Money & Banking
Trade credit and receivables exchange for MSMEs

Payments and settlements between PSUs and government departments that constitute a large market for the micro and small enterprises-MSEs have been very inefficient and these have been responsible for the creation of the NPAs in MSMEs

Micro, Small and Medium Enterprises (MSME) occupy an important space in the Indian economy both from the points of growth and employment. Still they suffer from serious disabilities due to their excessive dependence on debt markets. The window of opportunity that opened through the SME Exchanges has muted responses thus far. One of the key factors in the working capital cycle – credit sales suffer from payments beyond the due dates putting them in the non-performing asset (NPA) bracket – most often not on account but in spite of them. It is highly commendable that the Reserve Bank of India (RBI) has recently put out a document on the subject for comments from the public, as a sequel to the recommendations of the Committee on Financial Sector Reforms (2011-Raghuram Rajan). The issues raised are highly relevant and need resolution sooner than later. This brief only addresses the concerns raised in the document.

Having said that let me mention that in order to bind the corporates and the public sector units (PSUs) over their commitments to the MSMEs, the Companies Act 2000 has been amended to disclose all debts over Rs2 lakh in their half-yearly balance sheets. Unfortunately, neither the auditors, nor the credit rating agencies took a serious cognizance of it. Then the Canbank Factors Ltd and SBI Global Factors Ltd, were set up (1991) that had very disappointing response. Therefore, the proposal to set up a Trade Credit Exchange (TCE) where the buyers and sellers of the Bills accepted by the Financial Institutions meet to sell or buy the Bills of Exchange negotiated by the later to provide liquidity for the instrument during the tenor of the bill.

The MSME Development Act 2006 provided for arbitration and settlement processes with the State Commissioner of Industries as the Arbitrator and these have also not been able to resolve the issues either timely or to the mutual satisfaction. The main reason is that the MSMEs particularly the MSEs are in captive markets where the government departments and the PSUs even refused to accept bills that had a discount offer of 1% for prompt payment for fear of accountability and adverse comments from the Comptroller and Auditor General (CAG) eventually.

Several PSUs other than the eleven Ratnas depend heavily on budgetary grants and acceptance of memorandum of understandings (MoUs) by their related departments for honouring their purchase commitments. The state PSUs are worse still. The PSUs like the Hindustan Copper Ltd (HCL), accept goods but put payments on hold until they receive payments for their supplies. The tenor of the bills of MSMEs invariably is 60 days following the categorisation of MSME – NPAs on the threshold lines of 90 days. Therefore the question that needs to be addressed is, would the government departments and the PSUs be prepared to become the part of the TCE and conform to the trade discipline? The entire initiative now proposed would depend upon the positive response to this question.

India Inc has been having public debate on these issues and they are very likely to fall in line.

Micro and small enterprises function mostly in captive domestic unlike the medium enterprises that function both in diverse domestic and global markets. Contractual obligations therefore are more one sided and oppressive in favour of the buyer. Therefore, protection becomes imminent for the MSEs more than for the medium enterprises.

Payments and settlements between the public sector undertakings and government departments that constitute a large market for the micro and small enterprises have been very inefficient and these have been responsible for the creation of the NPAs in MSMEs. Factors did not take off. The vicious cycle of payments can be broken with only out-of-the-box solution. What the factors do basically is to create secondary market for the bills accepted by the financial institutions against goods supplied by the enterprises as part of the working capital cycle.

Additional Features to make the Secondary Markets Succeed

Government of India (GoI) can create a special fund and keep it with the two major factors –CANBANK and SBI GLOBAL Factors for the exclusive retailing to the MSMEs. This Fund should be taken recourse to by the Factors in upfront purchase of the outstanding bills beyond the agreed tenor of 60 days between the vendor and vendee when-after they can be taken to the mainstream of the factors. This would enable the free wheel of working capital to move in favour of the MSMEs.

MSME Development Act 2006 needs to be amended to make provision for the creation of such a Fund. Factors Act also needs to be amended to provide for ‘with recourse’ wheeling.

MSEs are more worried about the timely availability than cost of finance. They are not therefore so much weary about the going interest rate for working capital at 15% per annum. Even when inverse factoring takes place, if the fee plus the discounting charges of receivable factoring is retained at this rate, it would be good. But given the fact the interest and charges are outside the domain of the regulator, it depends upon how the regulator is going to enforce cost discipline to ensure that the new initiative would have many takers.

Rating institutions should be factoring the behaviour of corporates towards the MSMEs in their rating criteria as important point when there can be a modicum of compliance of the new TCE regime.

Although National Small Industries Corp Ltd (NSIC) through its vendor registration window for the SMEs has data base, the poor monitoring of payments has distanced many SMEs away. The New Exchange could have a fresh registration mandated for the Bill Trade Platform.

Pricing model options are in order although the better option would be the first one where the MSME bears the discount when the MSME seller secures immediate realisation of its bills that would allow working capital cycle undisturbed.

The secondary market should be order-based instead of auction based as the absence of bidders could spoil the broth. RBI suggested the auction-based trading.

(Dr Yerram Raju Behara is a former senior executive of SBI and former Dean of Studies at Administrative Staff College of India (ASCI). He is presently visiting Professor at Institute of Small Enterprise Development, Kochi and Advisor, KESDEE Inc, the E-Learning Centre at San Diego. The views expressed in the article are his personal.)


Leading Nowhere: The industry within the MLM

Several Herbalifers took their lead generation businesses with them to other MLMs, including to Vemma, setting up new or revamped sites that critics say can put consumers at financial risk

When Pershing Square hedge fund manager Bill Ackman renewed his push on federal regulators earlier this year to investigate Herbalife — a multilevel marketing (MLM) company that Ackman says is a pyramid scheme — he zeroed in on “lead generation” businesses linked to the company that his website called “fundamentally corrupt.”

Ackman noted that several of Herbalife’s key players, who had reached high levels in the organization, left when the supplement company — which was coming under increased scrutiny by consumer advocates and congressional officials — decided to distance itself from this type of business. As a result, several Herbalifers took their lead generation businesses with them to other MLMs, including to Vemma, setting up new or revamped sites that critics say can put consumers at financial risk.

What is lead generation?

Simply put, in the business community lead generation is a way companies solicit inquiries from customers for the purpose of future sales. But in the MLM industry, lead generation companies can act as revenue generators for upper-level members (called distributors, affiliates and sometimes brand partners) in several ways. Owners of the lead generation companies set up websites offering vague business opportunities to attract potential new recruits. The companies then may sell the names and contact information of these potential recruits to current MLM distributors. The current MLM distributors want those names because they are looking to increase their own revenues by increasing their sales teams, also known as downlines, from whom they earn compensation.

Lead generation sites, which are often advertised on television, the Internet, and in radio ads, may also sell an assortment of business tools, such as “decision packets” that the website promises will help potential recruits decide whether to join the vague business opportunity. If a consumer does end up joining and becoming a distributor for the MLM, the lead generation site may also sell training videos and website platforms to help new distributors grow their own downlines so their compensation will increase. All of this benefits not only the owners of the lead generation sites but the MLMs that are getting the new distributors. It’s an industry within the MLM industry that critics say may drain the pockets of consumers looking to get wealthy, while lining the pockets of the owners of the lead generation sites.

MLM expert Bill Keep, who is dean of the business school of the College of New Jersey and who has investigated Herbalife, said lead generation sites can be troublesome.

“Some top MLM distributors have been accused of using deceptive practices to gather names and contact information of ‘prospects’ that they then sell to newly recruited distributors at considerable profit,’’ he said. “The selling of such unproven ‘leads’ and other business support services can increase the cost of trying to succeed with little documented payoff.”

Herbalife backs away from lead generation

While Herbalife allowed — and Ackman says benefited greatly from — its high-level members’ lead generation efforts, in 2012 it backed away from these businesses. The company, under increased scrutiny, issued an advisory saying it would not allow distributors who used “unregistered business methods” (aka lead generation businesses) to build their teams to advance up the compensation ladder. Herbalife explained its rational for prohibiting such tactics as follows:

It could be misconstrued as supporting and rewarding Distributors with recognition when the methods used to achieve the qualification may involve misleading advertising or other abuses and therefore put the Distributor and Herbalife at risk.

As a result of the new edict, many key players left Herbalife, including Anthony Powell who had been a distributor for the company for 22 years and reached its President’s Team level.

Herbalife spokeswoman Barb Henderson said about Powell’s departure:

Anthony Powell’s stated focus is on creating ‘explosive growth’ fuelled by lead purchases. As he has also stated, this is a ‘difference in philosophy’ not consistent with Herbalife’s focus on building business through daily consumption of our nutrition products.

Vemma welcomes former Herbalifers

Despite Powell’s focus on lead generation, Vemma CEO Benson K Boreyko welcomed Powell and his whole core team with open arms. Powell shortly advanced to the “Royal Ambassador” level at Vemma, which means, according to 2013 Vemma’s income disclosure statement, Powell is earning on average close to $1 million in bonuses.

Powell now runs lead generation sites that not only benefit him but Vemma — through Global Pro Systems (GPS). Global Pro Systems is copyrighted to CRM Logix for which Powell lists himself as CEO on his LinkedIn page. One of his sites, 6FigureFrenzy, promises that for $29.95 a month and a $10 set-up fee, you’ll get “cool things” that will help you “conquer the world.” These cool things include email leads, online training, 24-7 coaching, and mobile apps.

It’s not until you look for the fine print that it discloses that the opportunity is to earn income with Vemma and that will also require purchases.

So, if you chose to participate, Vemma makes money and Powell makes money. Ca-ching! You may make money but are highly unlikely to make anywhere near six frenzied figures. Look closely at Vemma’s income disclosure statement. About 78% of “active affiliates” on average earned less than $1,600 in 2013 – an income that is, one should note, only four figures. And only 0.11% (or about 115 distributors) earned six figures in 2013.

Consumers complain

Consumers who complained to the FTC about Global Pro Systems said the company uses high-pressure tactics to push recruits to purchase additional products, repeatedly charged their credit cards for monthly purchases they did not want, charged for training material that was too vague and unhelpful and that the company would not refund their money when they tried to return the materials.

Said one consumer:

The product was supposed to be FREE! I was misled on information regarding work at home. The man on the site raves about scams and tells you he will give you FREE information and won’t ask for a penny like other websites, only to ask you to pay 9.95 for an express starter package and then I find out that my card will be billed 39.95 within 14 days. So the information is not free nor does he explain what kind of work you will be doing.

Said another:

Global Pro Vemma Nutrition advertised on the radio for a program to work at home. (T)hey advertised you could get started for $40 (but) first of all it turned out to be $50, then (when) you have your phone interview they say it will be $300 to start your training (and then) you have to pay for advertising. (T)hey also say that it is possible to make six figures within a year or two (but) after you sign up they send you a disclaimer which states only 25 percent of the company actually make that …

Powell’s team

When Powell came to Vemma he brought his core team with him and they are featured in testimonials on several other lead generation sites that funnel recruits to Vemma.

Lissa and Mark Munson were pictured endorsing, which had an “F” rating from the BBB (and now is no longer active on the Internet). Lissa, who tells Vemma readers “you need almost blind faith in your leaders,” is a busy woman. Moving on from BusinessSuccessPack, she is also featured on and In fact, Munson, Kairrie McClain and John Beall – all part of Powell’s team –are pictured on, which also funnels recruits to Vemma. McClain, Munson and Beall are also featured on described in the fine print also as an online method of becoming a Vemma brand partner. These sites are run by Kaption Media, or as it describes itself, “kapture prospects.” Capture prospects indeed.

Other Vemma high level distributors with sites

Another distributor of Vemma, Matt Morrow, who also has reached the Royal Ambassador level, runs a lead generation business as well called, which promises to lead Vemma distributors to new recruits “in many cases without you ever having to talk to the prospect.” Costs range from $200 for 500 leads to $2,000 for 10,000 leads.

The site is careful to say in a disclaimer that the program is not affiliated or offered by Vemma and Vemma has no liability in respect to it. But its webpage also notes in large letters: “The simplest and most cost effective way to build your Vemma business.”

Says Morrow on his site:

Our business is simple; make a friend, then make a sale. We offer up to 10,000 potential new “friends” for you to build with who all expressed an interest in a home business for a FRACTION of the cost of competitors.

When asked Boreyko why Vemma was embracing distributors who are running lead generation sites, Boreyko responded via an email from Vemma’s public relations firm. The email said:

We have a compliance department that monitors all third-party lead generation programs. While there are a handful of affiliates that operate third party companies that sell lead services, we monitor all lead generation programs, and take rapid action in the rare cases where we find mistakes are made.

Vemma’s compliance department may want to work extra hard. Earlier this month, the FTC signalled that it is taking a closer look at lead generation in general. Speaking at a consumer conference in Washington, D.C., FTC Bureau of Consumer Protection Director Jessica Rich referred to lead generators as “the artery of the fraud.”

More information about Vemma and MLMs can be found here.

You may also want to read…

Herbalife under FTC lens, finally!

Herbalife is a pyramid scheme worth zero dollars: Bill Ackman
How Herbalife sucks millions into its pyramid scheme
“We're broke, ill and splitting up”: Herbalife distributors tell their sad stories
American financial watchdog launches investigation into Herbalife
Herbalife lures Paralympics medallist HN Girisha as brand ambassador



US Medicaid programs drowning in backlog

With open enrolment over for private health insurance claims, states are struggling to process hundreds of thousands of Medicaid applications

Last week, federal health officials celebrated two milestones related to the Affordable Care Act. The first, which got considerable attention, was that more than 7 million people selected private health plans in state and federal health insurance exchanges. The second, which got less attention, was that some 3 million additional enrollees had signed up for Medicaid and the Children's Health Insurance Program (public health insurance programs for the poor), many as a result of Medicaid's expansion.

But there are growing signs that Obamacare's Medicaid expansion is a victim of its own success, unable to keep up with demand. While about half the states have refused to expand their Medicaid programs' eligibility, among those that have, some can't process applications fast enough.

Media reports from New Jersey, Illinois and California (states that have expanded their Medicaid programs) show that hundreds of thousands of consumers who may qualify for new Medicaid coverage aren't getting it.

So what's happening?

In Illinois, the Chicago Tribune reported last month that there's a backlog of more than 200,000 applications waiting to be processed.

Illinois officials initially expected 200,000 people to sign up for Medicaid under the expansion in 2014. But through last week, more than double that number have applied. And amid a marketing blitz, officials expect a surge of additional applications by the end of the year.

Unlike new commercial insurance products, which consumers can purchase through March 31, there's no deadline to sign up for Medicaid. By the end of the year, state officials expect about 350,000 new users to be enrolled in the program.

The growing backlog is causing concern among health care providers worried about getting paid, and confusion, frustration and anger among consumers, whose coverage was supposed to begin in January.

Much the same thing is happening in New Jersey, the Star-Ledger reported last week.

By all accounts, enrollment in the expanded Medicaid program has gone well in New Jersey. The numbers are robust as the program's expansion under the Affordable Care Act allows single residents and childless couples to get coverage provided their income is low enough. But getting an actual ID card that allows someone to see a doctor? The flood of applicants appears to have resulted in a systemwide backlog, according to applicants and field workers.

"I've heard getting an actual Medicaid card is nearly impossible. It's like getting Willy Wonka's Golden Ticket," said Rena Jordan, director of external affairs for Planned Parenthood of Metropolitan Jersey, which has been helping patients enroll.

"A lot of strange things have been happening, that's the easiest way to say it," said Virginia Nelson, administrative supervisor of the Medicaid Department for Middlesex County.

The flood of phone calls to her office about older cases has taken time away from processing the newest cases, Nelson said.

Federal officials conceded some of the blame for the delay can be put squarely at the feet of the federal website, That website transferred data about applicants whose income looked like they might qualify for Medicaid to the state system, but in a format the state system couldn't use.

And in California, the backlog now numbers 800,000 for Medi-Cal, the state's Medicaid program, the Los Angeles Times reported this week.

One patient wrote The Times to say she has a worrisome growth behind an ovary. She submitted an application in October. County health clinics informed her she won't be able to keep her appointments for blood tests and ultrasound scans until her Medi-Cal coverage is confirmed, she said. Or she can pay full price for the services.

As of Thursday, she was still waiting.

"A lot of good, smart people with good intentions in the state and county are working really hard to fix these problems," said Katie Murphy, managing attorney at Neighborhood Legal Services of Los Angeles County, which has a grant from the state to provide legal assistance to patients with Obamacare enrollment cases. "But until they do, people will fall through the cracks."

A state spokesman told the paper that "the volume of Medi-Cal applications, combined with challenges of new computer systems, hampered the state's ability to complete eligibility reviews in a timely and accurate manner."

Matt Salo, executive director of the National Association of Medicaid Directors, said many of the problems relate to the way transfers information to states about consumers who appear to qualify for Medicaid based on their incomes. But there are state-specific issues, as well.

"It's been the number one issue of concern for our members for the past nine months or so," he said in an email. "The problems are getting fixed, but what worries people is that we're only a few months away from NEXT year's open enrollment, so we have to hurry."



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