The recent series of suicides by committed by the poor borrowers from Microfinance Institution (MFI) in Andhra Pradesh, the state where it all began in India, brings the fundamental question of whether the MFIs are really a boon to the poor that are underserviced by the banking system or merely vultures that are replacing the moneylenders that were already charging usurious interest rates.
Let us begin by looking at the cost structure of the industry. There are three main cost components: cost of capital (11-12% for the top ones, 1-2% more for others), loan loss provisions (2%) and transaction costs (SKS reported 12.66% for fiscal 2009 in its prospectus). The transaction costs are high because of the mode of collection of repayments which is usually done on a weekly basis and the personnel costs. The sum total of these works out to be roughly around 26-30%.
In the wake of the spate of suicides, there is a call for the interest rates to be capped. But, the MFIs defend by saying that the interest rates they charge are probably what the credit card or a personal loan from a bank would cost, may be even a little lesser than them. (Average interest rate charged on credit cards in India-hold your breath, is a whopping 34%). They argue that though the proposed cap of 24% offers client protection, the needy might find excluded from this institutional credit system altogether! The logic is that the start-up MFIs and other smaller ones in remote areas will make losses for many years before breaking even. This also would mean that MFIs would avoid remote areas where process of delivering loans and collecting repayments is people intensive and quite expensive. Also, small ticket loans might not be issued because of the huge transaction costs involved. Hence, needy people cannot be brought into the ambit of Microfinance. Thus, it appears as if there is a trade-off between the availability of institutional finance and the reduction in interest rates.
Further, the argument is that as MFIs establish their business model in each market and start competing for customers, capital, employees and banking relationships, the economies of scale kick in and as they adopt new technologies, they would innovate in products and means of delivery/repayment to reduce the transaction costs and hence, the interest rates. Another thing that is used to oppose interest rate cap is the Raghuram Rajan Committee on financial sector reforms which says that liberalizing interest rates would allow the formal sector to lend to the poor and not the interest rate ceilings.
The proponents of a need for regulatory system for MFIs including a cap on the interest rate spread argue that the MFIs are making hyper profits at the expense of the poor robbing them of the meager surplus. Also, they point out various irregularities in the current MFI system, which include usurious interest rates, lack of transparency, cheating and using coercive mechanisms to recover loans like moneylenders.
They allege MFIs of indulging in multiple lending without due diligence exercise on the capacity to repay, purpose for the loan and its end use which is in direct violation of prudential norms. This raises the possibility of large scale defaults leading to a large chunk of Non Performing Assets (NPAs) which could have cascading effects on the balance sheets of the banks. They are also worried about the lack of transparency on effective interest rates and explain that because of weekly recoveries, poor unable to understand the usurious rates and that they are being taken for a ride by the MFIs.
The high transaction costs could also be because of the exorbitant sums of compensation the CEOs pay themselves in the large MFIs as pointed in the literature (Sriram, 2010). There is a total lack of transparency in this regard.
In the case of AP, critics point out that the state has had a community based SHGs existing more than 10 million women organized and federated at the village, mandal (an equivalent of Taluka) and the district levels. Further, Society for elimination of rural poverty (SERP) has achieved financial inclusion by linking SHGs with the banks. It holds more than 20,000 crores of outstanding loans on its books. MFIs are merely piggybacking on this system by showing them as Joint liability groups (JLG) formed by them. They are resorting to inducing SHG members to join the JLG by wooing the group leaders through freebies. Unlike SHGs MFIs getting hyper profits In case of non-payment or default, coercion and unethical means of recovery ranging from confiscating household articles using goondas, to forcing defaulters to take further loans for repayment and so on, which leads to distress and an increasing number of suicides.
They argue that currently there is a regulatory vacuum and the RBI needs to step in with a framework. The AP government itself is in the process of issuing an ordinance to regulate the activities of the MFIs.
The regulators must focus on improving MFIs’ lending practices, make them more transparent, ensure the clients understand the terms of loans and make sure that measures are in place to reduce multiple lending to segments like agricultural labourers for personal purposes rather than merely putting a cap on the interest rate spread.
In all, it is pretty clear that all is not well with the way MFIs are conducting themselves in the guise of NBFCs. It is definitely not working the way one leading MFI put its purpose as- Our purpose is to eradicate poverty. We do that by providing financial services to the poor and by using our channel to provide goods and services that the poor need. However, one positive to emerge out of this discussion is that these excesses by MFIs are being debated in the public domain is because of them being in organized space. The faceless moneylender who might’ve caused much more grief to the poor was never in such a spotlight.
Indian Hotels Company does a Tata Motors
The Indian Hotels Company recently announced the launch of Vivanta by Taj, hotels in the upper upscale segment.
Taj has thus positioned itself in the hospitality space similar to what Tata Motors has done in the automotive space. Taj is positioned in the luxury space, Vivanta by Taj in the upper upscale segment, Gateway in upscale and Ginger in the economy segment. Tata Motors, on the other hand, has positioned The Nano at the entry level, Indigo at the upscale segment, Safari and Jaguar or Land Rover at the upper upscale and luxury segments.
The reason for this segmentation is not to dilute the Taj brand by operating every kind of hotel under the same brand. Also, it is an effort towards retaining their market share in the face of many new hotel brands entering India.
Homegrown mobile phone companies sign big stars
While we may not realize, homegrown mobile phone companies have captured more than 20 percent of the market share. And they are definitely hungry for more!
Companies like Zen, Micromax, Spice etc. are displaying their ambitions by signing big stars to promote their products, especially in the tier-II and tier-III towns of India. Micromax has Akshay Kumar as its brand ambassador while Spice Mobile has signed on Sonam Kapoor.
The latest to join the bandwagon is Zen Mobile which has signed on the biggest superstar Amitabh Bacchan as its brand ambassador. It is to be seen whether these companies will be successful in penetrating the urban markets as well.
Fortis to buy key subsidiaries of Quality Healthcare Asia
Fortis Healthcare will buy key subsidiaries of quality Healthcare Asia (QHA) for about Rs. 882 crore. The firms to be acquired by Fortis Healthcare include Quality Healthcare Medical Services, Quality Healthcare Services, Quality HealthCare, Quality HealthCare Medical Holdings, and Portex.
QHA is the largest private healthcare provider in Hong Kong and this acquisition would provide Fortis with a footprint in Hong Kong.
Fortis has been keen to have a presence in South-East Asia for some time now as was evident when it tried to acquire the Singapore-based hospital chain Parkway Holdings.
Microsoft launches smartphones
Smartphones are touted to be the next big thing in tomorrow's world. Microsoft clearly does not want to let go of this opportunity considering there are firms which have already this market.
The smartphone by Microsoft is supposed to look like the iPhone but with a more interactive interface and superior functionalities. It’s also got the Xbox which should appeal to the younger generation.
This is probably Microsoft's last and only attempt at gaining a hold in the smartphone industry since many players have launched their smartphones before Microsoft did.
Africa – the first few thoughts that used to come to mind were apartheid, poverty, dictatorships, savannah grasslands and of course, lions. This perception has seen a polar shift in recent times. With an increase of 4.9% in real GDP from 2000 to 2008, Africa has experienced immense economic progress. Though still the poorest continent, it is perceived as a promising land with opportunities galore.
Why Africa?
Africa has abundant and varied natural resources ranging from diamonds to tropical fruits, gold to black gold, and other minerals and ores (like iron, cobalt, uranium, copper, bauxite). A majority of Africa’s resources are untapped even today. Given the rising prices of commodities one would believe Africa’s natural resources to be the only reason behind its rapid economic growth. However, natural resources directly account for only 24% of the GDP growth from 2000 to 2008. Many other factors have fuelled growth in Africa apart from its geological blessings.
Governance has improved drastically in Africa over the last decade. Macro and micro economic reforms along with a move to end armed conflicts have helped businesses grow. Several countries like Angola and Mozambique ended hostilities recently, creating political stability in the continent. Furthermore, Africa was able to reduce its inflation from 22% (1990s) to 8% (post 2000). Governments have shrunk fiscal deficits, decreased corporate taxes, removed trade barriers and strengthened regulatory systems. Privatisation has also played a role in improving the macro-economic environment.
Social and demographic trends in Africa are another reason for the continent’s growth. On one hand, the middle-class African consumer has emerged as a major growth driver. On the other, rapid urbanization which has led to an urban population of 40% is also a big factor. Incomes have risen steadily, 85m households in Africa have an annual income above $5000 (believed to be the point where a family starts discretionary spending). Such households are expected to increase by 50% in the next 10 years. Africa’s labour force is also expanding at the highest pace in the world. This large workforce could become a significant engine for consumption in future.
Attracted by the high rates of return, investors have flocked Africa in the recent years, increasing total capital inflows from $15 billion in 2000 to $87 billion in 2008. Companies investing in Africa not only provide capital but also bring technological and managerial know-how. Although this might harm regional players in the short term, it bodes well for long-term growth.
Booming Sectors
Global demand is likely to remain high for oil, coal and gas which account for 85% of Africa’s current resource production. With growth in African economies, the continent will have a flourishing market within itself and might not even need to rely on importers outside Africa. Smaller mining companies (Katanga Mining Company) or large companies from developing countries (Vedanta from India) seem most prepared to enter unexplored and unstable African countries. Such companies have more experience in working in developing countries and understand the risks present in setting up business in Africa.
With 60% of the world’s uncultivated arable land and low crop yields, Africa is waiting for a “Green revolution”. The continent’s agricultural output could increase from $280 billion a year today to $500 billion by 2020 and as much as $880 billion by 2030 according to a report by McKinsey Global Institute. This sector promises enormous potential to any player in the industry, be it a fertiliser/pesticides manufacturer, seeds supplier, machinery manufacturer or food processor. Although the know-how for a transformation in the agricultural sector is easily available, bringing about a change is easier said than done. The entire agricultural value chain has barriers that cannot be overcome by a single player. A comprehensive policy change with regards to supply, technology, distribution, availability of finance, better tax and land laws is the way to go forward. African governments have increased investments in agriculture and are open to involving the private sector, making this one of the most lucrative and easy to enter industries in Africa.
Consumer sectors in Africa are growing two to three times as fast as those in the countries belonging to the Organization for Economic Co-operation and Development (OECD). Spending patterns tend to change as discretionary household spending increases. Hence, consumer facing industries like retail banking, telecom, education, health-care and other consumer goods and services are expected to experience higher growth. One of the major challenges faced by such industries is the lack of infrastructure. So, companies entering Africa need to come up with innovative strategies for sales and merchandizing. Also, just like in India, companies cannot afford to concentrate only on the high-income segment of customers.
Africa has the distinction of being the first continent in the world where cellular telephony outnumbered the fixed line network. In recent years, Africa has witnessed massive reforms and development in the ICT (Information and Communication Technologies) sector. Mobile penetration is 42% while internet penetration stands at 8%. It comes as no surprise that Bharti would look attentively towards South Africa and make an all-out attempt to participate in the budding market.
A comparison of Africa with BRIC countries in terms of infrastructure reveals that the former lags far behind. The BRIC’s power consumption is twice that of Africa’s and road density is five times that of Africa. According to World Bank estimates, Africa needs an investment of $118 billion a year to cover its backlog. This need for infrastructure has implications for African governments as well as private players all over the world. Currently, 65% of infrastructure funding comes from the continent’s governments. In order to increase growth, governments would have to encourage the entry of private players in this sector. Although private investment has been growing at 13% since 2000, minimal support from the government and prevalence of unhealthy trade practices have discouraged private companies from entering the market.
Should I ...
Companies which wish to enter Africa should plan to build their consumer base in a range of African countries. Since nations vary widely in terms of stability, profitability and risk characteristics this strategy will help in hedging a company’s risks. The company could benefit from good infrastructure in a relatively developed country like South Africa and provide services across the continent, cashing in on the high growth in undeveloped countries.
Companies that engage in socio-economic development in Africa seem to perform better. Investing in communities by building plants, creating job opportunities or encouraging entrepreneurs help a company in establishing a stronghold by building a good rapport with consumers and governments.
.. or should I not?
Most companies take the rosy pictures of growth and potential opportunities with a pinch of salt. African countries differ greatly in their individual circumstances but the problems plaguing them are very basic and similar. Poverty, high mortality rates, unstable governments leading to frequent breaches in peace, highly unstable economies are few of the plethora of problems faced. Regulatory challenges also form major barriers to entry for companies. Most government processes are inefficient and involve extensive paperwork. Also, rules and processes are unclear and implemented badly, leading to corruption.
A few countries like Mozambique have started marketing themselves proactively. The president of Mozambique was in India recently, promoting his country as an economically and politically stable nation in order to encourage investments. International institutions have played an important role in bringing about peace and reducing mortality in the continent but most countries still have a long way to go.
References: Lions on the move: The progress and potential of African economies – McKinsey Global Insitute
M&M enters bike market
The competitive and high-volume bike industry recently saw another new entrant in the form of the conglomerate Mahindra & Mahindra. Mahindra & Mahindra has vehicles in the MUV, LCV, tractor and the two-wheeler car segments. The market currently is dominated primarily by Hero Honda and Bajaj Auto. They have been market leaders for some time now and it will be difficult to penetrate the motorcycle market.
However, Mahindra & Mahindra is relying on its branding and distribution networks to make it big in the bike segment. They intend to appeal to the cost-sensitive customers by launching the 110cc Stallio and to the more affluent customers by launching the 300cc Mojo.
Marlboro enters regular cigarette market
Marlboro, which entered the Indian markets with the king-size cigarette, has finally decided to enter the regular cigarette market. The regular cigarette market has high volumes and the company, Godfrey Philips, wants to get pie of this share. It will soon launch a campaign regarding this new foray.
The market leader in this segment is ITC. The Marlboro Gold Advance Impact, as the new brand launched by Marlboro will be known, will be priced at rs. 3.50 per stick. In response, ITC is launching a new product in the regular market segment called the Players Gold Leaf which will cost Rs. per stick. This reaction clearly suggests that it recognizes the dangers posed by this move by Marlboro.
Back to its roots
We observe that most commodity companies desire to move up the value chain and build itself a brand name. In this context, the decision of Tata Coffee to transfer its brands to Tata Global Beverages and focus instead on excelling in the coffee commodity business comes as a surprise.
This move has been undertaken by the management of Tata Coffee to focus on B2B business by consolidating their commodity business ranging from plantation to packaging. This is in stark contrast to what most coffee-making companies are doing. They are looking at taking advantage of the fact that a lot of unbranded coffee is sold to consumers.
Tata Coffee is expanding its coffee plantations not only in India but also in African countries. Along with this, Tata Coffee will need to strengthen its distribution network and enter into agreements with coffee brands and retailers.
Reliance Retail banks on toys
After Hamly's, Reliance Retail is now poised to enter into a joint venture with the US-based toy retailer Toys "R" Us. Toys "R" Us has over a 1000 stores across the world and owns brands such as Babies "R" Us and KB Toys. Hamly's and Toys "R" Us, however, operate in different operate in different price segments, with Hamly's catering to the upper class segments while Toys "R" Us caters to the middle and upper-middle class segments.
Reliance Retail wants to be in a position to take advantage of increasing consumer demand and clearly believes that there is huge potential in the Rs. 6,000 crore Indian toy market where over 60% of the market still belongs to the unorganized players.
Cash guzzling political campaigns are the talk of the town whenever the election season arrives. With the world zooming into the 21st century, these campaigns have evolved into a serious business of complex strategic planning and mass marketing with a single aim of getting the candidate into power. The advent of technology and a high degree of professionalism into this field has led to a ripened business of niche consulting catering to politicians and political parties.
Consultants and political advisors have been around forever, but the modern political consultants differ from their traditional counterparts in two major aspects:
Professional political consultants undertake projects under three major aspects of political campaigning.
1. Generating financial resources
The Obama-McCain presidential race in 2008 alone cost a staggering $2.4 billion. This showcases the need for massive funding and thus the expertise that is required to raise the money. This has been a major area where political parties turn to experienced professional political consultants.
2. Designing strategies
Voter base profiling, ground research and hours of analysis go into collecting data to build a strong foundation for a successful political campaign. Consultants specialize in these activities and can be the difference between success and failure.
3. Promotion and advertising
Developing promotional and advertising programmes has been the most dominant work for the political consulting firms. This area of work has evolved hugely with technology, web based campaigning and a constant need for breakthrough promotion strategies.
Political Consulting in India
The developed form of political consulting as described above is an evident characteristic of political campaigns in the United States but it is yet to find its feet in young democracies such as India. The political scenario in India is hugely different and more volatile than those in countries like the United States. As a result, dependence on new age professional consulting firms is limited to advertising, promotional activities and analytics. However, the Indian political picture is changing rapidly and professionalism seems to be the way to go. With young leaders bursting onto the scene and a spark of development politics, there is huge scope for such consulting expertise in India. Although it would still take some time before we see all this in mainstream action, budding firms (eg. Leadtech) are slowly gaining acceptance in India.
