High input and capital costs and uncertainties in the global economy are the major factors constraining growth of the manufacturing sector, a survey conducted by CII-ASCON has revealed
New Delhi: Growth in India’s manufacturing sector is expected to further moderate during October-December over the same period last year on account of high input costs and uncertainties in the global economy, reports PTI.
The sector’s growth was moderated in the April-September period compared to the corresponding period of the previous year.
“High input and capital costs and uncertainties in the global economy are the major factors constraining growth of the manufacturing sector,” CII-ASCON survey said today.
Out of the 85 sectors covered in the survey for the October-December period, the percentage of segments reporting excellent growth of more than 20% is expected to decline to 7%, it said.
Further, slowdown is also expected in large number of sectors falling in the moderate category of growth between 0%-10%.
“Most of the sectors (55.2%) are expected to grow at a moderate rate during October-December,” it said, adding the number of sectors recording excellent and high growth was expected to decline to moderate growth category.
It also highlighted some of the issues faced by the industry, including rise in the cost of raw materials, high cost of credit, infrastructure bottlenecks and land acquisition issue.
“These issues need to be addressed at the earliest to help the industry overcome the ongoing decelerating growth phase,” it said.
Fresh perspectives and radical (systemic) changes are required for developing an enabling micro-finance regulatory and supervisory mechanism that can really work on the ground for the benefit of large numbers of low income people
Moneylife reported last week that charges of serious misreporting and mismanagement have again surfaced in the public domain with regard to Indian micro-finance. Specifically, the article reported that Sahayata Microfinance Pvt Ltd, which was the darling of so many investors, lenders and stakeholders had apparently gone astray - with its now suspended CEO and senior management supposedly involved in serious misreporting and mismanagement. (http://www.moneylife.in/article/award-winning-sahayata-microfinance-is-the-latest-to-go-astray/21549.html)
As several previous Moneylife articles have noted, the dominant model in Indian Micro-finance is the commercial model where the MFI is registered as an NBFC with RBI and taps commercial funding (debt and equity) through different means. This model is based on fast tracked growth and generally carries a standard loan product - delivered to clients through joint liability groups and/or agents-based on weekly repayments and having (mandatory) loan related insurance. The emphasis is on-efficiency, standardized processes, large outreach and enhanced profitability – all elements of hardcore commercialization, strongly supported by agencies such as CGAP.
While there could be some modifications to the above model to suit different contexts, the above description is true, by and large, of most NBFC MFIs. The dominant NBFC MFI model is also based on the notion that, to reach and include vast number of unreached and excluded people (including the poor), MFIs must tap commercial funding in a big way from lenders and investors – Mr. Vijay Mahajan’s (Chairman, BASIX, Chairman, MFIN and Chair, Executive Committee, CGAP) statement to this effect, when SKS was to tap the capital markets, strongly resounds in memory. To do this successfully, the model also believes that commensurate (market) returns must be provided to the commercial investors. It is important to note that much of the basic tenets of this (commercial) model have evolved from the global development of new wave micro-finance – which was spearheaded by several stakeholders including CGAP, especially since 1997 onwards. This is a description of the commercial model as I understand it. And as long as the game is played fair and square (no frauds, no multiple/ghost/over lending, no tweaking of performance results etc), I have no problems with the commercial model.
That said, let us get back to the 2010 Indian micro-finance crisis. A critical point to be noted here is that the fastest growing MFIs, who perhaps contributed to this crisis in India, are primarily NBFCs MFIs that come under the purview of the Department of Non-Bank Supervision (DNBS), RBI. These NBFC MFIs grew at a phenomenal rate, adding several million clients and dollars to the gross loan portfolio over the period April 2008 to March 2010. The following basic facts are discernible from the data (www.mixmarket.org):
Please note that the phenomenal growth spurt was led by 5 large Andhra Pradesh headquartered MFIs (SKS, Spandana, Share, Basix and Asmitha), who added 2049 million US $ and 9.59 million clients between April 2008 and March 2010 – which is very significant indeed. This is equivalent to each of these 5 large Andhra Pradesh headquartered NBFC MFIs, adding a gross loan portfolio of Rs.78.55 crores per month, month after month, quarter after quarter, year on year for the 24 months in question (Rs.1 crore = Rs.10 million and exchange rate assumed is Rs. 46 per dollar).
And as noted in box 1 below, the department of non-bank supervision RBI is supposed to supervise every NBFC that has a loan portfolio of over 100 crores closely. As noted above, each of these 5 AP headquartered MFIs were adding (on an average) almost the equivalent of 78% of that threshold value of (Rs. 100 crores portfolio) every month during the period April 2008 to March 2010.
At this juncture, it seems pertinent to look at what Dr. Rangarajan and others have had to say about the business model of the NBFC MFIs and also apply the same to this analysis.
"The business model of microfinance institutions is faulty. They must revisit the model to support the income earning ability of the borrower," Prime Minister's Economic Advisory Council Chairman Dr C. Rangarajan said at an event organized here by Skoch Consultancy. Rangarajan said multiple lending done by MFIs is inconsistent with the very repayment capacity of borrower. He said MFIs have been indulging in multiple lending and large parts of the loans are given for consumption purposes and this model of business has landed them in trouble. "Income earning capacity must be criteria for granting loans... The provision of credit for consumption must be a small part of the total loan," Rangarajan said” (http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/finance/mfis-business-model-faulty-pm-panel/articleshow/7225090.cms)
Others have tended argue for the same and I reproduce a quote from Dr. Al Fernandez’s post on the CGAP blog. As Mr. Fernandez argues,
“The State of the Sector report 2010 (N. Srinivasan) indicates that out of 60 MFIs which reported on profitability, six had ROAs over 7%; thirty five had ROAs over 2%. In contrast the public sector banks in 2009 had average ROAs of 0.6% with the best being 1.6%, while the best private bank had ROAs of 2%. The yield on portfolio confirms this picture; in the case of 23 MFIs it was above 30 % (the highest being 41.29%). The report also says that economies of scale have not led to lower interest rates or lower yields. This implies that MFIs maximized their profits and competition did not decrease rates as it was expected to. The largest MFI recorded a 116% jump in net profit at Rupees 81 crores ($18 million) in the second quarter ending September 2010 as against the corresponding period last year.” (http://microfinance.cgap.org/2011/01/06/shgs-for-the-poor-mfis-for-the-non-poor/)
The cornerstone of these arguments is essentially this:
Many MFIs engaged in excessive and multiple lending for consumption purposes and often granted loans without assessing the loan absorption capacity of the clients. Implied in this statement is the fact that many MFIs (in their desire to reach scale and show better results) pushed loans indiscriminately to low-income clients for consumption purposes without any sensitivity to their debt servicing ability and tried to grow (very fast) showing unnatural profits so as to attract capital at high valuations. This is evident from the Indian micro-finance experience and also as noted in a CGAP paper (CGAP, JP Morgan, occasional Paper: Microfinance Global Valuation Survey 2010, March 2010). Thereafter, they had to justify these high valuations by providing better returns to investors. And investors likewise, as they had paid huge premiums, wanted to recover their investment fast and hence, were perhaps pushing the MFIs to grow faster. Hence, as diagrammed in figure 1 below, there appears to have been a mutually reinforcing cycle of multiple/over/ghost lending, fast growth, high profits, very high share valuation, equity investments, faster growth, greater profits, more returns, turbo charged growth and so on.
The utilities companies should be asked to pay interest to their consumers, who have given a security deposit, whether they are in the public or private sector. Though this does not amount to any substantial benefit individually, this is required to be implemented to ensure equity and justice to the consumer
The common man in our country is reeling under the burden of double-digit inflation for the last couple of years and the steps taken by the government do not appear to be yielding any result so far. To add insult to his injury, every public utility in the country is frequently raising tariffs, putting additional burden on the consumer. This is happening especially in the power sector and telecom companies, too, are reportedly proposing to raise tariffs due to rising cost of their operations. This will be followed by increase in domestic gas prices, as the Govt. is reportedly in the process of finalising the withdrawal or restricting the subsidy element so far enjoyed by domestic gas users. The cumulative effect of all these developments is that the cost of living has been going up on all fronts, with little prospects of seeing any light at the end of the tunnel.
At present all public utility companies insist upon depositing with them a certain amount as deposit at the time of making available their services to the public. Electricity companies ask for a deposit of one month’s estimated use of power, while telecom companies insist upon depositing a fixed amount at the time of connecting basic landline and also for mobile connections obtained on post-paid basis. Water bodies, too, ask for a certain amount of deposit from the users depending upon the consumption of water. Gas supplying companies providing domestic gas take a deposit as a security towards gas cylinders, based on whether you opt for one or two cylinders. Even those companies providing piped gas do take security deposit just like electricity companies. Though these deposits are considered as refundable deposits, they remain permanent so long as you use their services, which are rarely surrendered, as they are a necessity for every household.
These public utilities are perfectly justified in asking for a deposit to protect their own monthly receivables, but what is not justified is that these deposits do not bear any interest so far and the depositing public silently bears this loss of interest for no fault of theirs. As the saying goes, “there is no such thing as a free lunch in this world” and therefore, there is no justification for these utility companies to enjoy these deposits free of interest and there is no reason for depositors to forgo any interest, however small it may be.
The following utilities should, therefore, be immediately asked to pay interest to their consumers, who have given a security deposit, whether they are in the public or private sector.
1. All electricity companies, who supply power to the consumers.
2. All telecom companies who accept deposits from the users of their services as security deposit both for landline and for mobile connections.
3. All corporate or government bodies who provide water to all the users and from whom they accept security deposits, either from individuals or from any other users.
4. All companies who supply gas to the consumers through cylinders and who have taken security deposit towards the cylinders supplied to the consumers.
5. All companies who supply piped gas in several cities and wherever security deposit has been accepted by them from the consumers.
Besides, the rate of interest payable on these deposits should be market-driven based on the long-term deposit rates offered by banks in our country. It is best to benchmark these rates to the long-term deposit rate offered by State Bank of India (SBI) as on 31st March every year and the companies accepting security deposits should automatically calculate interest in the month of April every year and pay it to the consumer as a deduction from the bill amount payable for that month. Though this does not amount to any substantial benefit individually, this is required to be implemented to ensure equity and justice to the consumer.
The regulatory bodies who regulate these utility companies are expected to take care of the interest of the consumers; hence they should direct all the companies coming under their jurisdiction to comply with this requirement of payment of interest, which will, though in a small way, compensate a large number of consumers, who belong to the lower strata of our society. As this does not require any enactment or changes in the laws of the country, and it is within the powers of the regulators, it is all the more necessary to implement this suggestion without any further delay.
Yet another problem faced by the consumers of these utility companies is in respect of payment of their bills through the electronic clearing service (ECS) offered by banks in our country. Some times due to the mistake committed by the staff of the utility companies while claiming the monthly payment like punching wrong account number, etc, or due to any other reasons, the ECS claim gets rejected. But this non-payment is not promptly informed to the consumer either by the bank or by the utility company concerned. The consumer, who does not know about non-payment till he receives his next month’s bill, will have to pay penalty for the delayed payment or face the risk of disconnection of the service, putting him into a lot of inconvenience. It should, therefore, be made mandatory for all utility companies to communicate non-payment of bills in such cases through a written communication to the consumer within reasonable time and provide sufficient time thereafter for payment.
The suggestions mentioned above may look trivial, but if and when implemented, will make life a little bit easier for the common man, who is already burdened with innumerable problems in his daily life. Will the concerned regulatory bodies act swiftly and take steps to improve the lot of our people in the larger interest of our nation?
(The author is a banking & financial consultant. He writes for MoneyLife under the pen-name ‘Gurpur’)