Effect of the Andhra Pradesh Crisis on the Indian Micro Finance Industry

In rural India, capital has been a scarce resource for the most deprived sections. On one hand, local money lenders charge exorbitant rates and on the other, traditional financial institutions hesitate to extend credit to these borrowers. It is this gap in the lending market that micro-finance institutions (MFIs) have bridged by introducing the innovative concept of disbursing small loan amounts to a large number of clients repayable at short intervals. There are mainly two variations of the MFI model:

Self Help Groups

SHGs typically start off as loosely-linked groups of 10-20 members who meet regularly and pool their savings and disburse micro-loans from these savings. After roughly 6 months of stable savings, banks or other MFIs start providing credit to these groups. Further disbursement of loans happens according to the criteria developed by the group.

Grameen Model

In this model, each village has one or more centres with 6-8 groups of 5-6 members each.  The groups are very tightly bound together, resulting in high social pressure to repay the loans. Any member who fails to pay, risks social exclusion, but additionally, his group still has to repay his loan, thus ensuring nearly 100% repayment rates. MFIs under this model have shown the fastest growth both geographically and in the number of customers. But, developing such self-regulating centres requires a lot of training and effort.

Growth Drivers

Untapped Market: The MFI model made it possible to extend credit at affordable rates to the deprived sections of the society. As there was a dire need for credit in this segment and they did not have other comparable alternatives, MFIs were a welcome relief for them and thus there was a huge influx of customers.

Government Policies: Favorable policy changes, namely the 2004 RBI decree that included lending to MFIs through intermediaries under the purview of priority sector lending, led to an exponential growth of the microfinance industry; currently a total of Rs. 60,000 crores has been sanctioned by banks for lending to MFIs.

The Beginning of the Crisis

Most of the phenomenal growth witnessed by the industry was concentrated in Andhra Pradesh. Some of the big players like SKS were alleged of charging exorbitant interest rates and employing unethical loan recovery practices. The interest rates charged by the MFIs seemed inelastic to the steep decline in primary lending rates. The industry in general and SKS in particular continued to grow tremendously. In order to raise more funds to widen its reach, SKS decided to go for an IPO and with the backing of big PE players, SKS pulled off a highly successful IPO despite widespread criticisms of commercialization of the industry. This was soon followed by stories of SKS employees cashing out their stock options, becoming instant millionaires and the then CEO being sacked, leading to questions about corporate governance at SKS.

Major Issues

The problems at SKS exposed just the tip of the iceberg of issues plaguing the Indian microfinance industry. PE investors, the financial backbone of the industry, were pressurizing the MFIs to focus on growth. Many issues arose as a result:

Lending for Consumption: The pressure from PE investors to focus on aggressive growth led MFIs to extend loans for purchase of lifestyle items and consequently created a debt trap for the poor by encouraging extravagance.

Deviation from the SHG concept: The relentless focus on growth led to spending little time and effort on developing mutual trust within SHGs that is required for timely repayments.

Multiple Lending: Faced with an inability to pay back earlier loans that were used for consumption, many customers took loans to repay them, thus falling into a vicious debt trap.

Suicide of Borrowers: Unable to pay their loans, many borrowers committed suicide and many regional political parties exploited this to cast the MFIs in an evil light, resulting in the drop of repayment levels from 99% to 20%.

The Aftermath

To bring about changes in corporate governance of the MFIs and hoping to regulate the profit-motive of these institutions, the AP government passed the Microfinance Institutions Ordinance 2010. The salient features of the Ordinance were:

Registration of MFIs: MFIs have to be registered and have to furnish details such as interest rates charged, area of operations and methods used for loan recovery. They have to submit monthly reports of their operations which would be open to scrutiny.

Regulation of Interest Rates: a) Interest payable on a loan should not exceed the principal amount and this should be implemented with retrospective effect.
b) MFIs have to make the interest rates charged publicly available. And no costs other than the ones laid down in the application should be charged.

Curbing Multiple Lending: a) Second loan to be granted only on clearance of the first loan.
b) Membership only in one SHG and SHG members require permission of registering authority to take a second loan.

Directives for Loan Recovery: a) Only MFI personnel with identity cards to go for recovery, which would take place at Gram Panchayat offices and not at the borrowers’ residence.
b) Fast courts to be setup to handle grievances and loan sharks to face up to 3 years in jail and/or Rs.1 lakh fine.

Long- Term Implications

These measures are short-term fixes and have created a moral hazard problem for MFIs.The restrictions on multiple borrowings would mean non-renewal of a lot of current loans. And since most groups were made by MFIs and were not social groups that came together themselves, there is little social incentive to repay. Also due to the combined effect of political opportunism and the general anti-MFI environment, borrowers are exploiting the recovery laws to escape from repayment. If the trend continues, it would become increasingly difficult for the MFIs to get loans from banks for their operations. Thus, we see that the very laws which were meant to facilitate and regulate MFI activity in the state are now curbing all of MFI operations.

The authorities should realize that microfinance is in principle, capable of providing access to capital for the most deprived sections and the current failure was systemic, due to lack of regulation. This can be rectified by bringing proper policy changes through a regulator like RBI, which has a long history of good policy making. This would ensure that regulation of this sector is immune from political influences. Only then can the firms hope to survive through the current times and prosper and replicate the model in all parts of the country.

Low-Cost Carriers tranforming Indian aviation

The aviation sector is often believed to be in very close correlation with a region’s economic growth and prosperity. In parallel with rapid globalization and India’s recent growth story, the Commercial Aviation sector in India has witnessed a paradigm shift over the past two decades. It has changed from an over regulated, monopolized and ill-managed sector to a liberal and investor friendly playground. In 1953, nine existing companies were transferred to two government run entities: Indian Airlines (serving domestic routes) and Air India (serving international routes. From such a nationalized beginning the sector gradually opened up and 1992 was marked with the government deregulating India’s aviation sector. This marked the beginning of a new era in Commercial Indian Aviation where private airlines flourished and air travel came of age.
Simultaneously, on the global picture, dynamics of the aviation sector in the international market changed drastically with the introduction of Low Cost Carriers (LCCs) like Southwest Airlines (USA) and Ryanair (Europe). It was finally in 2003 that the launch of Air Deccan marked a beginning for Low Cost Carriers in India. This led to a reincarnation of air travel in India from “for the elites” to “for the people”. Ever since Air Deccan started the revolution, many such players have entered the industry and they continue to flourish with rapidly climbing revenues and air traffic figures.
Through a broad view point, the Indian LCCs have emulated their international counterparts who achieved success much earlier but there have been considerable efforts to include the Indian pulse.

Low Cost Carriers in India: Business Model

The LCC model is not just about low fares but also about more efficient operations and a constant drive to reduce operational costs. Very plainly, LCCs represent a leaner and fitter organization. The entire structure rests on the important principle of volume gain, no-frill plain travel services and an aim to commoditize air travel for the common man. Their operations are characterized by low margins and load factors are crucial for profitability.

Growth Drivers

Passenger Growth:  Airline passenger growth is generally related to the GDP of a country. It is seen that air transport grows at twice the rate of GDP growth. The international passengers have grown by around 16% and the domestic passengers have grown by over 22% over the years. Air travel has increased a lot over the years because of multiple reasons. Some the important ones being:
  • Increase in inbound and outbound tourists and medical tourism
  • Over 300 million strong middle class which can be tapped as a potential passenger and can be drawn away from railways.
  • Disposable incomes are expected to grow at an average rate of 8.5% per annum till 2015, which shows willingness on the part of passengers to shift to air travel.
Passenger Growth Data
Low Entry Barriers: Recent analysis in the sector has suggested that airline launch can be done with a capital of $10 million. Most of the components of air service ground handling; catering, training, reservation etc are outsourced by airline companies. Costs are further reduced by recruiting retired personnel from the Air force or PSU airlines in senior positions.
Economic factors:  The economy of India in the recent past has played an important role in giving a boost to many sectors in the country out of which aviation is a prominent one. The economy of India is growing steadily at about 9% per annum which has led to overall prosperity, growth and investments. More and more players want to be part of the aviation sector and offer better deals and better deals and service to the passenger.

Strategies adopted by different LCCs in India

Differentiation: The LCCs in India are mainly characterized by low fares but are positioned very differently in the market. They offer different value propositions to the customer and this is a major factor in the success of one airline over another.

Differentiation Strategies:
  1. IndiGo (http://www.goindigo.in) – On time performance guaranteed. Even at low fares.
  2. Spicejet (http://www.spicejet.com)– No Frill plain vanilla air travel at cheapest rates.
  3. Kingfisher Red (http://www.flykingfisher.com)– Value added services like snacks at LCC fares.
Market Share Distribution
Conquering the rail market: The demand potential for LCC air travel is huge. As of today, Indian railways carry about 17 million passengers every day which is more than what Indian Airlines carry in a year. Even a small percentage of it if attracted to LCCs will generate enormous revenues for the carriers. It is also observed that 20% of the railways’ revenue is generated by upper class travellers and that is exactly where LCCs wish to target their marketing campaigns.
Consolidation: Being an extremely competitive industry, the aviation sector has seen a fair amount of consolidation. In the near past we have seen lot of activity happening in this sector when it comes to consolidation. The Jet-Sahara deal and the Kingfisher-Air Deccan deal for example define the dynamics of the industry. These consolidation activities have been a direct result of the introduction of the concept of LCCs.

Impact of Low Cost Carriers on Indian Aviation

From an era of natural monopoly dominated by the state-run Air India and Indian airlines to a hypercompetitive industry that is integral to India’s vision for growth; the aviation industry has evolved and so have the business practices and industry dynamics. In addition to the liberalization by the Indian government in 1990 which allowed private players to enter the aviation sector, the introduction and establishment of Low Cost Carriers – as discussed in previous sections – has been a significant game changer. 
Impact on passenger traffic
The development of LCCs was well supported by the policy changes that happened simultaneously viz. Increase in FDI Cap, Encouragement of development of airports and infrastructure, allowing private carriers to operate overseas etc. The increase in passenger traffic was enormous and unexpected. Domestic passenger growth in the aviation sector was about 11 percent in 2003-04 but saw a massive increase to 25 percent in 2005.
A micro level representation of impact of low cost carriers in India can be seen by the effect of Air Deccan flights on the Delhi-Guwahati route. Soon after Air Deccan’s launch the average load on the Delhi-Guwahati route grew from 162 passengers a day to 215 passengers a day and average fares plummeted from INR 6000 to INR 4000. 
Impact on fleet sizes and seat capacity
The increase in passenger statistics due to evolution of LCCs has had a direct impact on capacity expansion in the aviation sector. Fleet sizes, routes and available seat capacity have grown tremendously. The increase in traffic on air routes has opened up opportunities that allow scalability in operations and thus airlines have been increasing fleet sizes. At present India accounts for more than 11% of global aircraft demand which is huge considering the low penetration of air transportation in India. 
Impact on Air Fares
As a fundamental of the LCC business model the average air fares in India have dropped considerably. Low fares are aimed at higher penetration levels and at commoditizing air travel. LCCs consistently offer 10-40% lower fares than FSCs. Low fares have been the most important factor in the success of LCCs in India. However, the LCCs face constant pressure on fares due to variability issues in demand and ATF prices. 
Impact on Full Service Carriers (FSCs)
Rise of LCCs has had strong impact on FSCs in Indian airspace. The popularity of the initial LCCs such as Air Deccan forced the FSCs to rethink their business moves and induced stiff competition between the airlines. Fares have been the main point of competition. Although the FSCs viz. Jet Airways and Kingfisher airlines are still preferred over LCCs for the quality of service, the economical flying segment demonstrates much greater growth rates for the years to come. The LCC phenomenon led to Jet Airways launching its own all economy class airline JetKonnect which is aimed at competing with the LCCs.
The LCCs have also proven to be robust and easier to sustain than FSCs during business downturns that have been more frequent than ever before. Even during the financial crisis, among volatile ATF costs and a bleeding aviation sector, LCCs fared decently well and performed much better than heavy debt laden FSCs who continue to make losses.

Is Philippines the new India ?

Over the last two decades, Business Process Outsourcing has emerged as a vital practice for organizations in almost every sector in an economy. This is primarily due to the competitive advantages it provides to organizations in terms of effective cost control structures, scalability, optimization of operations and development of core competencies. This was facilitated by rapid advances in low-cost technology, better communication facilities as well as increasing westernization of key regions in Asia, which were identified as the primary outsourcing destination for western countries.
By the early 21st century, India became the preferred destination for Business Process Outsourcing and was exporting a large array of services including data processing, software development, analytics, financial services and contact centre services. In 2005, USA was the largest importer of BPO services from India followed by Western European countries contributing shares of 66% and 20% to India’s BPO export revenues respectively. Among the services exported, one of the most sought-after services was voice service through the establishment of call centres. Companies engaged in this area of the BPO industry provide real-time customer support, technical support and telemarketing services for their clients. India has firmly established itself as the preferred location for setting up of customer care centres for organizations, and until recently, has held a virtual monopoly over the global call centre market.

Over the past 5 years, however, India has witnessed immense competition in the call centre market from a much smaller South-East Asian nation – Philippines. Organizations are gradually shifting bases to Philippines due to a number of factors. In fact, projected revenues from call centre operations in 2010 for Philippines are $5.7 billion, higher than the corresponding figure of $5.5 billion for India. “Ten years down the line, the Philippines may be a hotter destination,” said Sanjeev Bhatia, who oversees international operations for Wipro BPO. This reflects the increasing cause for concern for organizations in the Indian BPO services space, which are now looking for competitive strategies to fend off competition from Philippines.
The economy of Philippines bears a number of similarities to the Indian economy. From being a primarily agrarian economy, the country now depends more on the services sector for GDP growth. The services sector contributes to approximately 55% of the GDP of Philippines as per 2009 estimates. Of this, the BPO sector alone contributes 4.5%, and the country is being aggressively promoted to investors as the call-centre capital of the world by the government. These efforts are being led by the Department of Trade and Industry, and are part of the nation’s long term Information and Communication Technology roadmap. Also, Philippines is the second-largest employer of people in the BPO sector after India. As of 2008, contact centres accounted for 31% of the total number of companies comprising the BPO industry in Philippines. By 2010, the industry had achieved a CAGR of 38% over a period of five years, indicating a large amount of investment in the industry.

A Comparison
The criteria used to judge a country’s appeal as an outsourcing location can be broadly classified as economic, social and cultural, political and technological factors.
Economic Factors
Cost effectiveness – While considering the cost effectiveness of a location, the three main factors that count are wages, infrastructure costs and currency exchange rates. Labour costs typically comprise up to 60% of the total cost in a call centre as primary investment is in human resources. India has scored well on all the three factors in the past but its cost effectiveness has been falling in the recent years due to rising wage rates and appreciation of the Indian rupee against the US Dollar.Like India, Philippines has benefitted tremendously from average wage rates which are over 50% lower than those prevalent in countries such as the US or the UK.
Labour – In terms of labour volume, India is much larger than Philippines. It produces the largest number of English speaking graduates among developing nations. Philippines also has a highly skilled labour force in terms of English speaking graduates. Both India and Philippines are unique in the sense that they are the only two developing countries with a current working-age population of over 60% which is expected to remain above 60% by 2050. However, when it comes to managerial positions, Philippines faces scarcity of talent since its BPO industry is much smaller as compared to the Indian industry. One of the biggest problems faced by the BPO industry in the two countries is high attrition rates. Philippines has witnessed lower attrition rates (approximately 33%) as compared to India (upto 40%), which is mainly due to less competition for skilled human resources from other sectors like business processing and IT.
Macro-economic environment – India is emerging as one of the strong, self-sustaining economies of the world. Philippines, on the other hand, has undergone a recent transformation to become an industrialised economy supported by manufacturing and services sectors instead of agriculture. Therefore, the macro-economic environment of India is more stable and mature.
Social & Cultural Factors
Language – Language has been a critical factor in helping companies choose Philippines for offshoring contact centres over other nations such as India and China. Philippines is the third largest English speaking country in the world, with American English being the preferred language among a large number of Filipino youths. With USA being the largest importer of call centre services in the world, companies have capitalised on a high literacy rate of 94% and American English fluency level of 75% to set up customer care and support centres in Philippines. India, on the other hand, has British English speaking population.
Cultural Compatibility – Philippines was under the control of the United States between 1898 – 1935, and since then the US has left its cultural stamp on the nation. The country also follows the American education system and has experienced arguably the highest degree of westernization among Asian countries, and the neutral accent of Filipinos along with familiarity with American culture gives them an edge over India.
Education – Although Philippines has a much higher literacy rate, India has a higher Information Technology skills index of 8.59 compared to 7.44 for Philippines (a rating given out of 10 with 10 as the highest score). India’s educational institutions are famous for producing technically sound people while Philippines’ arts education programs produce well-rounded people more suited for communications work and hence the BPO industry.
Political & Legal Factors
Government Support – Ever since liberalisation, the Indian Government has supported the services industry by giving tax holidays and allocating Special Economic Zones to it. The Philippines government emulated India by setting up Special Economic Zones and creating a fast approval process for infrastructure projects. Hence, both the countries have supportive governments which have introduced BPO industry friendly policies. Apart from policies, comparison of Indian and Philippines governments in terms of transparency, red-tapism and corruption reveals that India is rated much higher than Philippines resulting in a more conducive business environment in India.
Techonological Factors
Telecom & Internet Connectivity – In Philippines, world class telecommunication and networking infrastructure have enabled companies to set up call centre operations quickly and efficiently. On the other hand, India does not have a liberalised telecom policy yet, leading to higher bandwidth tariffs.
Data Security & privacy – Indian companies give adequate importance to data security and process quality. They have adopted international quality standards like ISO, making them attractive to global clients. The government has also helped by strengthening the regulatory framework for data security. However, this is not the case in Philippines.

As per Gartner’s report on the “Top 10 locations for offshore services in Asia Pacific in 2010”, India still continues to dominate the BPO services sector, and there are no major indications of this trend changing. Revenues from outsourcing amount to $70 billion in India, as compared to $9 billion for Philippines, and it is only in the contact centre space that India is beginning to lag behind the latter. A major worrying trend is that of Indian companies themselves shifting voice operations to Philippines. For example, Wipro BPO has set up a centre in the city of Cebu where it employs 4000 people, as compared to 3000 in India. This can be countered by ensuring that sufficient initiatives are taken to develop the skill levels of call centre executives in India. The trend of Philippines turning into a global call centre hub may have a significant short term impact on the Indian BPO sector, but the long term sustainability of India’s superiority in this sector is definitely not in question yet.