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Business correspondent model at near-zero cost may fail with deep negative impact

Winning bids for BC model is at such low prices that it will either fail or service levels will be pathetic. Let’s hope regulators would strictly monitor what is happening on the ground

 

Something strange is happening in the financial inclusion and business correspondent (BC) space in India. The Maharashtra BC bid was won by Vakrangee Finserv for 0.48% of the reserve price of the bid. If that surprised most people, FINO’s winning BC bid of 0.35% for Jharkhand and parts of Bihar started to make people wonder. The icing on the cake was that FINO’s bid at 0.19% for being the common Chhattisgarh BC . And before I could complete this article, the bid results for the Orissa cluster are out and it has been won at 0.11%. Wonder what the next winning BC bid would be? I certainly do not want to hazard a guess!

I am sure that the regulators are knowledgeable people and they understand what is going and what the implications for financial inclusion are. To me, as someone who has worked at the grass-roots for over two decades, I see “quality servicing” of the last mile as very critical for business correspondents appointed to promote financial inclusion. And quality servicing is indeed costly as I explain later in this article.

While the use of technology is well taken, it is often perhaps over-hyped. Just as ‘putting more money in the hands of people (through micro loans) could never remove poverty’, likewise, technology alone cannot solve the puzzle of financial inclusion (especially servicing the last mile). And as FINO’s CEO is said to have once remarked—“technology is 10%, rest are people and processes”. FINO becomes common Banking Correspondent for Jharkhand.  That being the case, I am not sure of what is the rationale behind the present (low) bidding trend?  


Let me give you an example of why servicing the last mile is costly. Take the case of the micro-insurance (MI) regulation (2005), a pioneering effort by the Insurance Regulatory and Development Authority (IRDA). Some years ago, prior to the MI legislation being enacted, insurance agents for low income policies were compensated on the basis of a hugely front loaded commission (about 30% in the 1st year and 6% or so in the 2nd and subsequent years—the exact numbers are less relevant here but the larger issue of inappropriate agent compensation is what needs to be noted). Thereafter, it was consistently explained to the IRDA that:

a)    To collect the 2nd, 3rd, and or remaining years premium, the work to be done by the agent is much higher for low income insurance than in case of normal insurance; and
b)    In fact, renewals are almost equivalent to a sale [in term service levels] for low income insurance policies as in every renewal year, low income people have to be sought out and convinced (again) to make the insurance renewal payment—as the (competing) demands for their limited money is rather high, availability of such money is quite low and priorities are very dynamically changing.

On that basis, the IRDA came up with a novel agent commission scheme (as part of its MI regulation) that recognized the (larger) effort of the agent in collecting renewals for low income insurance schemes. And as per this novel scheme, agents were compensated commensurate to their efforts in the subsequent years—20% on a yearly basis for all years instead of the 30% in 1st year and 6% in subsequent years. Thus, as per the MI regulation, IRDA went in for a consistent larger yearly commission rather than a front-loaded yearly commission for agents with regard to low income insurance policies.

In fact, when I compared regular rural low income policies (where agents get the front-loaded yearly commission) to low income insurance policies as per the MI regulation (where the agents get a consistent larger yearly commission) in a very small sample some years ago, I found that the renewal rates were by and large higher for latter. This is because the agents could be compensated on the basis of real effort rather than some notional numbers. And in the case of the former (regular rural insurance policies for low income people), it is the people who suffered and the companies who gained as agents (who were compensated poorly in subsequent years) did not do their work properly and the policies lapsed after the initial year. Likewise, a similar argument could be made here in terms of the recurring savings deposits—where by the BC who has bid low (and their agents) could cut corners and not provide appropriate service and thereby it is the customer who would be affected (either in terms of penal charges and/or getting lower interest overall). This is just an example and there are many such aspects that could wrong in the BC model because of shortcuts taken by BC agents.

That is why, just as IRDA then brought in the micro-insurance regulation which made agent commission commensurate with the level of effort across the years (from the start year to renewal years), the BC model also needs to recognize the consistent and rigorous effort required in servicing rural low income people and compensate BCs and agents accordingly. I wonder how that would be possible given the present decreasing trend towards lower and lower BC bids as noted above?

Overall, the arguments here are very simple:

a.    Servicing the last mile especially in rural areas (remote ones) is costly. Take districts like Narayanpur (with population density/km of 20), Bijapur (with population density/km of 39) or Dantewade (with population density/km of 59) in Chattisgarh. I have personally worked in many of these (and other districts) given in Table #1 below. With a low population density and the attendant (Maoist or other kinds) problems, physical servicing can indeed be a very arduous task. Therefore, the lower bid for Chhattisgarh (even if a couple of these low population density districts are excluded) as compared to Maharashtra or even Jharkhand does not make intuitive sense. This is especially true given the fact that Maharashtra will provide a much larger business base than Chhattisgarh and most certainly, it would be much easier and safer for BCs and their agents to perform their tasks in Maharashtra (on a relative basis).

Likewise, many districts in Dandakaranya (parts of Chhattisgarh, Orissa, Maharashtra and Andhra Pradesh) or Santhal Parganas (parts of Jharkhand and Bihar) are extremely difficult to service in terms of the physical terrain and the prevailing socio-economic/political situation. Apart from having low population densities (as shown in the table below), for many of these districts, the business base is also not likely to be very high. That being the case, the present (low) bidding trend for cash management seems rather peculiar—the Chhattisgarh bid was lower than Jharkhand which was lower than Maharashtra … something very odd indeed…

 

b.    A second issue is that low income rural/tribal people need a lot of quality time in terms of service provision by the BCs and /or their agents: a) to break the ice, gain peoples’ confidence and have social acceptability first; and b) then explain the various aspects related to the products and schemes and also make them use these services. Hence, any servicing by the BC and/or their agents mandatorily requires a good financial literacy component as well. This aspect of financial literacy is also a necessity now given what happened in Indian micro-finance over the last few years and is perhaps in keeping with RBI’s drive for greater financial literacy and transparency at  the grass-roots

c.    And given the above, without any doubt, BCs and their agents need to be compensated appropriately. The issue of compensation especially becomes critical with regard to agents (for example, 4,200 are to be appointed for Maharashtra by Vakrangee) . And if these agents are not compensated properly, they will either not work or they will cut corners (like further sub-contracting the BC work) and that could be a recipe for disaster. You will all surely remember how the (notorious) individual agents played an important part in the Indian micro-finance crisis in 2010, as outlined in the following Moneylife articles:

(i)    Implementation safeguards against notorious agents are an imperative for the proposed microfinance bill;
(ii)    How and why did microfinance agents become a part of the Indian microfinance business?;  
(iii)    Proposed Microfinance Bill has to look at the centre leader as a microfinance agent;
(iv)    Microfinance: Will seal of excellence and social performance management as yardsticks work?;
(v)    MFIN-NCAER study unearths agents’ role in microfinance, but does not find these middlemen in Chennai; and
(vi)    MFIN-NCAER study: Here’s the proof that microfinance agents are thriving in Tamil Nadu.

Therefore, it is imperative that BCs and their agents are compensated appropriately so that they do their work as envisaged and diligently. Any attempt to reduce agent compensation is likely to manifest itself as reduced customer engagement through subsequent sub-contracting (it could be done many times over). And let us not forget what happened in 2010 in Andhra Pradesh and elsewhere where untrained and unrelated people (including those with criminal records) entered the MFI rolls (formally/informally) and very nearly destroyed the whole fabric of rural and low income finance. Thus, as Dr KC Chakrabarty, deputy governor, Reserve Bank of India (RBI), has consistently argued, “Banks have to realise that for Business Correspondent (BC) model to succeed, the BCs, who are the first level of contact for customers, have to be compensated adequately so that they too see this as a business opportunity” - Financial Inclusion and Banks : Issues and Perspectives

d.    And in the light of the fact that BCs and/or their agents may take shortcuts to get the job done and given what happened in Indian microfinance in 2010, it is imperative that banks and BCs have a rigorous system of internal audits. Also, because of the pan-India scale and the sheer volume of money to be handled, the current BC model could indeed pose a systemic risk to the banking system and that is why such internal audits are even more critical. And that again will cost money and so, like a broken record, I am back to the same issue: Can Banks and BCs provide effective and transparent financial inclusion services, especially given the very low and decreasing bidding trend that is slowly but surely gaining ground in the present scenario?

Apparently, a senior regular commenting on the BC bidding said “What do we do? It is the companies that have chosen to bid so low.” That, however, is a lame excuse as the ramifications of the low cost bids are many and serious and the regulators cannot afford to look elsewhere as then the whole financial inclusion paradigm, as envisaged under the BC model could collapse. While others have pointed out that the bid amounts are for cash management only and BCs will be compensated separately for other activities, based on my own experience of work in over 540 districts in India, I would say that the numbers simply don’t add up. While, most certainly, the RFPs do provide for additional compensation to BCs for various tasks, I am not sure if there has been enough thought into whether these amounts are and will be sufficient: a) to provide quality service at the grass-roots; and b) for the overall model to actually work on the ground (given the above aspects). And without question, what is really lacking is transparency on how the BC model will actually work on the ground and meet all of its attendant costs in such physically demanding geographies?

To summarise, let me reemphasize that without quality servicing (which requires appropriate costing first of all) and rigorous internal audits, the BC model is doomed to fail and I hope that the powers that be look closely into the present structure of model, do a dispassionate analysis and make the necessary course corrections. Otherwise, yet another sincere effort at financial inclusion could well be lost even before the game begins…

(Ramesh Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—Indian Microfinance, The Way Forward— is the first authentic compendium on the history of microfinance in India and its possible future.)

 

User

Revenue from bus stop advertisement is more important than human life

 

The death of a passenger electrocuted in a bus stop should shake up Traffic Police, Municipal Corporation, MSRDC, MMRDA, PWD, MTSU and perhaps even the judiciary

 

3 May 2012, Chota Durgah Bus Stop, Mahim: A commuter got electrocuted little past midnight. This happened because a live wire supplying power to the advertisement hoarding at the sleek and clean stainless steel (SS) bus stop is reported to have gotten loose and touched the integral steel structure. Apparently the earth-wire may have got disconnected from the structure and when the 21 year old youth tried to sit on the SS seat, the current passed through him and he died of electrocution.
   
Why did this happen at all? In my humble opinion, it happened because of abdication of duty by the governmental agency, in this case, the Brihanmumbai Electric Supply and Transportation Undertaking (BEST) from the very first stage of putting this new SS structure. No doubt prompt action was taken by BEST to shut off power to all the bus stops unless the advertising agency which put up these thousands of bus stops free of cost to BEST obtained the certificate of safety. It has been observed that none of the bus stops are illuminating their advertisements since then.

It is interesting to note that BEST, in trying to earn revenue from advertisements, have begun to cover their red SLP (street light pole) Box with a large metal box cover and providing space for illuminated advertisement. This SLP Box actually belongs to BEST’s Electric Supply wing, which is in fact already subsidizing the loss-making transport wing. If the purpose was to make transport wing self-sustaining, as desired by Central/Maharashtra Electricity Regulatory Commission (CERC/MERC), then this surely is cross subsidy. Keeping that issue aside, the safety aspect will continue to be identical to the bus stop in terms of possibility of earthing malfunction. While the SLP Box is a necessity and has been kept to the smallest dimensions for the purpose, the advertisinng box cover is an aggression on urban landscape and additional encroachment of footpaths. These advertisement box covers have the potential to electrocute a pedestrian road user and also force him to walk on the road if the footpath it occupies is narrow.
   
The new modular design SS bus stops were put up by a private advertising agency at no cost to BEST in lieu for getting advertising rights. The area for advertisement is not only on the top front but top sides and rear side concave panel seat level to eye level and the front splash protection panels. Depending upon the viewable location of bus stop and not number of passengers observed to be waiting or number of buses halting at the bus stop, the number of modules were decided by the agency and not BEST. With the sole aim to earn money, safety aspects naturally take a back seat. Firstly even on a narrow footpath, the same design was installed even though impractical for the location, forcing pedestrians to walk on the road. The level of footpath could have been lowered to enable bus passengers to queue up in the shelter rather than on the road—it takes effort and time to get down, walk to the bus and climb up into the bus.
     
In the early days of installation of these bus stop shelters, power supply was by either battery or by DG (diesel generating) sets with no particular attention given to proper earthing or air and noise pollution. Subsequently, when electric connection was obtained, more often it was by hanging cable from adjoining lamp post, the issue of secure power connection and earthing was not addressed.

It is not that BEST were unaware of the problem, but having abdicated their responsibility of providing a proper bus stop passenger shelter, they seem to have abdicated their responsibility to inspect and approve the installations from all aspects of safety and convenience to commuters and pedestrians alike. The only convenience these shelters have provided is cleanliness and seats. Even the meter boxes are placed precariously low, with every likelihood of its corner hitting a man’s head while entering the shelter or walking along the narrow footpath space in the back.

The callousness about electrical safety can be observed at several lamp posts where the switch box covers have been left missing on the one hand and on the other hand earthing cable not fitted.
     
Bus stops have been placed on the ramp section of flyovers on the Western Express Highway for buses plying on them in order to prevent them from moving to kerb side of the road after the flyover and then move back on the lanes going over the next flyover. Approach to the bus stop for bus commuters is from the slip road adjoining flyover through steel step ladder. While the step ladder has been provided with hand railing, the narrow footpath along the ramp of the flyover, the hand railing is conspicuous by its absence. While the bus stop passenger shelter may have been BEST’s responsibility, providing hand railing along the ramp of surely rests with Maharashtra State Road Development Corporation (MSRDC) or Public Works Department (PWD).
     
The list could be endless but one final point to note here is about having vehicles halt at Stop Line. Delhi Traffic Police seems to be doing that quite effectively. This begins with road markings.

 
The Mumbai Traffic Police on the other hand seem busy putting up hoardings “Stop at Zebra Crossing, it is Only Decent” or campaigns with barricade sign “Halt at Stop Line”. Instead of enforcing this on ground level, it asks vehicles to come forward to halt beyond the ‘Stop Line” and even occupy the zebra crossing. The Municipal Corporation of Greater Mumbai appears to be in a perpetual state of poor funds to make road markings, especially the Stop Lines and Zebra Crossings! This makes road crossing not only tedious but dangerous for all groups of people perhaps short of track athletes!
 

It is time members of the various authorities —Traffic Police, Municipal Corporation, MSRDC, MMRDA, PWD, MTSU and perhaps even the judiciary—took to walking and began to understand how dangerous the whole infrastructure is to practically the whole of Mumbai’s population. It is not that other cities things are any better—the Delhi example is an exception—they too have several issues. We have got to be caring to the Life and Limb and situation on the roads that reflects the pride of our nation’s ‘democracy’. Today it is far from it.

To end with positive note, it is observed that when the engineers are sensitized about the purpose of their work, they do respond positively. The turning at Chowpatty-Babulnath junction had a dead area where vehicles did not generally go over. A suggestion was made to build the footpath at that location. However, perhaps there was no budget for this work, MCGM did the next best—it continued the kerbside marking around the curve, thus psycologically making vehicle driver to avoid the dead space altogether. It is hoped that the footpath will be built there and make life safer to pedestrian.

Similarly, the footpath width was widened at Bharatiya Vidya Bhavan, addressing pedestrian safety, parking and traffic flow. There are a few bus stops which have been very correctly been earthed and provided with secured electricity supply, but ofcourse, after the electocution, electicity supply to all bus stop shelters have been cut off.  
 
(Sudhir Badami is a civil engineer and transportation analyst. He is on Government of Maharashtra’s Steering Committee on BRTS for Mumbai and Mumbai Metropolitan Region Development Authority’s Technical Advisory Committee on BRTS for Mumbai. He is also member of Research & MIS Committee of Unified Mumbai Metropolitan Transport Authority. He was member of Bombay High Court appointed erstwhile Road Monitoring Committee (2006-07). While he has been an active campaigner against Noise for more than a decade, he is a strong believer in functioning democracy. He can be contacted on email at [email protected])

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COMMENTS

Sailesh

4 years ago

To say that Unitech is run by crooks is not even libelous. Their MD has done time in jail. Only the company PR people and their PR agency would defend it because they are paid to do so

Rahul Nair

4 years ago

Hi.The article is very hardhitting. But I just wanted to give my opinion taht I did indeed make money on my investment with Unitech. A lot of developers since 2009 have been consolidating & reducing debts through various actions & strategies.However,I must point out I personally invest in real estate.I have bought in Unitech & I've been given my possession on time in Chennai-Uniworld City.More importantly, my capital appreciation is on course as I had expected.I also have a Unitech Property - Nirvana Country I in Gurgaon in a project called The Close-South. My appreciation here infact has been far better than my expectations. The township has come up beautifully on the whole.Except there was a delay on the handover.

REPLY

kumar krishnan

In Reply to Rahul Nair 4 years ago

Your experience is true for many many people who may have bought unitech flats, but has no relevance to the article. Realty prices in India have soared over the past 20 years, but for a couple of blips. So there is nothing significant in appreciation in property prices.

Rahul Nair

In Reply to kumar krishnan 4 years ago

My experience with Unitech properties has direct relevance to the article. Unitech Properties have proved to be Sure Shot Money Gainers for me. & Real Estate as such is an appreciating asset. So even though the article is hard hitting, it iseems biased & unfairly harsh on Unitech, which is a legitimate & stable real estate company, & not one of those fly in the pan companies.

Dravid

In Reply to Rahul Nair 4 years ago

The article talks about mis-selling and not about whether Unitech is genuine or not. And looking at your comments, readers like me are wondering if this is 'official' response from the Co HQ. Also why can't Unitech itself earn so much of profits...this way it will at least repay to its lenders.

Sarla Handa

4 years ago

I also got the emailer, being a member of an investor group - but whats the fuss-its a sales pitch as I can see spoken in a language that an investor understands. I even checked their properties, and the resale rates quoted by them are absolutely right. Debashish-go & find some other fish to fry!

a v moorthi besides TIHAR

4 years ago

Why Unitech is still mailing interest warrant it can definitely use NEFT/ECS for remittance by this facility there is no question of lost in transit business. didnot Sanjay Chandra of Uninor know about this ? how did he remit to A.Rajaa and Co for 2G deals patronage.

mk

4 years ago

this is a country of opportunists, culprits, rogues & crascals at every level!

almost nobody is sane including large entities.

Krishnaraj Rao

4 years ago

Terrific expose!

Vaibhav G Dhoka

4 years ago

Over a year Unitech Ltd is infinancial contsraint and it delayed repayment of Fixed deposit.It stopped accepting FD last year.Since february onwards.it repayed principal amount and delayed intrest.It conviently didnot repay intrest on FD cumulative.For everyones surprise company informed it FD holders that they have posted intrest warrant month before maturity by speed post.To investors surprise post doesn't deliver to addressee nor returns it to sender.(AS they are never sent)

Interest dispatch details is as follows:

FD NO.
NAME
CITY
STATE
DISPATCH DATE
SPEED POST

1014122
KANTILAL BHAGWANDAS KARNAWAT
PUNE
MAHARASHTRA
07.01.2012
ED581405801IN

1014123
CHANCHALA KANTILAL KARNAWAT
PUNE
MAHARASHTRA
07.01.2012
ED581405801IN




Above sent document has not been undelivered so far hence please inform them to check their account first and if they doesn’t find any details they can send us request to issue duplicate cheques. We can issue duplicate cheque on the reference of his/ her letter if cheques are still un paid.



Interest dispatch details is as follows:

FD NO.
NAME
CITY
STATE
DISPATCH DATE
SPEED POST

1014122
KANTILAL BHAGWANDAS KARNAWAT
PUNE
MAHARASHTRA
07.01.2012
ED581405801IN

1014123
CHANCHALA KANTILAL KARNAWAT
PUNE
MAHARASHTRA
07.01.2012
ED581405801IN




Above sent document has not been undelivered so far hence please inform them to check their account first and if they doesn’t find any details they can send us request to issue duplicate cheques. We can issue duplicate cheque on the reference of his/ her letter if cheques are still un paid.



Imagine your safety.

REPLY

Vikas Gupta

In Reply to Vaibhav G Dhoka 4 years ago

I totally agree with Mr Vaibhav that they were continously delaying the Maturity as well as Interest payment last year up to an extent of 45 days that too after Continous Followups at Different Levels, Their toll free no. was always engaged, FD Marketting Executives were sacked, Their only Lady Executive Ms. Sunaina Saxena at Gugaon Head Office never pick up her Office Telephone or Mobile & replied of the emails sent to her. But the worst manuplations Unitech has done that they are putting the actual date of maturity on the Maturity Cheque while despatching after 45 days.

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