Saturday, November 17, 2007

Zist of Microfinance

The concept of micro-finance is described in the most simplistic terms; as “banking for the poor”. As the name suggests, the most transactions under “micro-finance” involve small amount of money. But it is a powerful tool which is being used effectively for addressing poverty, empowering the socially marginalized poor and strengthening the social fabric. And when it is being directed towards women, the benefits accruing out of the micro-finance activities are expected to become manifold. That is why it is supposed to be changing the lives of people in every part of the globe. The concept of micro-finance includes micro-credit, remittance, micro insurance and micro-savings in its ambit. So, it is a much broader term. In India, the Task Force on Micro-finance has defined micro-finance as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income and improve living standards”.

The history of micro-finance has been traced from the Second World War and the formalized institutions started date back in 1970s. The most successful stories in the filed of micro-finance are Grameen Bank in Bangladesh and Shore bank in USA which is known as the inventory for community development banking and institutions. In India, this step forward in this direction has been taken by NABARD and SIDBI and various SHGs, MFIs and NGOs are also operating in this direction. The benefits of micro-finance are not only limited in giving access to loans but it also helps in extreme poverty and hunger, achieve proper education, promote gender equality and women’s empowerment, reduce child mortality, improve maternal health, and combat disease. For micro-finance to be successful there is a need for formal financial institution and micro-finance institutions to work in tandem. For this, there is a need to properly identify the target group after which the products can be customized according to the needs of the customers. There is a need to learn lessons from the developed economies where the micro-finance is highly commercialized; partnerships are being created, public-private assets are being leveraged and know-how is being shared. Lessons from the best managed micro-finance institutions in the world have shown that use of certain methods like group lending, peer guarantees, step-ladder lending, matching repayment terms with borrowers’ cash flows etc., have contributed largely to their success. Also, they have competently used information technologies and performance-linked incentives for their staff. Most of all, the strong and firm commitment of the top management of the bank to the micro-finance operations is an essential precondition for the sustainability of this business in any commercial bank.

Saturday, November 3, 2007

Microfinance ---- series 1

The first thing which comes into my mind when I read or hear the word microfinance is that of the Grameen Bank of Bangladesh. My first acquintance with the word microfinance was in 2000 when International Gandhi Peace Prize for year 2000 was awarded jointly to Dr Nelson Mandela and Grameen Bank of Bangladesh. That day I surfed the net to get the knowledge about this word " microfinance" and came to know how it helped in improving the staus of people especially women in Bangladesh. though Bangladesh was and still it is a pooor country, but the social and economic prosperity it has brought about in Bangladesh demands appreciation and praise. The fertility rate in Bangladesh has come down from 7 children to 3-4 children in a span of just 25 years.

For me microfinance was just providing small loans to very poor families in order to help them setting their tiny businesses and engaging them in productive activities so that they are able to have a standard of living. but this is not microfinance. This is what we call as microcredit.

Microfinance involves more than this. It is a bundle of services including, credits, savings, insurance etc., because as poor families have very little access to formal financial institutions they require different financial services other than loans. Just like anyone else, poor families need diverse set of financial services through which they can build their assets, check and stabilize their consumption and mitigate any risks in future. e.g., Many poor farmers are not interested in borrowing a loan from the institution but they want a palce to save their earnings from the harvest which will get consumed in several months as one's daily requirements. The clients of microfinance are those people who do not or have little access to the formal financial institutions. these are generally low income homebased-product entrpreneurs such as small farmers, people who involve in food and petty trade in rural areas and in urban areas the clients are shopkeepers, artisans, service providers, street vendors etc.

Poverty is multi-dimensional and so does its vulnerable effects. The people around the poverty line are highly vulnerable to external shocks such as illness of the bread earner, theft, bad weather etc. that put enormous pressure on the small financial kitties thereby forcing the entire family into the glooms of darkness from which it becomes impossible for them to come out. Microfinance help the poor to build viable business which not only increases their economic conditions but also increases their food secuirty, security of children's education, access to medical services etc.

Friday, November 2, 2007

Erroneous Calculation of Inflation

Rising Inflation was the most ticklish question that gave nightmares to Man Mohan Singh Government. But were the prices of essential commodities actually rising?

While preparing for the test of Macroeconomics, I came to know that almost all the developed countries like USA, UK, China, Japan use CPI i.e., Consumer Price Index for calculating inflation whereas India uses Wholesale Price Index for calculating inflation. So, the method which is being used in our country for calculating persistent rise in the prices of general items over time (which we call as inflation) is erroneous.

The figures of inflation in dailies are not the true figures. They are distorted and manipulated not by the statisticians but by the very method which has been adopted to calculate them.

Let us have some general idea about CPI and WPI

Wholesale Price Index

WPI was first published in 1902, and was one of the more economic indicators available to policy makers until it was replaced by most developed countries by the Consumer Price Index in the 1970s.

WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only two weeks. The Indian government has taken WPI as an indicator of the rate of inflation in the economy.

Consumer Price Index (CPI)

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.

CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.

Now the question arises how the inflation measurement by WPI is erroneous?

WPI as the name suggests is at the whole sale level and so, it does not measure the exact price rise which the end-consumer end up paying.

The second major problem with WPI calculation that more than 100 out of 435 items have lost their significance from consumption point of view.

e.g., the commodities like coarse grains which is generally used for cattle feed thereby having no significance continue to be there in the list which is used to measure inflation. Also, the services which have a lot of importance in our economy is not there in the list. Besides this, the list of commodities was last reviewed in 1993-1994 and today most of the commodities have become redundant in their use.

WPI gives us the essence of the business which we are taking as the nerve of the consumers while calculating price rise.

So, there is a high time need that India should shift from WPI to CPI for measuring inflation.

But is it possible in near future to shift to CPI from WPI for calculating inflation?

In India, we have four CPI indices

CPI UNME (Urban Non Manual Employees)

CPI AL (Agricultural Labour)

CPI RL (Rural Labour)

CPI IW (industrial Workers)

So, decision to choose which CPI index will be risky and unwieldy.

Second, important reason for which we are not using CPI is reported on monthly basis with a huge time lag whereas WPI is published weekly basis.

In India, inflation is calculated on weekly basis.