India in photos - view from our roof in Chennai

Right before a rainstorm

A few personal observations of India

A few of you wrote to me asking for my impressions on India. Full disclosure, I left to go see my amazing friend S. get married to the love of her live E. in Israel about a week after my arrival in Chennai, so my observations, while personal and authentic, cover only a brief stay in India. So here goes…

Darwinian driving rules & maximization of available space

So remember that game from the ’80 – I don’t remember the name, but the interface was pretty simple and the player needed to wade through oncoming cars. I describe driving, walking and biking in Chennai as a happy mutation between this game, whose name escapes me, and Tetris. On the other hand, if you happen to be the pedestrian in this environment, you are basically packman’s prey. The rules of driving in Chennai are simple, survival of the fittest and largest. Buses yield to no one, and I mean NO ONE, while trucks yield to buses. There exists a separate hierarchy among trucks depending on size gasoline and refuse carriers are at the top of the hierarchy, while small TATA made trucks and auto rickshaw trucks exist at the very bottom. Cars yield to trucks and buses, although this also depends on their size. SUVs have freer rein on the road than, let’s say ford fiestas. Auto rickshaws, or simply “autos”, yield to all cars, trucks and buses. Motorcycles and Mopeds yield to buses, trucks, cars, and “autos.” People who ride bikes yield to motorcycles, mopeds, “autos,” cars, trucks and buses. The pedestrian, as you may have already guessed occupies the bottom of this Darwinian road hierarchy. With sidewalks virtually non-existent, life of the pedestrian, yours truly, is at the same time adrenaline-inducing and terrifying. 

People don’t usually wear seatbelts. “Autos” do not have any seatbelts at all. Commuters make use of every available inch of seating in all vehicles. Pretty often one can spot a man, his wife and infant on the same moped, sans safety belts and helmets. Considering the Darwinian driving environment, families on bikes take serious risks getting on the road. Ahh, the “auto” quite comfortable in the heat while moving, sticky and not so fun when your driver stops at a gas station, about 25 m from when you got on and negotiated your destination and fare. Fare negotiations are a challenge. Don’t get me wrong, I am not fooling myself into believing I am getting a fair price, I am as pale as any human you may encounter in life. However I take offence at getting highway robbery rates. Having spent significant time periods in the Middle East, haggling for a moderately fair price is a way of life; otherwise the person providing you with the service will not respect you. I stand on principle. Speaking a few words of Tamil both generates good will and easier rate negotiation with “auto” drivers. Even though, the stakes of this price negotiation are minimal, I haggle with pride.

Pants optional

Due to the extremely hot and humid climate in Chennai and other parts of India, some men wear lungi instead of pants. A lungi, also known as a sarong, is a long garment worn around the waist by South Asian men. I knew that, but what I did not know is that there is a summer knee length lungi, also popular in town. Rewrapping your lungi in the middle of the street is also perfectly acceptable. Watch out girls, if your legs are not covered, you get stares from men. With that said, unlike in Delhi men will not harass you. 

Malls & Bathrooms

The malls in Chennai encompass more space than I noticed in any other public or retail spaces in this city. Malls here take up significant space and feature a wide selection of Western-style women’s clothing. However, most people you encounter on the streets, including expats do not wear Western-style clothing. The very humid and hot climate of Chennai and its surrounding areas makes it virtually impossible to wear fabrics and styles which we wear in the West. Besides the lack of comfort in with type of clothing, Western-style clothing does not hold up to the number of washes needed to keep clothes fresh and clean. So who actually buys these clothes? How do these stores justify paying their rent? I am not sure yet, but when I find out, I will definitely share my findings. Oh, we also passed a store exclusively for grooms; I offered to get married to A. once again just to see him with in full South Indian wedding regalia on a white horse. Also I believe I can totally rock the red and gold sari, with my weight in gold jewelry.

Last weekend A. and I went to our first movie in India and we went to see X-men. The movie theater felt like a nightclub, complete with a bouncer at the door, wonderful AC, and pumping techno. The screening rooms had seats for couples and singles, a first for me. Halfway through the movie we got an intermission followed by about 20 minutes of ads from local merchants. I went to the toilet and felt like a queen. I literally sat on a toilet throne, installed on a raised platform. The stalls also featured a yet to be connected sink, dryer, and a decorative fountain. The working sinks in the more public area of the ladies’ room were pretty cool. There were no sinks per say, just a solid slab of marble with water spouts positioned just above the slab. The motion activated water spouts and water drained behind the slab of marble to a hidden drainage ditch. Oh yes, our tickets cost $6 for the two of us.

Miscellaneous

Before departure, our State Department nurse instructed us to brush our teeth with filtered water as unfiltered water is not so safe in this neck of the woods. We’ve also been ordering drinks with no ice as a precaution. I went shopping with two of my husband’s co-workers and brought my first salwar kameez (kurta and dupatta as its called in Chennai). The outfit includes a fuchsia pair of pants – I think more fabric went in the making of the pants than the shirt (kurta). The pants can comfortably fit three of me. Our cook-maid remarked that I was wearing a lunghi, which is what men wear here in lieu of pants. I was wearing a halter dress which ties around my neck. Watch out ladies, apparently I am now a trend setter!

Enough with the personal stuff, next up – markets!

Microfinance in India Part 1

I read an article in The Hindu last week about the state of Tamil Nadu shielding its women from exploitative practices of Microfinance institutions. I found the content of the article thought provoking. While, I understand the economics of microfinance, I am only learning about India’s microfinance sector, thus the following post is heavily sourced. At the end of the post you will find sources which I used for this post.

Introduction and History

 

Some of you may have read about the microfinance credit crisis in India’s state of Andhra Pradesh in 2010 as well as the recent retirement of Mohammad Yunus, a Bangladeshi financier that created one of Asia’s most prominent micro lending institutions – the Grammeen Bank. India’s regulatory authorities, both state and national are working on instituting a package of new regulation which is supposed to both protect the consumers seeking micro loans and create a regulatory environment within which the micro lending industry will thrive.

I felt that to learn more about microfinance in India, I first needed to delve into the modern history of India’s financial institutions and regulatory framework. India’s experiences with establishing and regulating its financial sector created the environment within which social entrepreneurs established India’s micro-lending institutions in the late 1980s.  To understand India’s banking and regulatory legacy, I looked at the Economist Intelligencer Unit, IMF reports and Elizabeth Rhyne’s illuminating article on Huffington Post. Elizabeth Rhyne is the Managing Director at the Center for Financial Inclusion, Vaneet Rai of the Harvard Review Blog and others. 

Background 

Since India’s independence in 1947, the country carried out three major initiatives that shaped the country’s banking sector. The first took place in 1955 when India moved towards greater public ownership of banks, when the Imperial Bank of India was taken over by the government and renamed into the State Bank of India. The State Bank of India took over seven banks and its subsidiaries in 1959. In 1969 the Indian government nationalized 14 more private banks. The idea behind nationalizations was prevention of concentration of the financial sector within a few private hands and promotion of a balance of financial development. 

Following in Ghandi’s goal of self sufficiency, the government took steps to ensure that the financial sector provided enough credit to agriculture (especially in underdeveloped rural areas), export and small scale industries. While in 1974 the Reserve Bank of India issued guidelines indicating that both private and public banks must allocate at least one third of its credits to priority sectors indicated above, this requirement was increased to 40% in 1980. Heavy regulation of the banking sector lasted until the liberalization of the 1990s. Liberalizations of the 1990s removed controls on interest rates, liquidity ratios, entry barriers, relaxation of credit controls, and more. 

Microfinance: Background

The idea of micro-lending comes from the broader idea of financial inclusion. In other words, all people rich or poor need access to affordable financial services to conduct daily activities. When we think of banks we think of the types services they provide to customers; such as opening checking and savings accounts, obtaining credit cards, as well as loans to go to university, buy a house or a car. All banking services come at costs which are split between the bank and its customers. To issue a loan, the bank will need a lot of paperwork, including but not limited to establishing the customer’s identity, collateral, creditworthiness and the ability to repay the lent amount. Based on available background on the customer and health of the credit market, the bank will decide how much interest to charge. The amount of charged interest will bring the bank some profit, cover the risk of lending capital and cover the cost of administering the loan.

However, there are customers that both need tiny loans and are high risk borrowers. These potential customers are not likely to be part of the traditional financial system, may not have a credit history, collateral, and may not look like good candidates for a regular bank loan. Additionally, if the loan is small enough a regular bank may have no interest in processing it as administrative costs may turn out to be higher than the return on the loan. 

As a result, these customers tend to obtain loans from informal sources, such as the local moneylender. Micro-lending institutions come in to fill this gap and extend financial services to those customers.  In issuing loans, micro finance institutions use traditional social structures and higher interest rates to mitigate risk from such customers. These institutions lend to groups, which means that both administrative costs are lower per capita and overall loans tend to be larger overall. Microfinance institutions’ interest rates are higher than traditional banks to mitigate higher risk customers who often lack collateral. The majority of beneficiaries are in rural areas, where traditional banking services are far from villages and are part of close knit communities. Lending to a group within a close knit community provides social pressure on individual members of the debtor group to pay on time. Groups that fail to repay communal micro-loans do not get new loans, thus hurting the long-term prosperity of the group. As in the case of Grameen Bank, groups applying for loans go through months of financial planning courses, mitigating non-repayment risk further. 

While this is not the case in India, in some parts of the world, microfinance institutions take bank deposits, thus giving poor communities a way to buy into the success of the micro-lending institution. If groups that borrow from a micro-lending institution also have savings accounts, they give themselves a strong incentive to pay back their loans. Failure to repay a loan will not only mean a denial on the next loan, but also a higher chance that their lender will go out of business. If a micro-lender goes out of business, the community’s savings held at the same bank disappear with the lending institution. From a business development perspective, providing financial services to a group of people previously not part of the financial system, not only gives more income flexibility to this group, but brings a previously untapped source of customers for micro-lending institution – in other words more customers is good for business. This leads to a question, are MFIs in this line of work for the good of the people or business? 

Microfinance: India

After a number of nationalizations of India’s banks, the Bank Penetration and SHG-Bank Linkage Program was created in order to both maximize the increase of the reach of banking services to remote areas and incentivize people to use state banking services instead of more informal traditional financial sources – moneylenders.  The program succeeded in bringing financial services to remote areas and in fostering economic development. 

Andhra Pradesh of the late 1980s emerged as the poster child of success of this government program. This state worked together with the Indian government through SGH-Bank Linkage Program and the National Bank of Agriculture and Rural Development, NGOs, as well as the World Bank towards economic growth. As a result of this success Andhra Pradesh became birthplace of India’s robust microfinance sector. Ultimately, nationalizations and banking policy prior to the reforms of the 1990s resulted in preferential treatment of public sector banks and SHGs. 

In my next post, I plan to cover the development and growth of India’s micro-lending sector and how India’s regulatory framework promoted lending and growth within this sector.

Sources:

1. 1.      Gupta, Poonam, Kochhar, Kalpana, and Panth, Sunjaya. “Bank Ownership and the Effects of Financial Liberalization: Evidence in India.” IMF Working Paper. 3 March 2011 <http://www.imf.org/external/pubs/cat/longres.aspx?sk=24695>
2. “India: Demand for Financial Services.” Economist Intelligencer Unit. Main Report: Finance 2010. <http://www.eiu.com.proxy1.library.jhu.edu/index.asp?layout=displayIssueTOC&issue_id=187333003&publication_id=690002069> 
3. Kannan, Ramya. “State to Shield Women From Microfinance Institutions,” The Hindu. 8 March 2011 <http://www.thehindu.com/news/states/tamil-nadu/article1518093.ece> 
4.  Pankaj Kumar and Ramesh Golait, “Bank Penetration and SHG-Bank Linkage Programme: A Critique” Reserve Bank of India. 19 June 2007. <http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=2029> 
5. Rai, Vineet “India's Microfinance Crisis is a Battle to Monopolize the Poor” Harvard Business Review Blog , 4 November 2010. <http://blogs.hbr.org/cs/2010/11/indias_microfinance_crisis_is.html> 
6. Rhyne, Elizabeth. “On Microfinance: Who's to Blame for the Crisis in Andhra Pradesh?” Huffington Post. 2 November 2010 <http://www.huffingtonpost.com/elisabeth-rhyne/on-microfinance-whos-to-b_b_777911.html >