Tomorrow is the expected date of a judgement on the Ayodhya dispute. Sure, there are strong possibilities that it may get deferred yet again (the Congress wants this as a live issue)or if there is a decision, the losing side will go to the Supreme Court. My blood boils at the media for focusing with so much intensity on an issue that is best forgotten. They are the ones fanning the flames of communalism.
I am a Hindu by birth. I am comfortable with the freedom that Hinduism has given me. I do not need any self appointed guardian for my faith. The Vishwa Hindu Parishad (and its proxy, the BJP) think that they are the self appointed guardians of all Hindus. They could not be more mistaken. The Hindu is not so weak that he needs rabble rousers to be his guardians. To a Hindu it does not matter whether he goes to a temple or not. He is as comfortable in worshipping a Ganesha as he is in worshipping Sai Baba of Shirdi. He is equally comfortable in not doing any worship. Just because he is not following a ritual does not mean that he is an atheist. To him atheism is a fall out of what the preachers of the faith have turned the religion in to.
As a Hindu, I do not need a VHP or a BJP to tell me what is faith. What they tell me about faith is not faith at all. Faith is not following some idol or God or demi God. Faith is not found inside a temple, church or mosque. To me, all these symbols are mere edifices of some one’s belief or a vested interest. Apart from an archaeological interest, I find no spirits in these places. And in each of these places, whether it is a Tirupati or a Kalighat or Jagannath Puri, the gatekeepers of those Gods make sure that even an agnostic will surely get converted to an atheist. In Tamil Nadu, I have seen a humungous number of people who have ‘converted’ from Hinduism to Christianity or Islam. Today, when I meet someone with the name of Srinivasan, I cannot take it for granted that he is a Hindu. These conversions are purely driven by economic considerations and the failure of institutions like VHP to do anything positive for the Hindus.
Organisations like VHP / BJP have not anything for the Hindu they claim to represent. I have also seen Christian (there are about fifty different church branches- with most having adopted Hindu rituals in order to keep the new convert involved) leaders siphon away wealth in crores, but at least most of these convertors have given some money or a school admission to the convert. It is a different story that after conversion, they extract their pound of flesh. Conversions in India is a big business and I will not dwell on it here.
The other interesting role is that of the Congress party. Right from the days of P J Nehru, appeasement of muslims has been fashionable. In the name of ‘secularism’ the Congress has always turned a blind eye to the Hindu. The Congress does not want the Ayodhya issue to be resolved since it is a permanent tool to bash the BJP. The day the dispute is resolved, Congress has no grounds to talk about any shortcomings in the BJP which they themselves do not possess. They are stupid not to have accepted a 'compromise' to have a temple and a mosque side by side.
The BJP is plain stupid. Self styled leaders like Advani think that their rabid styles get votes. Sadly, guys like this have done zilch to do anything for the betterment of the Hindu. They also fall in to the trap of opening their stupid mouths in the media with nothing positive to demonstrate. They are sliding down a banister with splinters pointing up.
Finally, the media in India is probably the worst in the world. Today, when people care a damn about Ayodhya (frankly, I did not know anything about the dispute in so much depth but for the media noise in the last two weeks or so) they keep throwing images of demolition of the Babri masjid. And by having daily debates anchored by their rabble rousing and obnoxious anchors. They publish and announce messages of ‘peace’ but make sure that there will be trouble tomorrow, by raising tempers and fanning the flame of communalism in the name of secularism.
Wednesday, September 29, 2010
Thursday, September 23, 2010
MICROFINANCE- The New new thing.
(This article appears in Moneylife Magazine)
FOR I DID DREAM OF MONEYBAGS TONIGHT ......SHYLOCK in “The Merchant of Venice”
Microfinance is the new buzzword. In the name of ‘financial inclusion’ no one has bothered to either regulate them or decipher them. The first IPO was a roaring success with all making money. Hopefully all the forthcoming IPO’s from this sector will also help all stakeholders to make money.
Microfinance is not an easily scalable business. Being small is a virtue in this industry. This is because the lending has to deal with groups of borrowers whose characteristics change from region to region. In its simplest form, it involves lending small amounts (usually around ten thousand rupees) to each borrower in a group of four to five people, and make each one of them responsible collectively and individually. ThLis works fine when the needs are small and genuine. Moral suasion helps. The typical lending is for ten to eleven months, with weekly repayments. All is in cash. Some lenders have used this model to push compulsory insurance products at the borrowers and reap the benefits of the high commission that the insurance company pays. The lending rates typically vary from thirty to fifty percent per annum and the insurance commission is the icing on the cake.
In the early days, most microfinance companies started off with a lot of social fervour and with grants from multilateral agencies that support the cause of upliftment of the poor. Most companies started off as ‘not for profit’ companies. Gradually, the realisation that a listing is good, made these companies buy shell companies that had NBFC licenses and then merge the business in to them. In the process, the founders and the staff rewarded themselves with more than market salaries and huge stock options (mostly with zero outlay). The founding NGO’s took their money and so will the private equity investors who grabbed this opportunity.
I would urge those who are interested in this subject, to go through the papers written by Prof M S Sriram of IIM Ahmedabad, who holds a key position in the area of Microfinance. He has documented some very interesting case studies about the beginnings of the microfinance companies, which gives us a good insight in to a few of the promoters and professionals of the high profile industry. I found the paper titled “A Paper on Commercialisation of Microfinance in India” particularly fascinating. This paper documents how the professionals who started off with a ‘not for profit’ motive ultimately get back to making money, forgetting the start up vision.
I do not see this business as a scalable model. It is tough to scale up a business when it involves dealing with people (remember, the borrowers are of the highest risk category, with no wherewithal and unable to get credit from the banking system) across different regions, religions, castes and communities.
It is unlikely that microfinance companies will help to significantly replace the traditional moneylender. Maybe they would bring down the interest rates a wee bit, but not substantially. Given the ticket size and the collection costs, I do not see any lending below, say, thirty percent per annum being economically viable. Yes, if they sacrifice on employee costs, they can, but then why would anyone do this?
The other big factor is the ease with which the companies raise money. Having a large amount of lendable resources is the biggest threat. I think geographical scaling is not possible. The next risk they will take is of increasing the ticket size. I hear of the limit being raised from ten to twenty-five thousand. This is extremely high risk. Already, if you go through the offer document of the recently listed SKS Micro, the fact that frauds do happen is indicated. When ticket sizes are small, the number of frauds will be lower. Since it is an element of the business model to hire people at different locations, without much training or financial scrutiny, employee frauds are bound to keep going up. Credit standards also would get diluted (if not already happening).
The other big issue is one of regulatory imposts. Today, the microfinance companies operate in a vacuum, with total freedom. They do not have to disclose the rates of lending etc to the borrower. Once they start doing all this, there is bound to be social and moral pressure to lower the rate. For some time they will pretend to do so, by creating some fancy structures and selling other products like insurance etc to protect yields. However, I do not see this as a sustainable thing. Also, as the problems of collections start mounting, employee turnover is bound to increase exponentially. The capital market welcome to SKS micro will push up employee costs as each one who wants to hit the capital market will try and poach anyone with prior experience.
In the eighties, we used to have a lot of NBFC’s that went in to consumer finance. Today they are shuttered down and dead. Will microfinance companies give them company in the graveyard?
FOR I DID DREAM OF MONEYBAGS TONIGHT ......SHYLOCK in “The Merchant of Venice”
Microfinance is the new buzzword. In the name of ‘financial inclusion’ no one has bothered to either regulate them or decipher them. The first IPO was a roaring success with all making money. Hopefully all the forthcoming IPO’s from this sector will also help all stakeholders to make money.
Microfinance is not an easily scalable business. Being small is a virtue in this industry. This is because the lending has to deal with groups of borrowers whose characteristics change from region to region. In its simplest form, it involves lending small amounts (usually around ten thousand rupees) to each borrower in a group of four to five people, and make each one of them responsible collectively and individually. ThLis works fine when the needs are small and genuine. Moral suasion helps. The typical lending is for ten to eleven months, with weekly repayments. All is in cash. Some lenders have used this model to push compulsory insurance products at the borrowers and reap the benefits of the high commission that the insurance company pays. The lending rates typically vary from thirty to fifty percent per annum and the insurance commission is the icing on the cake.
In the early days, most microfinance companies started off with a lot of social fervour and with grants from multilateral agencies that support the cause of upliftment of the poor. Most companies started off as ‘not for profit’ companies. Gradually, the realisation that a listing is good, made these companies buy shell companies that had NBFC licenses and then merge the business in to them. In the process, the founders and the staff rewarded themselves with more than market salaries and huge stock options (mostly with zero outlay). The founding NGO’s took their money and so will the private equity investors who grabbed this opportunity.
I would urge those who are interested in this subject, to go through the papers written by Prof M S Sriram of IIM Ahmedabad, who holds a key position in the area of Microfinance. He has documented some very interesting case studies about the beginnings of the microfinance companies, which gives us a good insight in to a few of the promoters and professionals of the high profile industry. I found the paper titled “A Paper on Commercialisation of Microfinance in India” particularly fascinating. This paper documents how the professionals who started off with a ‘not for profit’ motive ultimately get back to making money, forgetting the start up vision.
I do not see this business as a scalable model. It is tough to scale up a business when it involves dealing with people (remember, the borrowers are of the highest risk category, with no wherewithal and unable to get credit from the banking system) across different regions, religions, castes and communities.
It is unlikely that microfinance companies will help to significantly replace the traditional moneylender. Maybe they would bring down the interest rates a wee bit, but not substantially. Given the ticket size and the collection costs, I do not see any lending below, say, thirty percent per annum being economically viable. Yes, if they sacrifice on employee costs, they can, but then why would anyone do this?
The other big factor is the ease with which the companies raise money. Having a large amount of lendable resources is the biggest threat. I think geographical scaling is not possible. The next risk they will take is of increasing the ticket size. I hear of the limit being raised from ten to twenty-five thousand. This is extremely high risk. Already, if you go through the offer document of the recently listed SKS Micro, the fact that frauds do happen is indicated. When ticket sizes are small, the number of frauds will be lower. Since it is an element of the business model to hire people at different locations, without much training or financial scrutiny, employee frauds are bound to keep going up. Credit standards also would get diluted (if not already happening).
The other big issue is one of regulatory imposts. Today, the microfinance companies operate in a vacuum, with total freedom. They do not have to disclose the rates of lending etc to the borrower. Once they start doing all this, there is bound to be social and moral pressure to lower the rate. For some time they will pretend to do so, by creating some fancy structures and selling other products like insurance etc to protect yields. However, I do not see this as a sustainable thing. Also, as the problems of collections start mounting, employee turnover is bound to increase exponentially. The capital market welcome to SKS micro will push up employee costs as each one who wants to hit the capital market will try and poach anyone with prior experience.
In the eighties, we used to have a lot of NBFC’s that went in to consumer finance. Today they are shuttered down and dead. Will microfinance companies give them company in the graveyard?
Sunday, September 12, 2010
Monday, September 6, 2010
Buy, Sell or Hold???
(This piece appears in Moneylife magazine)
The Joys of Uncertainty
It is interesting to see the big debate on our markets in the context of ‘expected’ doom that is being forecast for the American markets. And just to put it in perspective, the doom prediction is also a forecast from someone who sees a monster pattern in the charts, so it adds credibility to people who believe in charts and Ouija boards. Since the investment world is not a rational one, I guess these kind of forecasters are perhaps more relevant once you run out of fundamental reasons to support a cause.
Our markets are perhaps under the spell of an ancient Chinese blessing (May you live in interesting times). Otherwise, how does one explain the following factors?
i) The markets are a near two year high;
ii) The P/E multiple is almost at 22 times;
iii) There are no value stocks available ( Am not talking about finding obscure companies with micro market capitalisation);
iv) Earnings growth continues to be strong with the June quarter results being quite strong with profit growth of over twenty percent;
v) Dividend yields (though Indian promoters hate to give money to non promoter shareholders) just above one percent;
vi) Price to Book Value is upward of four times (this is not relevant to India, since most companies stated asset costs are divergent with real costs due to funny accounting, over invoicing and inconsistent depreciation policies);
vii) Interest rates showing an upward bias, with ten year yields nearing eight percent and corporate borrowing rates going up;
viii) Gold prices are at record highs;
ix) Inflation on the ground abating, but price levels still at very high levels across commodities, food products, fuel and every other thing;
x) Central government finances are better than last year, but if you exclude the realisation of sale of family silver (the 3G network) not very comforting;
xi) Middle class buying continues unabated thanks to easy money and supply bottlenecks;
xii) Moneyflow in to Indian markets continues to be good and if there is a global crises, the amounts invested are an insignificant part of global wealth and will not run away;
xiii) Analysts, Economists, Planning Commission members, government mouthpieces and non traditional forecasters are all of the view that India will grow rapidly, irrespective of what happens to the world;
xiv) India, China, Russia etc are countries where the future of the world is etc;
xv) Buy recommendations from analysts, brokers outnumber sell recommendations by more than 20 to 1;
xvi) Corporate action (mergers etc) is strong;
xvii) IPO’s are back in fashion, with fads like microfinance queuing up;
xviii) Real estate markets are recovering all over India;
I can add to this list with a few more good things.
So, the only conclusion I can draw is that we are ‘buying’ in to optimism. Optimism- that growth is forever and should be easily above twenty percent. We do not care about the rest of the world.
We will slowly see bad news coming. What shape will it take? Protectionism (like raising visa fees, imposing quotas) from slow growing economies is surely one of them. The other could be in the form of inflation in double digits continuing for a few more years. Do not trust government numbers on this. Keep track of daily living prices, rents etc.,
But, the argument goes that even if bad news were to descend on our economy, the liquidity will not be impacted. This is simply because we are different. Ours is the land of hope. So, money managers world over will not disturb their assets in India, for fear of missing out if something were to happen. Also, the government may announce more positive things like permitting FDI somewhere, removing controls somewhere etc., So, we will have ‘good news’ flow coming in, that would stop the foreigners from taking away their money from our markets and may prompt them to hike their stakes in India. The FII’s have a total AUM of nearly ten lakh crores of rupees, with around fifteen percent coming in through Participatory Notes. They are the ones to decide the future direction of this market.
From the domestic side, the much hated ULIP is the biggest (perhaps the only) incremental investor in Indian markets. Retail investors are yet to make their direct presence felt, a sure sign that we are yet to reach the top.
So what does one do? Wait, sell or buy? This is a good time to sell and if I take the next ten years as the horizon, we should get same or lower prices at some points in time. One possibility is that the markets may remain in the range of 15,000 to 19,000 for the next few years, waiting for earnings to catch up. Of course, a surge in liquidity can lead to a blow out on the upside and if the markets touch anything like 21000 in the next twelve months; it may be a great selling opportunity.
If you are a long term investor (i.e. one who does not ‘need’ to sell) then keep your good quality stocks and dump the dubious ones or those that have become grossly overpriced in relation to their earnings.
The key dilemma is what to do with fresh money? My call is to keep it in some fixed income instrument and wait for better times. Ultimately, either price has to wait for earnings to catch up or correct in order to align with the earnings. Of course, if I take the last ten years as an example, the markets remain overvalued for a long period and good buying opportunities came just about twice.
The Joys of Uncertainty
It is interesting to see the big debate on our markets in the context of ‘expected’ doom that is being forecast for the American markets. And just to put it in perspective, the doom prediction is also a forecast from someone who sees a monster pattern in the charts, so it adds credibility to people who believe in charts and Ouija boards. Since the investment world is not a rational one, I guess these kind of forecasters are perhaps more relevant once you run out of fundamental reasons to support a cause.
Our markets are perhaps under the spell of an ancient Chinese blessing (May you live in interesting times). Otherwise, how does one explain the following factors?
i) The markets are a near two year high;
ii) The P/E multiple is almost at 22 times;
iii) There are no value stocks available ( Am not talking about finding obscure companies with micro market capitalisation);
iv) Earnings growth continues to be strong with the June quarter results being quite strong with profit growth of over twenty percent;
v) Dividend yields (though Indian promoters hate to give money to non promoter shareholders) just above one percent;
vi) Price to Book Value is upward of four times (this is not relevant to India, since most companies stated asset costs are divergent with real costs due to funny accounting, over invoicing and inconsistent depreciation policies);
vii) Interest rates showing an upward bias, with ten year yields nearing eight percent and corporate borrowing rates going up;
viii) Gold prices are at record highs;
ix) Inflation on the ground abating, but price levels still at very high levels across commodities, food products, fuel and every other thing;
x) Central government finances are better than last year, but if you exclude the realisation of sale of family silver (the 3G network) not very comforting;
xi) Middle class buying continues unabated thanks to easy money and supply bottlenecks;
xii) Moneyflow in to Indian markets continues to be good and if there is a global crises, the amounts invested are an insignificant part of global wealth and will not run away;
xiii) Analysts, Economists, Planning Commission members, government mouthpieces and non traditional forecasters are all of the view that India will grow rapidly, irrespective of what happens to the world;
xiv) India, China, Russia etc are countries where the future of the world is etc;
xv) Buy recommendations from analysts, brokers outnumber sell recommendations by more than 20 to 1;
xvi) Corporate action (mergers etc) is strong;
xvii) IPO’s are back in fashion, with fads like microfinance queuing up;
xviii) Real estate markets are recovering all over India;
I can add to this list with a few more good things.
So, the only conclusion I can draw is that we are ‘buying’ in to optimism. Optimism- that growth is forever and should be easily above twenty percent. We do not care about the rest of the world.
We will slowly see bad news coming. What shape will it take? Protectionism (like raising visa fees, imposing quotas) from slow growing economies is surely one of them. The other could be in the form of inflation in double digits continuing for a few more years. Do not trust government numbers on this. Keep track of daily living prices, rents etc.,
But, the argument goes that even if bad news were to descend on our economy, the liquidity will not be impacted. This is simply because we are different. Ours is the land of hope. So, money managers world over will not disturb their assets in India, for fear of missing out if something were to happen. Also, the government may announce more positive things like permitting FDI somewhere, removing controls somewhere etc., So, we will have ‘good news’ flow coming in, that would stop the foreigners from taking away their money from our markets and may prompt them to hike their stakes in India. The FII’s have a total AUM of nearly ten lakh crores of rupees, with around fifteen percent coming in through Participatory Notes. They are the ones to decide the future direction of this market.
From the domestic side, the much hated ULIP is the biggest (perhaps the only) incremental investor in Indian markets. Retail investors are yet to make their direct presence felt, a sure sign that we are yet to reach the top.
So what does one do? Wait, sell or buy? This is a good time to sell and if I take the next ten years as the horizon, we should get same or lower prices at some points in time. One possibility is that the markets may remain in the range of 15,000 to 19,000 for the next few years, waiting for earnings to catch up. Of course, a surge in liquidity can lead to a blow out on the upside and if the markets touch anything like 21000 in the next twelve months; it may be a great selling opportunity.
If you are a long term investor (i.e. one who does not ‘need’ to sell) then keep your good quality stocks and dump the dubious ones or those that have become grossly overpriced in relation to their earnings.
The key dilemma is what to do with fresh money? My call is to keep it in some fixed income instrument and wait for better times. Ultimately, either price has to wait for earnings to catch up or correct in order to align with the earnings. Of course, if I take the last ten years as an example, the markets remain overvalued for a long period and good buying opportunities came just about twice.
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