CHAPTER 3: NOKIA AND MICROFINANCE
3.7 Getting Crowded
manufactured 300 million devices between then and October 2009, half of which were exported to 60 countries. "Nokia has been proactive as the market leader,".
Nokia was the first mobile phone maker to set up a satellite R&D center in India as it began tailoring products for the rural terrain. The phones look as sleek as high-end models, but are also sturdy to withstand rough usage. They have seamless keypads to protect them from dust and special grips to make them easier to hold in India's humidity. Some phones -- Nokia 1200 and Nokia 1208 -- also double up as flashlights because of rural India's frequent power outages.
Nokia has also embraced the country's plethora of languages, with interfaces in Hindi, Marathi, Kannada, Telugu and Tamil.
Along the way, Nokia has learned important lessons that are crucial to any MNC's survival in the hinterland. One of them relates to customer service. It‘s after-sales service includes some 700 care centers in urban India. But it's a different matter in rural India. Nokia has more than 300 vans staffed with sales representatives who regularly criss-cross the countryside.
It also set up low-cost collection points like chemist shops, where distributors and micro-distributors collect the phones and take them to the nearest care center.
But according to Nokia, customer service in rural markets such as India's can be just as -- if not more -- important before rather than after a sale. "Consumers always worry about anything going wrong with digital products and must always be assured that care or service is just a call away," says Shivakumar. "We needed to build care ahead of sales to provide a sense of trust and peace of mind." Now the vans are divided into two groups -- one to provide support and repairs and others to travel around with Nokia partners, ranging from Idea Cellular to SKS Microfinance, to promote their products and services while catering to novice mobile customers. "The rural market is still an area for a first-time user," says Shivakumar.
3.7 Getting Crowded
As all this happens, service providers have been slashing call rates and expanding their networks. That has had a cascading effect on the overall affordability of mobile telephony. Rates
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have plummeted from 32 cents a minute in 1998 to less than a cent today, cutting the average revenue per user from US$60 to US$4, one of the lowest in the world.
Nokia is now facing competition across all its product segments. The big confrontation is at the low end, where a number of players are wooing entry-level users. Chinese phones costing US$20 have flooded the market, and a slew of local and foreign competitors -- like Simoco, Kyocera, Intex and Karbonn -- are aiming to do the same. Micromax Mobile, too, is a challenger.
Since it launched two years ago, it has become the third-largest GSM phone vendor, with 6%
market share, after Nokia (62%) and Samsung (8%).
These changes offer Nokia another big lesson -- competing on price isn't the only avenue it can take as pressure intensifies in its rural markets. So rather than discounting prices on existing products, Nokia says it prefers to focus on providing additional services. "Just selling a device will not take you into the future,"
This is where Nokia Life Tools comes in. Launched last autumn in India, it bundles a handset with a service for farmers so that they can get access to crop prices and weather forecasts as well as English lessons for a monthly fee beginning at 65 cents. Nokia claims Life Tools has attracted nearly one million users using just one service provider -- Idea Cellular, the telecom arm of conglomerate Aditya Birla Group. It expects faster growth as it expands the tool using other service providers.
The success of Nokia's rural value-added services, is based on a range of key performance indicators (KPIs) including volume, the number of outlets that sell the offering, the returns to the service provider and visibility. But there are greater KPIs that might not show up on its top or bottom line. As he sees it, Nokia in rural India is not just a brand, but a "vehicle for social and economic transformation."
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Nokia brand awareness is tremendous, due to wide reach to poor rural population. This awareness started from 2006 after Nokia introduces microfinance to sell mobile phone. Brand awareness gives Nokia a boost to reach such number one position.
Now Nokia is #1 Most Trusted Brand in India for last 3-years5. Nokia on the other hand managed its rapid rise up the charts after being launched in India as recently as 1995. It debuted at a respectable 71 in 2004, moved to 44 in 2006, 4 in 2007 and then shot up to number one — a position that it has held three years running.
Nokia from a trust perspective is its robustness. The technology never lets the customer down. Sure there's competition and different interface points given the various operating systems.
But what works in Nokia's favour is that it is tried and tested, and therefore trusted."
5Nokia: Hat-trick for Nokia will have to read pitch to stay No 1
http://economictimes.indiatimes.com/features/brand-equity/Nokia-Hat-trick-for-Nokia-will-have-to-read-pitch-to-stay-No-1/articleshow/6470687.cms
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A key building block to this is Nokia's extensive service network. Nokia claims that 70%
of consumers who approach customer care are served within an hour, with 90% of phone issues handled within 24 hours. Even before environment friendliness became a really hot-button issue in India, Nokia developed a widely publicised recycling programme, run through its retail and collection points.
Nokia brand awareness is tremendous, due to wide reach to poor rural population. This awareness started from 2006 after Nokia introduces microfinance to sell mobile phone. Brand awareness gives Nokia a boost to reach such number one position. As mention above Nokia was number 44 in 2006 and position improved lot to number four (4) positions in 2007 due to microfinance.
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Chapter 4 : Current controversy on microfinance
4.1 Micro Credit Bubble
After SKS IPO, danger with so much capital, especially private equity, sloshing about is high valuations. SKS is valued at more than 6 times book value, or three times the global average, and higher than other Indian MFIs, according to The World Bank's Consultative Group to Assist the Poor.
The good news is: MFIs are growing, they need capital. And investors want microfinance exposure. They're buying MFIs like they bought IT 10 years ago. But the valuations don't reflect earnings expectations; they're due to excess capital flows. There are fundamentals backing these valuations. It can only lead to disappointment.
At least half a dozen large Indian MFIs, encouraged by the response to SKS, may be contemplating IPOs. These may include Spandana Sphoorthy Financial Ltd, Share Microfin Ltd, Asmitha Microfin and Bhartiya Samruddhi Finance. Clearly, now that SKS has got this kind of valuation, others will be looking at similar or even higher valuations.
But the valuations don't reflect the risks inherent in the business model: rising costs, worsening credit quality, risk of defaults, regulatory risks, high leverage levels and pressure on yields, which leaves little scope for return ratios to expand. Listing will bring additional pressure to perform, he said.
Muhammad Yunus, the Nobel Prize-winning pioneer of microfinance in Bangladesh, has warned that profit-making MFIs are no different from loan-sharking moneylenders. In India, the sector desperately needs credit bureau to maintain low delinquencies, and better governance, said World Bank‘s.
With a potential base of 120 million unbanked homes, likely credit demand of about $240 billion is the highest in the world, concern is responsible lending. There's no discipline; the industry should be careful there is no over-heating, that there's no bubble.
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cutting rates for new loans in Andhra Pradesh to 24.55 percent annually, from 26.69 percent.The prospect of new regulation and negative publicity are expected to delay the IPO plans of several operators in India. New rules could also make it hard for them to attract the sort of multiples commanded by SKS, the only listed player in India, which was valued at more than six times book value, or three times the global average, when it listed in August 2010 in a heavily oversubscribed issue.
Shares in SKS Microfinance have fallen 30 percent since 4th Oct 2010, in part because of ongoing media attention surrounding the firing of its chief executive just two months after its listing. Share Microfin Ltd, Spandana Sphoorthy Financial Ltd , Asmitha Microfin and Bhartiya Samruddhi Finance are all planning IPOs, analysts told Reuters in August.
Spandana, the country's No.2 player, had hoped to raise as much as $400 million in an IPO early next year (Q1 2011), but sources with direct knowledge of the matter said the offer may be delayed in the wake of recent industry developments. IPOs will come but they may not go for such high valuations like SKS.
4.2 Microfinance industry draws scrutiny
Reports of dozens of suicides by poor borrowers in Andhra Pradesh, the hub of India's microfinance sector, prompted the state to enact a rule against aggressive recovery practices by lenders who make loans that average about $150 to poor customers at interest rates that can top 30 percent.
On 28th Oct 2010, the finance minister said this week that he expects the industry to develop a code of conduct on interest rates and recovery practices, while the central bank recently set up a panel to study issues surrounding the sector. Several industry insiders and watchers said greater oversight is needed, although many worry about overregulation.
The rise of for-profit microfinance has made billions of dollars in credit available to millions of poor people in India and elsewhere, but it has also spurred controversy. Commercial
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microfinance makes lending attractive to poor borrowers who would otherwise be at the mercy of unregulated moneylenders who are known to charge interest rates as high as 100 percent.
Critics are uncomfortable with high profit margins earned from poor borrowers, and worry that the social mission of microfinance has been sidelined in favor of profits.
4.3 Microfinance in India is like subprime lending
Venugopal Reddy, former Reserve Bank of India (central bank) governor credited with saving the nation‘s financial system from the 2008 meltdown, has said what many finance experts believed, but did not have the courage to admit publicly: microfinance is India’s subprime.
―Ultimately, it‘s something like subprime lending,‖ Mr Reddy told Economic Times (ET) in an interview ahead of his book release on 23rd Nov 2010. ―The same incentives are operating here... it was securitization and derivatives that operated in the US. Here it is the priority sector lending by banks‖
Subprime lending refers to loans extended to people with poor repaying ability that ultimately led to defaults. The $5.5 billion microfinance industry is facing tumultuous times ever since the biggest, SKS Microfinance, created a controversy two months ago by sacking chief executive Suresh Gurumani.
There was a confluence of woes for the sector when the Andhra Pradesh government came up with legislation curbing SKS Microfinance operations. Banks pulled back on lending as some of the institutions were behaving more like moneylenders and in some cases drove borrowers to suicide.
Indian banks such as SBI, ICICI Bank and Axis Bank are estimated to have lent $3.5 billion to micro lenders. ICICI‘s lending is at $450 million, SBI‘s at more than $225 million and Sidbi‘s at $900 million, according to data from rating company Care.
The financial magnitude may not be the same with the Indian microfinance industry being tiny compared with the subprime lending crisis that led to more than a trillion dollars of losses
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salaries and commissions inducing unethical business, and leverage.―Also, if you look at it, the resource is leveraged; it‘s not just money lending business. The moneylender normally lends out his own money, whereas here the MFI is actually borrowing money from depositors and lending the money. So essentially, he is a moneylender, but a leveraged moneylender.‖
These institutions are no more the not-for-profit ones as envisioned by Nobel Laureate Mohammed Yunus, so regulations are essential. Bangladesh-born Yunus had seen micro lending as a vehicle to lift people out of poverty rather than enhance returns of wealthy investors in private equity funds.
―The idea that MFIs should be treated like banks but given soft regulations is dangerous,‖
said former central bank chairman Mr. Venugopal Reddy.
4.4 Looking at microfinance, dispassionately
Recently in late 2010, microfinance has lot of controversy in India. Part of the reason is that its deadly combination of high interest rates, coercive recovery processes and stories of suicides by farmers, extravagant salaries paid to top microfinance brass and promoters making huge sums selling their stake through initial public offerings gives the sector all the makings of a Bollywood potboiler.
The net result is that the Reserve Bank of India (RBI) has finally stepped in (reluctantly, perhaps) to try and do damage control. Never mind that the Bank really doesn‘t have much of a locus standi . As it warns in the press release announcing the setting up of an expert committee to look into the issue, it regulates only those Micro Finance Institutions (MFIs) that are registered with the RBI as non-banking finance companies (NBFCs) and more importantly, have systemic implications for financial sector stability.
And the reality is that for all the noise being made, as of now MFIs do not pose a systemic risk to the financial sector. Nonetheless, given the high-decibel controversy, the central bank‘s expert committee has been given a wide mandate: review the definition of ‗microfinance‘ and
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‗MFIs‘ and make appropriate recommendations; examine the prevalent practices of MFIs in regard to interest rates, lending and recovery practices to identify trends that impinge on borrowers‘ interests; delineate the objectives and scope of regulation of NBFCs undertaking microfinance by the RBI and the regulatory framework needed to achieve those objectives.
In short the RBI has been asked to see what can be done about the gathering storm clouds over the once-widely lauded microfinance sector. The move is well-intentioned. But the bottom-line is can the RBI ensure proper enforcement of whatever regulations it may frame in a sector characterised by a large number of players and scattered, impoverished, often uneducated clientele who are unaware of their rights?
Or should it limit its role to ensuring the misadventures of microfinance sector do not jeopardise the safety of the banking system since the latter rides on the implicit guarantee of taxpayer money. It could do this very simply by taking away the priority sector tag from lending to microfinance.
MFIs are essentially money-lenders, as the former RBI governor YV Reddy, who is known for making the right, if not always politically correct, statements said recently. But if that is the case we also need to keep in mind the limited success we‘ve had with regulating money lenders and design a suitable regulatory structure – one that lays down some broad prudential parameters without killing the sector altogether.
Too tight a regulatory framework will militate against the essence of micro-finance – informality and flexibility. And will be impossible to enforce in letter and spirit. The far better solution would be to ring-fence the banking system by removing the ‗priority sector‘ tag that provides easy access to funds to the microfinance sector and no less important, educate consumers. Remember there is no dearth of laws in this country; but when it comes to implementation and enforcement it is another story altogether.
Think of all the laws on money-lending. Have any of them made an iota of difference? No, they have not for the simple reason that when people are poor and desperate they will go to money lenders, laws be dammed. Poverty, lack of education and social mores that sanction, any mandate, unproductive (wasteful?) expenses on occasions like funerals, marraige etc, make it
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impossible for the formal banking system to step into the shoes of the money-lender. To the extent micro-finance meets the same kind of needs its place can never be taken by the formal banking system either.
However between a situation like we have today with virtually no rules and one where there is a labyrinth of rules of the kind the Andhra Pardesh Ordinance has sought to impose, some kind of middle path that lays down some rules will at least provide a yardstick against which they can be measured might help. If regulations become like what the wag said about second marriages – the triumph of hope over experience – then we‘ll not get very far.
The trick, as in much else in life, is to get the balance right. Dispassionately!
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Chapter 5: Conclusions
5.1 Double bottom line
Muhammad Yunus, the Nobel Prize-winning pioneer of microfinance in Bangladesh and founder of Grameen Bank, has expressed his displeasure about microfinance's move from its social mission to a commercial model.
"The direction is very clear that microfinance institutions have to pass on the benefits of economies of scale and lower costs to clients in the form of lower interest rates," said Royston Braganza, chief executive of Grameen Capital India.
Grameen Capital India is a Mumbai-based nonprofit consulting and investment banking firm that is a collaboration between Grameen Foundation , IFMR Trust and an arm of Citigroup.
Mexico's Compartamos became the first microfinance company to go public, in 2007, bringing the debate over the industry's dueling objectives -- the so-called "double bottom line" -- to the fore.
The business case for the existence of MFIs is so strong, you cannot finish it off. There is a huge market and there is a huge need that banks are not able to meet. India is home to roughly 400 microfinance lenders with a combined 207 billion indian rupees ($4.6 billion) in outstanding loans to 70 million poor people. The 10 largest players account for roughly 80 percent of the industry. With a potential base of 120 million unbanked homes, microcredit demand in India has the potential to rise sharply.
New rules are expected eventually to bring down interest rates, and reduce aggressive lending and collection practices, potentially squeezing out smaller players. Ultimately, that could make the industry more transparent and accountable, if less profitable. If at the end of it, the unethical people are rooted out of the sector that will be good in long-run for MFI industry.
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In past budgets, microfinance has been overshadowed by heavyweight industries such as IT, autos, telecom, banking and infrastructure. But now microfinance is emerging as an influential and high-potential industry in its own right. C Rangarajan‘s committee on financial inclusion reported that microfinance institutions (MFIs) ―could play a significant role in facilitating inclusion, as they are uniquely positioned in reaching out to the rural poor.‖
In past budgets, microfinance has been overshadowed by heavyweight industries such as IT, autos, telecom, banking and infrastructure. But now microfinance is emerging as an influential and high-potential industry in its own right. C Rangarajan‘s committee on financial inclusion reported that microfinance institutions (MFIs) ―could play a significant role in facilitating inclusion, as they are uniquely positioned in reaching out to the rural poor.‖