taking care of the money, when they spend less than what they earn is critical. Therefore, appreciating the criticality of this service, thrift atleast among enrolled members in a regulated NBFC, needs to be clearly considered. This suggestion is being made for non-SHG clients / individuals and are also important clients of mFIs.

·        Perhaps the condition of institutional rating of the mFI and ceiling on thrift mobilized viz; as multiples of networth of the mFI could be considered. This is being suggested more as a need for fulfilling an important client need as also the national agenda of financial inclusion.

·        Another aspect why this is worthy of due consideration is because, poor often view small thrifts / savings set aside as an important substitute for insurance.
Restriction on CEO and top executive remuneration
·        Executive pay is often as a mixture of salary, bonuses, shares, call options on the company stock, etc. Executive pay of some of the larger mFIs operating in the country has risen dramatically and often exceeds the largest of banking companies in the world. While this is an important aspect of the corporate governance, however, the BOD approves it. What is critical is not the pay per se, but how it upwardly influences the transaction cost of the financial service being provided by the mFIs.

·        As a guideline it would be desirable to prescribe benchmarks for the same. Studies in USA after the introduction of Troubled Asset Relief Programme and executive programme have not exhibited any negative influence on performance / output.
Need an Institutional assessment format (Indian) which reflects the clear picture of the interest cost and non-interest levies on client 
·        The present practice is to use formats of CGAP or others with variations and to report FSS, OSS or other ratios at based on the decision of the mFI or its management.

·        There is a need for introducing a simple uniform institutional assessment framework for reporting and assessing mFIs in our country. These could be comparable with LABs or even RRBs . As it would provide a comparative assessment of the success of these institutions in terms of outreach, cost  and delivery of services and also its sustainability.

well these are some of my thoughts .....RBI could mull over, perhaps !! 

Saturday, January 1, 2011

Works at NABARD for poor HH / was Research Affiliate at CDS, Tvm / was Visiting Faculty on microFinance for MBA students NMIMS, Mumbai.