With the recent hype on Microfinance its time for us to look on the basis of existence of this MF organisations. I believe MF started as a concept from the Grameen bank in order to serve the deprived part of the society which gradually changed and now became a profit making business model.
Andhra pradesh is now seen as the MF hub of the country is really spurred with several MF institutions. Why and how these MF is different from banks is really we need to understand. Also do these MF institutions really doing what they intended to do or they missing on the basics??
Banks do talk more on financial inclusion but when coming to the point of serving poor they are simply finding it difficult. They are good in getting the micro-savings from the poor through CASA and deposits but not really interested or properly aided with regulations for providing micro credits. This is seen more as an opportunity to begin and explore by MF institutions which started borrowing from banks at a very low cost of 14-16% and lent around 40-60% or even more. Not to be surprised many foreign institutions also directed their funding to these institutions which earned a reasonably good profit compared to investing in stock markets !!
So basically one of the weakness of the banks( their ability to reach poor) were used by these institutions to generate profits. Also many of the customers of these MF institutions feel that this MF institutions are a way better and in the pipeline they come in between the highly greed private moneylenders and very conservative banks, which made them to access these institutions for credits.
Its good that AP govt come up with the ordinance which caps on the interest that MF institutions charge to their customers and also regulating their operations. I do feel its completely absurd to avoid these institutions which are right in their direction i.e towards financial inclusion but the path they took is bit clouded with too many players with different objectives which needs to be regulated.
So my view is we should not completely move away from MF institutions, we need to take some of their concepts and rework on that to reach financial inclusion.
Its time for an apex institution like RBI to take up regulating these institutions and provide them suggestions and facilities like a common database like CIBIL in order to avoid multiple loans and have a detailed history of the customers.
Also banks also need to learn some of the innovative practices and highly recovery mechanisms using social respect which are adopted by MF institutions.
Thursday, November 25, 2010
Tuesday, November 2, 2010
FII flow vs Interest rate vs inflation
Just an attempt to relate all this macro economic variables.
We recently see a huge surge in the FII inflow into the country.October month alone contributed around one-fourth of the total inflows this year. What could be the reason for this inflow, obviously it is because of the better returns in India compared to other countries and more opportunities in terms of primary market.
This has lead to an increased flow of foreign currencies which will convert the available rupee in the economy into portfolio investments. Because of this the availability of rupee in the economy will get reduced which is transformed into the depreciation of foreign currency and appreciation of Indian rupees (due to increased demand of rupee). You can see observe this through the volatility especially between USD,EUR with INR .
Is the foreign currency flow is good or bad for economy. It is how the country's internal policy able to utilise this flow and If the country is not able to utilise this opportunity again the flows can be reverted in short term. Here comes RBI, The effective conversion of this foreign currency flows into forex reserves is one of the job of RBI during these times and this is done by accumulating the forex reserves which will help to smoothen the effect of current account deficit. This is usually done by RBI through monetary tools like repo , reverse repo.
Also this FII inflow will increase the money supply in the economy which will increase the inflation to an extent in case there is no substantial output created. But since inflation is one of the effects of FII flow , FII flow cannot be restricted which will affect the growth of the country. Country's economy and policy should be good enough to absorb such FII flows. So this inflation which we see is not alone due to FII's its also because of internal economic policies. this increase in inflation need to curbed through increasing interest rate which is now done by RBI with a 25 bps raise in repo and reverse repo.
We recently see a huge surge in the FII inflow into the country.October month alone contributed around one-fourth of the total inflows this year. What could be the reason for this inflow, obviously it is because of the better returns in India compared to other countries and more opportunities in terms of primary market.
This has lead to an increased flow of foreign currencies which will convert the available rupee in the economy into portfolio investments. Because of this the availability of rupee in the economy will get reduced which is transformed into the depreciation of foreign currency and appreciation of Indian rupees (due to increased demand of rupee). You can see observe this through the volatility especially between USD,EUR with INR .
Is the foreign currency flow is good or bad for economy. It is how the country's internal policy able to utilise this flow and If the country is not able to utilise this opportunity again the flows can be reverted in short term. Here comes RBI, The effective conversion of this foreign currency flows into forex reserves is one of the job of RBI during these times and this is done by accumulating the forex reserves which will help to smoothen the effect of current account deficit. This is usually done by RBI through monetary tools like repo , reverse repo.
Also this FII inflow will increase the money supply in the economy which will increase the inflation to an extent in case there is no substantial output created. But since inflation is one of the effects of FII flow , FII flow cannot be restricted which will affect the growth of the country. Country's economy and policy should be good enough to absorb such FII flows. So this inflation which we see is not alone due to FII's its also because of internal economic policies. this increase in inflation need to curbed through increasing interest rate which is now done by RBI with a 25 bps raise in repo and reverse repo.
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