Returning to the PMJDY

WordPress helpfully reminded me that I haven’t written since my last blog soon after demonetisation in India. For one, demonetisation really negatively impacted the poorest and I felt there was little to write about which would bring hope. Until this morning, when The Hindu Business Line reported that PMJDY accounts have been seeing an increase in transactions and average balances.

From a financial inclusion success story, this is definitely something to boast about. World Bank Findex reported earlier this year that India had the highest number of dormant accounts in the world. So clearly, something about DBT, facilitating easy digital transactions and access to bank accounts has begun to shift these accounts from post box accounts use for CICO to actual usage.

Bankers, who have always resisted no frills accounts, are now facing a separate unique problem. One of the features of the PMJDY account is that it caps the total deposit at Rs. 50,000. This is clearly a regulatory feature that harks back to the time when customers did not have identity proof. With DBT customers now having Aadhaar as a pre-requisite, this is a feature that can be removed.

I have always been a strong critic of the PMJDY in its design and implementation, because anything that is done at speed and claims success too quickly cannot be sustainable. Thankfully, after the early claims and in the face of such criticism, the hoopla died and the focus could shift to actual implementation. The current data is proof that the hypothesis that people will start using accounts when they find it useful and relevant is absolutely true. Now that bankers are beginning to speak about an arbitrary cap, it is totally up to the architects of the PMJDY to remove it. In general, the role of regulation is enabling infrastructure, customer protection and a level playing field that does not favour certain stakeholders over others. Regulators would do well to remember this and not define micro-prudential regulations.

(Image credit: Madura Insights, https://madurainsights.com/pradhan-mantri-jan-dhan-yojana-pmjdy-implications-microfinance/ )


India’s $1.3 bn crop insurance

The Guardian’s headlines this morning stated “Thousands of farmer suicides prompt India to set up $1.3 bn crop insurance scheme”. The programme is meant to be a direct response to news of farmer suicides in rural areas, with two successive years of drought. Amongst various reports is one that states that over 300,000 farmers have committed suicide since 1995. News of such deaths is indeed tragic and while it must be examined closely to address the underlying issues, the structure of the current crop insurance scheme does little in this regard.

One can understand the urgency to woo the agricultural community in the light of protests held earlier last year on a bill that made it easier to take over farm land for large projects. Second, the results of two state elections, Delhi and Bihar make the upcoming five elections; i.e. Tamil Nadu, West Bengal, Kerala and Assam in 2016 and that of Uttar Pradesh in 2017, extremely important. It is no coincidence that all of these have large farming communities. Also, data shows that all of these states have shown a high level of farmer suicides in the past decade (see chart below).


While it is right to sit up and respond to this statistic, elections notwithstanding, would the new Pradhan Mantri Fasal Bima Yojana (PMFBY) be the right solution?

What does the PMFBY entail?

The highlights of the scheme are as follows:

i) There will be a uniform premium of only 2% (of the value of the crop) to be paid by farmers for all Kharif crops and 1.5% (of the value of the crop) for all Rabi crops. In case of annual commercial and horticultural crops, the premium to be paid by farmers will be only 5% (of the value of the crop). The balance premium will be paid by the Government to provide full insured amount to the farmers against crop loss on account of natural calamities.

ii) There is no upper limit on Government subsidy. Even if balance premium is 90%, it will be borne by the Government.

iii) Earlier, there was a provision of capping the premium rate which resulted in low claims being paid to farmers. This capping was done to limit Government outgo on the premium subsidy. This cap has now been removed and farmers will get claim against full sum insured without any reduction.

iv) The use of technology will be encouraged to a great extent. Smart phones will be used to capture and upload data of crop cutting to reduce the delays in claim payment to farmers. Remote sensing will be used to reduce the number of crop cutting experiments.

The PMFBY is slated to replace the existing two schemes i.e.. National Agricultural Insurance Scheme (NAIS) as well as Modified NAIS (MNAIS). The target is to increase uptake of crop insurance from 23% to 50%.

Challenges with the current design:

Before analysing whether the crop insurance programme would actually result in a reduction in farmer suicides, it is important to state that insurance can play a role in reducing distress faced by a farmer in case of crop failure.

Variability in weather and uncertainty of crop yields has been a challenge across the world for farmers. In India, it is exacerbated due to the changing climatic conditions, combined with a set of farmers that is extremely dependent on the weather for farming. Add to this, poor economic conditions of most farmers and a lack of adequate cushion to deal with crop failures and one has a situation of agrarian distress. At the macroeconomic level, there are other issues that further contribute to this dismal situation. Revenues have been stagnant, while cost of inputs has been increasing. Most farmers do not have access to formal, institutional credit (less than 15% access institutional credit) and have land holding that are extremely small, limiting the use of technology and further impacting yield.

However, the challenges that existed with the NAIS continue to exist with the current crop insurance scheme since it is still yield based and not weather based.

  1. Yield based schemes are hard to administer since the systemic nature of agricultural risk goes against the working of insurance policies (i.e. the belief that the event would impact only a small section of the insured population), making it hard to calculate premium and indemnity
  2. There is a scope for moral hazard, especially when the proportion of subsidy borne by the Government is higher than that borne by an individual
  3. There are challenges of viability due to the uncapped subsidy offered by the State

It would be much better to have a weather based insurance product that pays indemnities based on realisation of an index which is correlated with actual losses. This would also be automatically triggered reducing the claim payout time.

If the government is truly serious about addressing agrarian distress, they should also address the challenge of access to timely, institutional credit and ensure an easy claim settlement process.

Will this reduce farmer suicides?

It is simplistic and populist to assume that the launch of a crop insurance policy would reduce the number of suicides. While insurance is an important component to reduce distress faced by a farming household, the causes that result in a suicide may be far more varied. In a study conducted by Shamika Ravi and Mudit Kapoor, less than 5% of the farmer deaths were found to be due to debt or bankruptcy. In fact, in an op-ed, the authors state that “In stark contrast,  poor health, mental and physical, accounted for 30% of all suicides..”. In fact, as a country, poor health leads to seven times more suicide than debt or bankruptcy.

Given this statistic, the current government should perhaps consider improving the health system and addressing mental health issues rather than stop at the populist measure of crop insurance schemes. That would lead to a happier farming community and perhaps a happier population.

(Picture source: The Guardian)




Digital financial inclusion sans consumer protection

A few weeks ago, I happened to stop over at a popular fast food restaurant where I used my debit card to make a payment. Their card machine “hung” after I typed in my PIN number and they had to re-swipe my card. Now, usually I get an update on my mobile, but on that day I had left my mobile at home. When I got back home I realised that my account had been debited twice. Naturally, I was livid. Not that the amount was large, but the principle of it! So I called up the customer care who politely directed me back to the merchant, who (luckily!) was not far from home. So I went back and demanded to be refunded and was shown a notice that said in such a case, we were to contact the bank and they could not do anything. The manager at the fast food joint also assured me that if the transaction were not reversed in 14 days (!!), I could get back to him.

In a separate incident, my colleague was at a bar, and her card was swiped for 180,000 instead of 1800/-. Of course, that was a much bigger hit and caused many alarm bells to go off in my head and hers.

Eventually both transactions were reversed, but the two incidents tell us many things need to be put in place before the government decides to incentivise digital financial inclusion in India.

1) Training of front line staff at retail outlets

2) Proper mechanisms for customer protection

3) Clear recourse mechanisms in case of errors

What if our transactions had not been reversed? What if the account belonged to someone from a low income household, who had just enough money that had to be used for a medical emergency? Or a wedding? And 14 days to reverse a transaction that takes less than 30 seconds one way?? Does the government not think about the loss of interest/ emotional cost when your savings account is debited with 180,000 instead of 1800?

Today, the only recourse mechanism available is to call a call centre where a bored, and ill trained customer service executive takes the request and does not commit to any TAT for the error to be rectified. If one belongs to a low income household, chances are that the call centre would not be called at all. In the circumstance that someone does decide to call the call centre, there is such little information provided and so little confidence generated in the services of the bank, that I would be very worried.

Also, bad experiences such as the anecdotes describe above only worsen uptake amongst their peer group. Our government, banks and current policy makers would do well to make sure we have the where-with-all to deal with the challenges that  can emerge from faceless and digital transactions, and develop policies that are more customer friendly. Else, this is likely to meet with a similar fate as no-frills account: i.e. low usage.

Licensing “small finance banks”

The Reserve Bank of India today released the final regulations for setting up “Small Finance Banks” in India.  The Reserve Bank of India has taken this step with the objective of furthering financial inclusion by (i) providing savings vehicles (ii) providing credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, through high technology-low cost operations.

With this move, the Reserve Bank of India is making a significant shift in the landscape of financial inclusion in India. While on the one hand the step indicates the commitment that the central bank is making to the issue of lip service, the step is likely to have other ripples in the sector.

Priority Sector Assets

The circular requires Small Finance Banks to ensure that at least 75% of their portfolio qualifies as Priority Sector. With the two new banking licenses that were provisionally given earlier this year, this creates a huge demand for Priority Sector Assets. There is an immediate need for banker’s training colleges to begin thinking about, and developing deep expertise in underwriting these asset classes. In the absence of this expertise, credit will continue to flow to a select few resulting in either an under-utilisation of the PSL target, or over-lending to a select few.

Impact on the NBFC-MFI sector

The circular outlines that existing NBFCs or MFIs can opt for conversion into small finance banks. For the microfinance sector that has faced a slew of regulations in the past two years, this offers a clear pathway to the next stage of growth. There are, two options that are available to most MFIs as a result of this circular. They can either opt to be Business Correspondents (BCs) of existing banks, or they can choose to transform themselves into small finance banks. Further, with great foresight, the RBI has also stated that a small finance bank cannot be the BC of any other bank, but can appoint other BCs themselves. Effectively, this implies several small MFIs that are high quality originators in a limited geography, who were hitherto unable to raise debt themselves to act as BCs of banks, allowing for geographical diversification at the level of the bank. Seldom does one see policy that has been thought out in such a systematic fashion, especially with respect to ensuring risk aggregation.

Location of small finance banks

The RBI has categorically stated that there will be no restriction in the area of operations of small finance banks. However, they will have to follow similar branch licensing norms of setting up 25% of their branches in unbanked districts. Unlike a half baked Jan Dhan Yojana, this is a systematic means of ensuring that households even in rural India have access to a complete suite of financial products.

Challenges and opportunities

Contenders for the small finance bank licenses will need strong technology and data analytics at their disposal to ensure that their business model works. One of the key challenges that these banks will face is requisite infrastructure in unbanked locations, whether it is electricity or access to technology. It is high time that investments were made by these banks to understand households in these areas and their needs and requirements, before developing relevant products. As these banks set up branches in remote, rural locations, it is possibly also time to begin thinking about true inclusion: is the branch equipped with facilities that can cater to customers who have physical challenges, the aged, people who need wheel chair access? How can these banks develop GUIs that are accessible by all?

These contenders will also do well to begin by identifying metrics that would truly impact the market segment they ought to be reaching. This cannot be limited to superficial measures like number of accounts opened, or number of insurance policies provided. Instead, banks need to start thinking about metrics like reduced vulnerability or improved wealth of their customers. While such metrics seem harder to achieve, following these would help them succeed. The other factor that would greatly aid better underwriting is getting credit bureaus to share databases with each other.

Responsible journalism and development

I was asked by a friend yesterday if I would like to accompany her for a book launch at Euston by a friend’s friend. Then she added, “you should meet her, she has written about the microfinance situation in AP”. That really piqued my interest and I had to find out who this person was and what she had written about the sector. I was also mildly intrigued. Anyone who had written any sense about the sector is someone that I would have met in the past five years. After a session of googling and trawling all articles written by this person, I came across the microfinance article. There was one, written in the same style as other issues, which I feel contributes to irresponsible journalism.

In the specific context of Andhra Pradesh and microfinance, there were a number of issues that went awry. I do not defend the investors and the incentives that caused promoters to possibly lend aggressively and lead to over-indebtedness. However, media played a significant role in creating mass hysteria and resulting in knee jerk reactions from policy makers. Yes, there are some good things that came out of the microfinance crisis like the use of credit bureaus. But there are many things that we still do not know. For instance, what are households doing for access to finance today, besides possibly borrowing from moneylenders at high rates of interest? What is happening to poverty levels in the state? And my question to all journalists who somehow managed to correlate suicides to microfinance loans is: is there a drop in these rates now? Are people less indebted?

There are several journalists who continued reporting on the issue until it was impossible to get any data from the state on what was actually happening at the household level. That is responsible journalism, because it means people are engaging with the issue and following the impact of various decisions. Unfortunately, the more popular and prevalent journalism seems to be the kind that creates a stir and washes it’s hands off the repercussions of their ‘story’. The more dangerous trend that one notices with this kind of journalism is also the mixing of qualitative data and passing that off as rigorous scientific data. I think journalists need to realise that media is a powerful tool and everyone becomes a stakeholder in the stories they are reporting.


Banana Skins report 2014

I had the opportunity to attend the London Microfinance Club meeting last week where the Microfinance_Banana_Skins_2014_-_WEB was launched and discussed. In the past, I have always used the Banana Skins report as a barometer to check if my assessment of risk in the sector is accurate and in line with larger sectoral perceptions. Also, when I was making investments in the microfinance sector, it helped to both reinforce our own monitoring as well as check for new developments.

The last Banana Skins report was published in 2012 and several interesting changes have taken place since then, particularly in the Indian context. For one, microfinance institutions had to deal with a cap on their operational expenses, making it necessary for management to re-look at their operations and see how to do this. Secondly, the Reserve Bank of India has been bringing about several changes in regulations rapidly. This includes allowing NBFC MFIs to act as Business Correspondents for banks, the proposed licensing of payment banks and two new players in the Indian context were given bank licenses: IDFC and Bandhan. This, combined with the fact that a client could not have more than 2 lenders lending to her, should have MFI CEOs worrying about the strategy of their companies, which I find missing. Third, the cap effectively reduced the ROE of institutions resulting in lower equity investments. This raised the question of long term funding and viability of the sector to continue expanding at the same rate.

In the Indian context, the greatest risk, as expected is political interference. The Andhra Pradesh crisis is testimony to what can go wrong if politics and finance are mixed. I continue to wonder what is happening to low income households in the state of AP. How can a system that drives people into the arms of money lenders be possibly more effective in the long run? The one good fall out of the AP crisis, however, is that the Reserve Bank of India has stepped in to regulate microfinance institutions and hopefully prevent the kind of risks that we saw three years ago. What is unusual as a risk is over-indebtedness that continues to rank fairly high in the list. This comes as a surprise because most microfinance institutions in India now have a credit bureau check and do not lend to customers who are already borrowing from two other lenders. There are two things that might be happening here: one, this could be debt from a bank or an informal source like  a money lender and therefore, is not quite a risk to the microfinance sector as one might imagine. Two, the borrowing from banks as a third loan might be possible because banks are not using the same credit bureaus as microfinance institutions. Which leads me to wonder if there is a need for a banana skins report for the financial inclusion sector as a whole. Why are we not thinking about the risks to large balance sheets as a result of priority sector lending targets?

A new risk that has been stated in the Indian context is ‘strategy’, which is something that I concur with. However, the absence of long term strategy may not be a soft skill input, as is often thought, but the absence of inadequate long term funding to the sector. If CEOs do not have long term funds, how would they plan for and make investments for the next 5 years or a decade?

One cannot deny the importance of local finance/microfinance institutions as an important mechanism for cash flow smoothing for low income households. Given this importance, it is critical that investors and MFIs begin to think of the gaps in the sector and the long term vision to address some of these challenges.

1) Governance: is it possible to create database of independent directors along with their specific areas of expertise which can be used as a common knowledge base by the sector as a whole?

2) Long term capital: Can banks and financial institutions pool in their CSR funds to create a long term fund for microfinance institutions, which specifically targets aspects like investment in MIS, making systems and processes efficient, investing in data analytics and decision making tools?

3) Common infrastructure: Credit bureaus that are used across financial institutions should be uniform. It would not make sense for banks to follow one set of Credit Bureau data while MFIs use another. There is also a need to have data analytics firms that would help understand product development in a more scientific fashion. This should solve the challenge of over-indebtedness.


Thinking in silos

With 1.2 billion people, there is no denying that India is a powerful player to contend with in the world. However, the rich dividends from this demographic strength can only be reaped if there is a shake-up in the current bureaucracy and policy makers begin to think outside of their restricted silos. My analysis of the inability of most bureaucrats to think strategically stems from a selection process that is part of our inherited legacy and was designed to make ‘civil servants’ rather than people who would think and question. Amongst other legacy based systems that we are seeking to change, it is imperative that this one receives high priority. It is also interesting to see that the UK, from where we inherited the legacy has long since moved on, having recognised the importance of selecting people from different walks of life, and the importance of cross pollination of ideas to create effective policy makers.

Especially in subjects like defence or security, it is critical that the people making the policy have a strong sense of changing trends that can lead to possible risks. We have a long way to go in India’s training academies where there is no single institution that aggregates trends and points out areas of synergy. In some senses, the thinking in silos is also symptomatic of poor institutional design, leading to replication of efforts, lack of transparency and creation of power centres, not to mention policies that are not holistic in nature and therefore are bound to fail.

As the world changes and access to information through social media and use of internet increases, the risks that a government faces are bound to increase. There are also other changes that can have an unforeseen effect on internal security. For e.g. climate change, resulting in large scale migration to already over crowded cities with creaking infrastructure that further exacerbates the divide between the haves and have nots, resulting in possible catalyst for unrest and conflict.

Policy think tanks also tend to specialise in specific areas and are unable to expand their understanding to the impact due to seemingly uncorrelated events. In a world where information spreads at the speed of light, the butterfly effect that chaos theorists predicted is a reality. The only way to counter this is to create an ecosystem of institutions that are dynamic and flexible and speak to each other. Then, there is of course, the larger challenge of recruiting and creating a cadre of bureaucrats who are strategic thinkers. That is a tougher battle for India today.

When Sophie Mol died…

Today was the second time in the past year that I felt stunned. The first was when I read about Phillip Seymour Hoffman ‘ s death at about the same time last year. Today it was Robin Williams. Two extremely talented actors, each holding their own fort. I am struck by the similarities in their deaths. They were both alone when they died, yet loved and respected by millions across the globe. Makes one wonder what they might have gone through at their last moments. The one line that comes to mind when I think of death is something that my professor quoted many years ago from the God of Small Things. I re – quote. ” when Sophie mol died, she left a Sophie mol shaped hole in everyone’s lives”. This is certainly true of the two men in this blog post. May their souls rest in peace.

Where have all the women gone?

For most part of my life, I have been fortunate in not being reminded of my gender. I say most part, because there are moments, when I am reminded of the fact that I am a woman, and possibly in a minority in the choices I make, in the lifestyle I lead, in my role at work. I was recently at a meeting in a large organisation and was struck by the fact that I was the only woman in the room. Other than the secretary, who had called me the previous day to confirm the meeting under the mistaken assumption that I might be the executive assistant, because I was the only woman in the list.

When I went to B-school, we had a healthy gender ratio of 1:1. In fact, this was often commented upon enviously by fellow batchmates from other B-schools. A decade down the line, the curve has skewed rather drastically. This is a nation where recent census data shows that 160 million women, 88% of whom are between 15 and 59 years of age, are performing household duties, rather than being gainfully employed.

Claudia Goldin’s work at Harvard University on women in the workforce explains some of this phenomenon. Dr. Goldin, in her paper, suggested that economic development and gender equality share a synchronous relationship. “Gender equality spurs economic development, particularly where children are concerned, while economic development fosters gender equality“, she says. I can vouch for this through anecdotal evidence and my work in financial inclusion.

Microfinance in India has largely focussed on women clients because they display higher repayment rates. Women have also been seen as more credit worthy since they tend to invest the monies borrowed in income generating activities leading to the improvement of the families’ well-being. The oblique impact on gender equality is obvious while visiting groups of women borrowers in eastern Uttar Pradesh, a state that continues to be notorious for its patriarchal culture and poor treatment of women. In meeting after meeting that I attended, the women interacted with us, chided the male field officer for being late and displayed their passbooks proudly for having repaid on time and running a business successfully. They spoke of their dreams of sending their daughters to school, and revelled their newly found financial independence. In the south of India, I visited branches, where the number of women employees outnumbered the men. I also realised when I spoke to the women that they were better qualified than the men, and far more ambitious. One of them spoke about how she had sent both her children, a boy and a girl, to an English medium school, facilitated a loan for her husband’s cropping season and bought a two wheeler for herself.

Having interacted with these women, I wonder at the high attrition seen at slightly higher income levels. The Global Gender Gap Report 2013 published by the World Economic Forum shows that less than 50% of the women who graduate from business school continue in the workforce in India. From a return on investment point of view, this is a terrible scenario for the nation. It is also terrible for the women from a personal growth standpoint. There is yet another data point that tells a different story: the increasing participation of women at senior management levels, showing that the proportion has increased from 14% to 19% in a year. While this might still be low, the increasing trend does tell a different story.

Dr. Goldin explains this phenomenon by her U-shaped curve explanation.  At lower income levels, women are in the workforce, but often engaged by the family or household businesses. Their work is implicitly bought by the family and then the women retreat into their homes, although their hours of work remain the same i.e. from dawn to dusk. As education levels improve, and the value of their work in the market increases, they come back into the paid workforce. Some of these women might work as entrepreneurs within the confines of their home, allowing them to straddle both worlds. Despite rising income levels, there is a huge drop out at middle management levels, when women prioritise personal commitments and often find it hard to balance family, work and personal time. At senior management levels, again, the number of women might be showing an increasing trend due to other incentives brought about by higher incomes such as access to better child care, support systems to balance home and work, and others.

While the Women’s Reservation Bill has been doing the rounds since 1996, I wonder if a simplistic solution such as Reservation could solve this problem. A recent working paper released by the Brooking’s Institute by Shamika Ravi and Rohan Sandhu shows that while the current government has 10.6% women Members of Parliament, this number is less than half of the global average, and a majority hail from politically connected families themselves. Therefore, the role of government cannot be to merely increase participation of women in the workforce by creating positions, but to enable a larger number of women to aspire and participate with ease. Steps that we can take include learning from the Nordic countries experience of creating a situation where wage disparities between genders are low, both genders take equal responsibility for household chores and work, and better childcare facilities. In addition, the identification of possible mentors for women who want to continue in the workforce to help chart out career paths, to hand hold them to senior management levels would smoothen the dip seen due to middle management attrition. There is possibly also a need to create opportunities for women to return back to work after taking a break for child birth, care of family or other reasons.






Why “Thinking at the margins”

One of the first principles that I learnt in Economics way back in college was that rational people “think at the margins”. In my previous business roles, the principle certainly helped in decisions. In the past year, I have increasingly discovered the relevance in leading a fuller life, one choice at a time. The name is also a pun on the nature of my work, which deals with innovative ideas and impacting sections of society that are excluded from the mainstream.