Once there lived a village of creatures along the bottom of a great crystal river.
The current of the river swept silently over them all – young and old, rich and poor, good and evil, the current going its own way knowing only its own crystal self.
Each creature in its own manner clung tightly to the twigs and rocks of the river bottom, for clinging was their way of life, and resisting the current what each had learned from birth.
But one creature said at last. “I am tired of clinging. Though I cannot see it with my eyes, I trust that the current knows where it is going. I shall let go, and let it take me where it will. Clinging, I shall die of boredom.
The other creatures laughed and said: “Fool! Let go, and that current you worship will throw you tumbled and smashed across the rocks, and you will die quicker than boredom!”
But the one heeded them not, and taking a breath let go, and at once was tumbled and smashed by the current across the rocks.
Yet in time, as the creature refused to cling again, the current lifted him free from the bottom and he was bruised no more.
And the creatures downstream, to whom he was a stranger, cried, “See a miracle! A creature like ourselves, yet he flies! See the Messiah, come to save us all!”
And the one carried in the current said. “I am no more Messiah than you. The river delights to lift us free, if only we dare let go. Our true work is this voyage, this adventure.”
But they cried the more, “Saviour!” all the while clinging to the rocks, and when they looked again, he was gone, and they were left alone making legends of a Saviour.”
“What you hold on to most dear will always hold you back!!”
Source: “Illusions” – by Richard Bach
Wednesday, 31 August 2011
The Folded Napkin - A Trucker Stop Story
"I try not to be biased, but I had my doubts about hiring Stevie. His placement counselor assured me that he would be a good, reliable busboy. But I had never had a mentally handicapped employee and wasn't sure I wanted one. I wasn't sure how my customers would react to Stevie.
He was short, a little dumpy with the smooth facial features and thick-tongued speech of Downs Syndrome. I wasn't worried about most of my trucker customers because truckers don't generally care who buses tables as long as the meatloaf platter is good and the pies are homemade.
The ones who concerned me were the mouthy college kids traveling to school; the yuppie snobs who secretly polish their silverware with their napkins for fear of catching some dreaded 'truck stop germ'; the pairs of white-shirted business men on expense accounts who think every truck stop waitress wants to be flirted with. I knew those people would be uncomfortable around Stevie so I closely watched him for the first few weeks...
I shouldn't have worried. After the first week, Stevie had my staff wrapped around his stubby little finger, and within a month my truck regulars had adopted him as their official truck stop mascot.
After that, I really didn't care what the rest of the customers thought of him. He was like a 21-year-old in blue jeans and Nikes, eager to laugh and eager to please, but fierce in his attention to his duties. Every salt and peppershaker was exactly in its place, not a breadcrumb or coffee spill was visible when Stevie got done with the table.
Our only problem was persuading him to wait to clean a table until after the customers were finished. He would hover in the background, shifting his weight from one foot to the other, scanning the dining room until a table was empty. Then he would scurry to the empty table and carefully bus dishes and glasses onto his cart and meticulously wipe the table up with a practiced flourish of his rag.
If he thought a customer was watching, his brow would pucker with added concentration. He took pride in doing his job exactly right, and you had to love how hard he tried to please each and every person he met.
Over time, we learned that he lived with his mother, a widow who was disabled after repeated surgeries for cancer. They lived on their Social Security benefits in public housing two miles from the truck stop. Their social worker, who stopped to check on him every so often, admitted they had fallen between the cracks. Money was tight, and what I paid him was probably the difference between them being able to live together and Stevie being sent to a group home. That's why the restaurant was a gloomy place that morning last August, the first morning in three years that Stevie missed work.
He was at the Mayo Clinic in Rochester getting a new valve or something put in his heart. His social worker said that people with Downs Syndrome often have heart problems at an early age so this wasn't unexpected, and there was a good chance he would come through the surgery in good shape and be back at work in a few months.
A ripple of excitement ran through the staff later that morning when word came that he was out of surgery, in recovery, and doing fine.
Frannie, the head waitress, let out a war hoop and did a little dance in the aisle when she heard the good news.
Bell Ringer, one of our regular trucker customers, stared at the sight of this 50-year-old grandmother of four doing a victory shimmy beside his table.
Frannie blushed, smoothed her apron and shot Bell Ringer a withering look.
He grinned. 'OK, Frannie , what was that all about?' he asked..
'We just got word that Stevie is out of surgery and going to be okay.'
'I was wondering where he was. I had a new joke to tell him. What was the surgery about?'
Frannie quickly told Bell Ringer and the other two drivers sitting at his booth about Stevie's surgery then sighed: 'Yeah, I'm glad he is going to be OK,' she said. 'But I don't know how he and his Mom are going to handle all the bills. From what I hear, they're barely getting by as it is.' Bell Ringer nodded thoughtfully, and Frannie hurried off to wait on the rest of her tables. Since I hadn't had time to round up a busboy to replace Stevie and really didn't want to replace him, the girls were busing their own tables that day until we decided what to do.
After the morning rush, Frannie walked into my office. She had a couple of paper napkins in her hand and a funny look on her face.
'What's up?' I asked.
'I didn't get that table where Bell Ringer and his friends were sitting cleared off after they left, and Pony Pete and Tony Tipper were sitting there when I got back to clean it off,' she said. 'This was folded and tucked under a coffee cup.'
She handed the napkin to me, and three $20 bills fell onto my desk when I opened it. On the outside, in big, bold letters, was printed 'Something For Stevie'.
'Pony Pete asked me what that was all about,' she said, 'so I told him about Stevie and his Mom and everything, and Pete looked at Tony and Tony looked at Pete, and they ended up giving me this.'
She handed me another paper napkin that had 'Something For Stevie' scrawled on its outside. Two $50 bills were tucked within its folds. Frannie looked at me with wet, shiny eyes, shook her head and said simply: 'Truckers!!'
That was three months ago. Today is Thanksgiving, the first day Stevie is supposed to be back to work.
His placement worker said he's been counting the days until the doctor said he could work, and it didn't matter at all that it was a holiday. He called ten times in the past week, making sure we knew he was coming, fearful that we had forgotten him or that his job was in jeopardy.
I arranged to have his mother bring him to work. I then met them in the parking lot and invited them both to celebrate his day back.
Stevie was thinner and paler, but couldn't stop grinning as he pushed through the doors and headed for the back room where his apron and busing cart were waiting
'Hold up there, Stevie, not so fast,' I said. I took him and his mother by their arms. 'Work can wait for a minute. To celebrate you coming back, breakfast for you and your mother is on me!'
I led them toward a large corner booth at the rear of the room.
I could feel and hear the rest of the staff following behind as we marched through the dining room. Glancing over my shoulder, I saw booth after booth of grinning truckers empty and join the procession. We stopped in front of the big table. Its surface was covered with coffee cups, saucers and dinner plates, all sitting slightly crooked on dozens of folded paper napkins 'First thing you have to do, Stevie, is clean up this mess,' I said. I tried to sound stern.
Stevie looked at me, and then at his mother, then pulled out one of the napkins. It had 'Something for Stevie' printed on the outside. As he picked it up, two $10 bills fell onto the table.
Stevie stared at the money, then at all the napkins peeking from beneath the tableware, each with his name printed or scrawled on it. I turned to his mother. 'There's more than $10,000 in cash and checks on that table, all from truckers and trucking companies that heard about your problems. 'Happy Thanksgiving.'
Well, it got real noisy about that time, with everybody hollering and shouting, and there were a few tears, as well.
But you know what's funny? While everybody else was busy shaking hands and hugging each other, Stevie, with a big, big smile on his face, was busy clearing all the cups and dishes from the table....
Best worker I ever hired."
Plant a seed and watch it grow.....
Source: Rohan Singal
He was short, a little dumpy with the smooth facial features and thick-tongued speech of Downs Syndrome. I wasn't worried about most of my trucker customers because truckers don't generally care who buses tables as long as the meatloaf platter is good and the pies are homemade.
The ones who concerned me were the mouthy college kids traveling to school; the yuppie snobs who secretly polish their silverware with their napkins for fear of catching some dreaded 'truck stop germ'; the pairs of white-shirted business men on expense accounts who think every truck stop waitress wants to be flirted with. I knew those people would be uncomfortable around Stevie so I closely watched him for the first few weeks...
I shouldn't have worried. After the first week, Stevie had my staff wrapped around his stubby little finger, and within a month my truck regulars had adopted him as their official truck stop mascot.
After that, I really didn't care what the rest of the customers thought of him. He was like a 21-year-old in blue jeans and Nikes, eager to laugh and eager to please, but fierce in his attention to his duties. Every salt and peppershaker was exactly in its place, not a breadcrumb or coffee spill was visible when Stevie got done with the table.
Our only problem was persuading him to wait to clean a table until after the customers were finished. He would hover in the background, shifting his weight from one foot to the other, scanning the dining room until a table was empty. Then he would scurry to the empty table and carefully bus dishes and glasses onto his cart and meticulously wipe the table up with a practiced flourish of his rag.
If he thought a customer was watching, his brow would pucker with added concentration. He took pride in doing his job exactly right, and you had to love how hard he tried to please each and every person he met.
Over time, we learned that he lived with his mother, a widow who was disabled after repeated surgeries for cancer. They lived on their Social Security benefits in public housing two miles from the truck stop. Their social worker, who stopped to check on him every so often, admitted they had fallen between the cracks. Money was tight, and what I paid him was probably the difference between them being able to live together and Stevie being sent to a group home. That's why the restaurant was a gloomy place that morning last August, the first morning in three years that Stevie missed work.
He was at the Mayo Clinic in Rochester getting a new valve or something put in his heart. His social worker said that people with Downs Syndrome often have heart problems at an early age so this wasn't unexpected, and there was a good chance he would come through the surgery in good shape and be back at work in a few months.
A ripple of excitement ran through the staff later that morning when word came that he was out of surgery, in recovery, and doing fine.
Frannie, the head waitress, let out a war hoop and did a little dance in the aisle when she heard the good news.
Bell Ringer, one of our regular trucker customers, stared at the sight of this 50-year-old grandmother of four doing a victory shimmy beside his table.
Frannie blushed, smoothed her apron and shot Bell Ringer a withering look.
He grinned. 'OK, Frannie , what was that all about?' he asked..
'We just got word that Stevie is out of surgery and going to be okay.'
'I was wondering where he was. I had a new joke to tell him. What was the surgery about?'
Frannie quickly told Bell Ringer and the other two drivers sitting at his booth about Stevie's surgery then sighed: 'Yeah, I'm glad he is going to be OK,' she said. 'But I don't know how he and his Mom are going to handle all the bills. From what I hear, they're barely getting by as it is.' Bell Ringer nodded thoughtfully, and Frannie hurried off to wait on the rest of her tables. Since I hadn't had time to round up a busboy to replace Stevie and really didn't want to replace him, the girls were busing their own tables that day until we decided what to do.
After the morning rush, Frannie walked into my office. She had a couple of paper napkins in her hand and a funny look on her face.
'What's up?' I asked.
'I didn't get that table where Bell Ringer and his friends were sitting cleared off after they left, and Pony Pete and Tony Tipper were sitting there when I got back to clean it off,' she said. 'This was folded and tucked under a coffee cup.'
She handed the napkin to me, and three $20 bills fell onto my desk when I opened it. On the outside, in big, bold letters, was printed 'Something For Stevie'.
'Pony Pete asked me what that was all about,' she said, 'so I told him about Stevie and his Mom and everything, and Pete looked at Tony and Tony looked at Pete, and they ended up giving me this.'
She handed me another paper napkin that had 'Something For Stevie' scrawled on its outside. Two $50 bills were tucked within its folds. Frannie looked at me with wet, shiny eyes, shook her head and said simply: 'Truckers!!'
That was three months ago. Today is Thanksgiving, the first day Stevie is supposed to be back to work.
His placement worker said he's been counting the days until the doctor said he could work, and it didn't matter at all that it was a holiday. He called ten times in the past week, making sure we knew he was coming, fearful that we had forgotten him or that his job was in jeopardy.
I arranged to have his mother bring him to work. I then met them in the parking lot and invited them both to celebrate his day back.
Stevie was thinner and paler, but couldn't stop grinning as he pushed through the doors and headed for the back room where his apron and busing cart were waiting
'Hold up there, Stevie, not so fast,' I said. I took him and his mother by their arms. 'Work can wait for a minute. To celebrate you coming back, breakfast for you and your mother is on me!'
I led them toward a large corner booth at the rear of the room.
I could feel and hear the rest of the staff following behind as we marched through the dining room. Glancing over my shoulder, I saw booth after booth of grinning truckers empty and join the procession. We stopped in front of the big table. Its surface was covered with coffee cups, saucers and dinner plates, all sitting slightly crooked on dozens of folded paper napkins 'First thing you have to do, Stevie, is clean up this mess,' I said. I tried to sound stern.
Stevie looked at me, and then at his mother, then pulled out one of the napkins. It had 'Something for Stevie' printed on the outside. As he picked it up, two $10 bills fell onto the table.
Stevie stared at the money, then at all the napkins peeking from beneath the tableware, each with his name printed or scrawled on it. I turned to his mother. 'There's more than $10,000 in cash and checks on that table, all from truckers and trucking companies that heard about your problems. 'Happy Thanksgiving.'
Well, it got real noisy about that time, with everybody hollering and shouting, and there were a few tears, as well.
But you know what's funny? While everybody else was busy shaking hands and hugging each other, Stevie, with a big, big smile on his face, was busy clearing all the cups and dishes from the table....
Best worker I ever hired."
Plant a seed and watch it grow.....
Source: Rohan Singal
A tale of two seas - lessons from nature
Sitting in the Geography class in school, I remember how fascinated I was when we were being taught all about the Dead Sea. As you probably recall, the Dead Sea is really a Lake, not a sea (and as my Geography teacher pointed out, if you understood that, it would guarantee 4 marks in the term paper!) It’s so high in salt content that the human body can float easily. You can almost lie down and read a book! The salt in the Dead Sea is as high as 35% - almost 10 times the normal ocean water. And all that saltiness has meant that there is no life at all in the Dead Sea. No fish. No vegetation. No sea animals. Nothing lives in the Dead Sea.
And hence the name: Dead Sea.
While the Dead Sea has remained etched in my memory, I don't seem to recall learning about the Sea of Galilee in my school Geography lesson. So when I heard about the Sea of Galilee and the Dead Sea and the tale of the two seas - I was intrigued.
Turns out that the Sea of Galilee is just north of the Dead Sea. Both the Sea of Galilee and the Dead Sea receive their water from river Jordan. And yet, they are very, very different.
Unlike the Dead Sea, the Sea of Galilee is pretty, resplendent with rich, colorful marine life. There are lots of plants. And lots of fish too. In fact, the Sea of Galilee is home to over twenty different types of fishes.
Same region, same source of water, and yet while one sea is full of life, the other is dead. How come?
Here’s apparently why. The River Jordan flows into the Sea of Galilee and then flows out. The water simply passes through the Sea of Galilee in and then out - and that keeps the sea healthy and vibrant, teeming with marine life.
But the Dead Sea is so far below the mean sea level, that it has no outlet. The water flows in from the river Jordan, but does not flow out. There are no outlet streams. It is estimated that over 7 million tons of water evaporate from the Dead Sea every day. Leaving it salty. Too full of minerals. And unfit for any marine life.
The Dead Sea takes water from the River Jordan, and holds it. It does not give.
Result? No life at all.
Think about it.
Life is not just about getting. Its about giving. We all need to be a bit like the Sea of Galilee.
We are fortunate to get wealth, knowledge, love and respect. But if we don't learn to give, we could all end up like the Dead Sea. The love and the respect, the wealth and the knowledge could all evaporate. Like the water in the Dead Sea.
If we get the Dead Sea mentality of merely taking in more water, more money, more everything the results can be disastrous.
Good idea to make sure that in the sea of your own life, you have outlets. Many outlets. For love and wealth - and everything else that you get in your life. Make sure you don't just get, you give too.
Open the taps. And you'll open the floodgates to happiness. Make that a habit. To share. To give.
And experience life. Experience the magic!
Source: Rohan Singal
And hence the name: Dead Sea.
While the Dead Sea has remained etched in my memory, I don't seem to recall learning about the Sea of Galilee in my school Geography lesson. So when I heard about the Sea of Galilee and the Dead Sea and the tale of the two seas - I was intrigued.
Turns out that the Sea of Galilee is just north of the Dead Sea. Both the Sea of Galilee and the Dead Sea receive their water from river Jordan. And yet, they are very, very different.
Unlike the Dead Sea, the Sea of Galilee is pretty, resplendent with rich, colorful marine life. There are lots of plants. And lots of fish too. In fact, the Sea of Galilee is home to over twenty different types of fishes.
Same region, same source of water, and yet while one sea is full of life, the other is dead. How come?
Here’s apparently why. The River Jordan flows into the Sea of Galilee and then flows out. The water simply passes through the Sea of Galilee in and then out - and that keeps the sea healthy and vibrant, teeming with marine life.
But the Dead Sea is so far below the mean sea level, that it has no outlet. The water flows in from the river Jordan, but does not flow out. There are no outlet streams. It is estimated that over 7 million tons of water evaporate from the Dead Sea every day. Leaving it salty. Too full of minerals. And unfit for any marine life.
The Dead Sea takes water from the River Jordan, and holds it. It does not give.
Result? No life at all.
Think about it.
Life is not just about getting. Its about giving. We all need to be a bit like the Sea of Galilee.
We are fortunate to get wealth, knowledge, love and respect. But if we don't learn to give, we could all end up like the Dead Sea. The love and the respect, the wealth and the knowledge could all evaporate. Like the water in the Dead Sea.
If we get the Dead Sea mentality of merely taking in more water, more money, more everything the results can be disastrous.
Good idea to make sure that in the sea of your own life, you have outlets. Many outlets. For love and wealth - and everything else that you get in your life. Make sure you don't just get, you give too.
Open the taps. And you'll open the floodgates to happiness. Make that a habit. To share. To give.
And experience life. Experience the magic!
Source: Rohan Singal
Fable of the porcupine
It was the coldest winter ever. Many animals died because of the cold. The porcupines, realizing the situation, decided to group together to keep warm. This way they covered and protected themselves; but the quills of each one wounded their closest companions. After awhile, they decided to distance themselves one from the other and they began to die, alone and frozen. So they had to make a choice: either accept the quills of their companions or disappear from the Earth. Wisely, they decided to go back to being together. They learned to live with the little wounds caused by the close relationship with their companions in order to receive the warmth that came from the others. This way they were able to survive. Moral of the story: The best relationship is not the one that brings together perfect people, but when each individual learns to live with the imperfections of others and can admire the other person's good qualities.
Source: E-mail Fwd
Source: E-mail Fwd
Sunday, 24 April 2011
A step by step guide to first financial plan
Prabu was a college student till yesterday. Today he has got a job. He has changed his costume from T-shirt and jeans to a formal wear with a tie. When he got his first pay cheque, his father advised him to save, his girl friend asked him to take her out on a date, and his friends wanted a party. Prabu was totally confused what to do with his first salary. What are all his actual priorities? Let us help him by laying out a step by step initial financial plan for him.
Get a PAN Card:
PAN Card is an ID card issued by income tax department. This card is useful in filing your Income Tax returns. Apart from this, the PAN card is very much useful in opening a bank a\c, demat a\c, investing in mutual funds and the like. The required documents for getting a PAN card is a passport size photo, address proof and an identification proof. You need to apply with either UTI or NSDL. They are the two approved agencies by income tax department for issuing PAN card.
Personal Accident and Disability Insurance:
Almost every day you can find a news column about road accident. It may be your colleague, your distant relative, your neighbor, your friend, your classmate. The stories of such incidents give us a reminder that the accidents can happen to anyone. The impact of these accidents on ones working life could be huge. Some accidents could reduce our employability temporarily or permanently. Personal accident and disability insurance policies will cover the financial losses arising out of accident and disability.
You need to decide the coverage amount of this policy based on the estimated loss you may suffer because of accident. That is how much loss you may incur from employment temporarily or permanently because of the accident. This will cost you approximately Rs.1500 p.a for a coverage of Rs.10 lakhs.
Health Insurance:
Most people don’t think about health insurance very often. But it comes to mind first when a loved one is sick. Under health insurance, the insurance company pays the medical bills if the insured person becomes sick and hospitalized. Health insurance can protect a family from financial damage in case of severe and serious illness.
If you have a health insurance from your employer, that may not be sufficient. Employer may cover the employee and not his family members. And moreover these policies are not portable and cannot be individualized if you leave the job. Employer provided policies cannot be transferred to another employer in case you switch your job. Also employer provided policies will give you coverage as long as you are employed. Once you retire you may not be having coverage. It is really unfortunate that only after your retirement you need health insurance at the most. If you plan to take a fresh policy after retirement, insurance company will not cover the pre-existing diseases at that point in time. Though your employer provides a health insurance policy it is better for you to take a separate health insurance policy at least with a small amount of coverage.
The coverage amount of the health insurance policy need to be decided based on your health consciousness, your family health history, and the class of hospital you choose for treatments.
Term Insurance:
Generally as a beginner, there will not be any requirement for any life insurance. But if your parents are financially depending on you, then you need to cover yourself with life insurance. As a breadwinner, today you are there for your family to provide a lifestyle. In case of any mishappening to you, your family members should not compromise on their lifestyle. That is why it is advisable to cover yourself with life insurance if you have dependents.
But don’t fall prey for ulips. Go for a pure term insurance policy. These policies give you a high coverage with low premium. The premium for a sum assured of Rs.10 lakhs will cost a 25 year old only Rs.2500 p.a. approximately.
Emergency Reserve:
Once you have completed the above obligations, you need to build an emergency reserve or contingency fund. One aspect of financial planning involves planning for situations where there could be a temporary break in one’s professional income. This could happen, amongst other reasons, due to ill health or could even be self opted. Such planning requires creation of contingency fund. The size of a contingency fund is linked to one’s estimate of what could be the maximum duration of such a break. For instance some people plan for the possibility of a 3 months break, others for 6 months.
This emergency fund gives a psychological security to you. In case you need to quit you r present job and need to search a new one, you can do that comfortably and confidently as you have an emergency fund for the intermediate period. You need not panic. If you have created a contingency fund, in the event of any emergency you need not pre-close your other investments and hence you avoid paying penalty or booking losses.
Tax Planning:
You can save under section 80 C up to Rs.120000. Out of this Rs.20000 need to be invested in the infrastructure bonds and the balance Rs.100000 can be invested in NSC, PPF, insurance premium, and ELSS mutual funds., You can give maximum allocation to ELSS mutual funds, as you are so young and in the beginning of your career.
Other goals:
You may have other goals like buying a laptop, higher studies, and vacation. You need to plan for all these goals. You need to keep in mind two things before deciding an investment. They are your risk tolerance and time horizon. How much risk you are afford to take and psychologically comfortable in taking? When do you need this money back? Based on the answers to these questions you need to choose the right kind of investment plan.
Plan out your work and work out your plan. Normally we don’t plan to fail, but we fail to plan.If you work on your financial plan, when your friends are partying and taking their girlfriends out, you will be definitely going to be retired richer than your friends.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.
Get a PAN Card:
PAN Card is an ID card issued by income tax department. This card is useful in filing your Income Tax returns. Apart from this, the PAN card is very much useful in opening a bank a\c, demat a\c, investing in mutual funds and the like. The required documents for getting a PAN card is a passport size photo, address proof and an identification proof. You need to apply with either UTI or NSDL. They are the two approved agencies by income tax department for issuing PAN card.
Personal Accident and Disability Insurance:
Almost every day you can find a news column about road accident. It may be your colleague, your distant relative, your neighbor, your friend, your classmate. The stories of such incidents give us a reminder that the accidents can happen to anyone. The impact of these accidents on ones working life could be huge. Some accidents could reduce our employability temporarily or permanently. Personal accident and disability insurance policies will cover the financial losses arising out of accident and disability.
You need to decide the coverage amount of this policy based on the estimated loss you may suffer because of accident. That is how much loss you may incur from employment temporarily or permanently because of the accident. This will cost you approximately Rs.1500 p.a for a coverage of Rs.10 lakhs.
Health Insurance:
Most people don’t think about health insurance very often. But it comes to mind first when a loved one is sick. Under health insurance, the insurance company pays the medical bills if the insured person becomes sick and hospitalized. Health insurance can protect a family from financial damage in case of severe and serious illness.
If you have a health insurance from your employer, that may not be sufficient. Employer may cover the employee and not his family members. And moreover these policies are not portable and cannot be individualized if you leave the job. Employer provided policies cannot be transferred to another employer in case you switch your job. Also employer provided policies will give you coverage as long as you are employed. Once you retire you may not be having coverage. It is really unfortunate that only after your retirement you need health insurance at the most. If you plan to take a fresh policy after retirement, insurance company will not cover the pre-existing diseases at that point in time. Though your employer provides a health insurance policy it is better for you to take a separate health insurance policy at least with a small amount of coverage.
The coverage amount of the health insurance policy need to be decided based on your health consciousness, your family health history, and the class of hospital you choose for treatments.
Term Insurance:
Generally as a beginner, there will not be any requirement for any life insurance. But if your parents are financially depending on you, then you need to cover yourself with life insurance. As a breadwinner, today you are there for your family to provide a lifestyle. In case of any mishappening to you, your family members should not compromise on their lifestyle. That is why it is advisable to cover yourself with life insurance if you have dependents.
But don’t fall prey for ulips. Go for a pure term insurance policy. These policies give you a high coverage with low premium. The premium for a sum assured of Rs.10 lakhs will cost a 25 year old only Rs.2500 p.a. approximately.
Emergency Reserve:
Once you have completed the above obligations, you need to build an emergency reserve or contingency fund. One aspect of financial planning involves planning for situations where there could be a temporary break in one’s professional income. This could happen, amongst other reasons, due to ill health or could even be self opted. Such planning requires creation of contingency fund. The size of a contingency fund is linked to one’s estimate of what could be the maximum duration of such a break. For instance some people plan for the possibility of a 3 months break, others for 6 months.
This emergency fund gives a psychological security to you. In case you need to quit you r present job and need to search a new one, you can do that comfortably and confidently as you have an emergency fund for the intermediate period. You need not panic. If you have created a contingency fund, in the event of any emergency you need not pre-close your other investments and hence you avoid paying penalty or booking losses.
Tax Planning:
You can save under section 80 C up to Rs.120000. Out of this Rs.20000 need to be invested in the infrastructure bonds and the balance Rs.100000 can be invested in NSC, PPF, insurance premium, and ELSS mutual funds., You can give maximum allocation to ELSS mutual funds, as you are so young and in the beginning of your career.
Other goals:
You may have other goals like buying a laptop, higher studies, and vacation. You need to plan for all these goals. You need to keep in mind two things before deciding an investment. They are your risk tolerance and time horizon. How much risk you are afford to take and psychologically comfortable in taking? When do you need this money back? Based on the answers to these questions you need to choose the right kind of investment plan.
Plan out your work and work out your plan. Normally we don’t plan to fail, but we fail to plan.If you work on your financial plan, when your friends are partying and taking their girlfriends out, you will be definitely going to be retired richer than your friends.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.
ALL you wanted to know about Company Deposits
Company Deposits are simply nothing but fixed deposits in companies that earn a fixed rate of return over a period of time. Company deposits are really down-to-earth products. The influential advantage of the company deposits is its plain simplicity. Company deposit is understood even by the most novices among the investors community.
Have you ever wondered the logic behind why pure vanilla flavored ice cream sells more than any other flavor? Similar logic is just as true when it comes to the company deposits vis-a-vis many other modern investment options.
With the meltdown of NBFCs almost a decade ago, company deposit market had a major slow down, but volumes still remain significant and there are loyal investors who prefer company deposits to other investment products.
Advantages of Company deposits:
Assured return.
Higher interest when compared to bank deposits.
Low risk when compared to stock market investments.
Service at your doorstep.
Lock in period in most of the cases is 6 months only.
If the interest income is less than Rs.5000 in one financial year, then NO TDS.
Risk in Company Deposits:
Company deposits are basically unsecured. That is if the company defaults in repaying the interest or principal, the investor will not be able to recover his capital. As a company deposit holder, you don’t have any lien on any asset of the company, in case it goes into financial difficulties. This makes the company deposits a risky investment option.
Identifying Risky Company Deposits:
One of the important tasks in investment planning in company deposits is to identify the risky company deposits and avoiding them. If you find any of the below symptoms in any of the company deposit scheme, then it is better to avoid such company deposit schemes.
Poor credit ratings like A or lesser ratings.
Companies making losses.
Companies that skip dividends.
Companies that offer higher than 3% to 4% of bank deposit rates.
Checklist for choosing right company deposits:
There are some good investment options in company deposits. Also there are some bad investment options. If you know how to select the right company deposit then company deposits can be really an interesting investment option in your portfolio.
You need to ignore all the unrated companies and need to choose companies with the rating of AA or higher.
Choose the company with better reputation within a given rating grade. If you read business papers and magazines periodically, it is not difficult for you to check the credentials of the company.
Take the help of the qualified financial advisor in choosing the right company deposit. But mind you, there are very few reputed and qualified financial advisors.
Company deposits need to be spread over a large number of companies in different industries. By this, you can diversify your risk. Irrespective of the rating and reputation of the company, don’t invest all your investments in a single company deposit scheme.
You need to check on the servicing level and standard of the company. You need to ignore companies that don’t care or care little about issues like sending interest warrants and principal cheques.
After investing in a company deposit, you need to constantly track the company’s credit rating. The times are uncertain and downgrades are rampant.
Check the company’s balance sheet for its asset back up, profitability, reserves, existing borrowings and loans.
Every investment has its distinct features and benefits. Likewise each investor has specific risk taking ability and personal needs. Professional investment planning needs matching of the product benefits and features with the financial objectives of the investors. So one need to weigh the various alternative investment options like bank deposits, debt funds vis-a-vis company deposits before making a choice.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.
Have you ever wondered the logic behind why pure vanilla flavored ice cream sells more than any other flavor? Similar logic is just as true when it comes to the company deposits vis-a-vis many other modern investment options.
With the meltdown of NBFCs almost a decade ago, company deposit market had a major slow down, but volumes still remain significant and there are loyal investors who prefer company deposits to other investment products.
Advantages of Company deposits:
Assured return.
Higher interest when compared to bank deposits.
Low risk when compared to stock market investments.
Service at your doorstep.
Lock in period in most of the cases is 6 months only.
If the interest income is less than Rs.5000 in one financial year, then NO TDS.
Risk in Company Deposits:
Company deposits are basically unsecured. That is if the company defaults in repaying the interest or principal, the investor will not be able to recover his capital. As a company deposit holder, you don’t have any lien on any asset of the company, in case it goes into financial difficulties. This makes the company deposits a risky investment option.
Identifying Risky Company Deposits:
One of the important tasks in investment planning in company deposits is to identify the risky company deposits and avoiding them. If you find any of the below symptoms in any of the company deposit scheme, then it is better to avoid such company deposit schemes.
Poor credit ratings like A or lesser ratings.
Companies making losses.
Companies that skip dividends.
Companies that offer higher than 3% to 4% of bank deposit rates.
Checklist for choosing right company deposits:
There are some good investment options in company deposits. Also there are some bad investment options. If you know how to select the right company deposit then company deposits can be really an interesting investment option in your portfolio.
You need to ignore all the unrated companies and need to choose companies with the rating of AA or higher.
Choose the company with better reputation within a given rating grade. If you read business papers and magazines periodically, it is not difficult for you to check the credentials of the company.
Take the help of the qualified financial advisor in choosing the right company deposit. But mind you, there are very few reputed and qualified financial advisors.
Company deposits need to be spread over a large number of companies in different industries. By this, you can diversify your risk. Irrespective of the rating and reputation of the company, don’t invest all your investments in a single company deposit scheme.
You need to check on the servicing level and standard of the company. You need to ignore companies that don’t care or care little about issues like sending interest warrants and principal cheques.
After investing in a company deposit, you need to constantly track the company’s credit rating. The times are uncertain and downgrades are rampant.
Check the company’s balance sheet for its asset back up, profitability, reserves, existing borrowings and loans.
Every investment has its distinct features and benefits. Likewise each investor has specific risk taking ability and personal needs. Professional investment planning needs matching of the product benefits and features with the financial objectives of the investors. So one need to weigh the various alternative investment options like bank deposits, debt funds vis-a-vis company deposits before making a choice.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.
Wednesday, 7 April 2010
Microfinance – An overview
{Given below is my understanding / interpretation of various discussions held during the course on ‘Microfinance’ by Prof. Shamika Ravi at the Indian School of Business (ISB), Hyderabad}.
IntroductionThe question that sowed the seeds of microfinance; Can you do business with ‘un-bankable’ clients? By un-bankable clients we mean people who are very poor and do not have any assets that can be used as collaterals. Banking with such people is risky and hence we do not find commercial banks lending or dealing with them.
But is it so easy to eliminate such huge masses from financial system just because they are risky? The recent financial turmoil due to subprime crisis has shown that the so called ‘non-poor’ (people like many of us) are equally risky if not more. Microfinance was invented through innovation in the process of market creation that reduces the risk. It is interesting to note the mechanics of how microfinance institutions operate to understand the innovation, but before that let us dwell in the types of risk that a bank will carry if it extends loan to un-bankable population.
Types of risk
The word ‘risk’ as used in common parlance means a source of danger or possibility of incurring loss or misfortune. Hence when a bank denies a rural labourer (un-bankable person in our case) for a loan, the rationale provided is lending in this case is risky. (The reason that person is taking a loan could vary from setting up his own small shop to renovating his home to getting his children married). What risk are we talking about? A risk that the bank may not be able to recover the loan and it has no collateral; hence it is risk of the loan going bad. The causes for the loan going bad are lack of information about the borrower, and hence inability of bank to distinguish between a good and a bad person based on loan application form and lack of collateral to enforce repayment. Hence we see two major risks that the banks face:
1. Adverse Selection: Neither banks nor other institutions have adequate information of credit-worthiness of the un-bankable population. Hence if banks were to extend loans to them they would need to charge high interest rates to compensate for bad loans from the pool of loan made to un-bankable people. However as the interest rate goes up, a good un-bankable person would avoid taking loan and hence the pool of un-bankable that comes to take loan will become worse. This is similar to ‘market of lemons’ as coined by George Akerlof. Hence the first risk is that to cover for bad loans / defaults the bank would need to charge high interest rates for un-bankable population and if it does that the pool of un-bankable that comes to take loan becomes worse and default increases, the basic cause being lack of information.
2. Moral Hazard: Even if the bank can get some information on credit- worthiness of un-bankable population and it starts extending loans assuming that a few of them would default there is always a risk of moral hazard. When a few people default, other people who ideally would not like to default will always be tempted to delay their payments or default on their loans as they have nothing to lose. Since there is no collateral in all these cases if from a pool of hundred un-bankable people taking loan, one of them defaults, the other ninety nine have nothing to lose, if they default and hence they are certain to default. The bank in this case carries a risk of 100% default due to moral hazard
The next time we see an old Hindi movie, where a village money lender charges exorbitant interest rates from poor people think about the above two risks; namely ‘adverse selection’ and ‘moral hazard’. It is very easy for us to sympathise with the poor person and consider the money lender as villain; but he is only trying to cover the above two risks, he may not be as bad as we think him to be.
Mechanics of operation- Group Lending‘Group lending’ has become synonymous to microfinance operations. A microfinance institution goes to a village and asks the potential borrowers to form groups of 3 – 10 among themselves (depending on the policy of micro finance institution). The lending is first done to only one of the members of a group and repayment is often weekly. Only after the repayment of first loan is completed to certain extent, a second person gets an opportunity to take loan and based on his repayment the third gets his opportunity and the cycle continues. However if the person who takes loan defaults; there is a clause of ‘joint liability’ which makes the other people in the group jointly liable to make the loan good. In case other people do not make good, they would not be extended any credit in future. If one finds it difficult to understand this concept; think of ‘VISI or VISHI’ that is run by many people in our community. The concept of group lending and joint liability is somewhat similar to it.
It is astonishing to see how this simple mode of operation reduces the above two risks of adverse selection and moral hazard to a great extent:
1. Adverse Selection: This risk as described above was due to lack of availability of information with the bank (lender) about the un-bankable borrowers. This was because banks were dealing directly with each borrower. By creating this simple concept of group lending, the lender is now dealing with a group of borrowers and not individual borrowers. Further the group is formed by the villagers who have information about the credit-worthiness of each other better than the bank. Hence while the groups are formed with an understanding of joint liability, each person will ensure that only good people i.e. people with intention of making regular payments form group together. Hence the problem of lack of information is solved automatically for the bank, though the bank remains as ignorant about credit-worthiness of each borrower as before. As this reduces defaults, the interest automatically comes down and hence the pool of un-bankable borrowers becomes better; exactly reverse of what happened earlier.
2. Moral Hazard: This risk as described above was due to lack of any collateral which would mean that the lender may not be able to recover anything in case of default, which is further aggravated by the fact that even if one person in the pool defaults, there is a very high likelihood that all the borrowers will default as they are dealing with bank individually. However with clause of joint liability in group lending, in case anyone of the group of 3 – 10 members defaults than other people need to make that good, else they would not be extended any credit. Hence the onus of recovery now shifts from the bank to the group that borrower belongs to. In this case the other members of the group would help the person who has taken the loan in his work so as to ensure that he does not default. There is also peer pressure and loss of face in case of default; which ensure that the borrower repays the loan instalments as per schedule. It once again surprises us the way in which a simple group lending with joint liability solves the problem of moral hazard; and the bank still does not have any collateral to protect him against default, yet the defaults reduces dramatically.
It is easy for us to believe that group lending is always good; but let us pen down some specific advantages as well as disadvantages of this mechanism.
Advantages:
• Convenient to borrower as the lender comes to his village
• Convenient to lender as the transaction cost is reduced as he is dealing with group
• Reduction of two most important risks; viz. Adverse Selection and Moral Hazard
• Creates a market without any extra information or collateral
Disadvantages
• Collusion by all the group members might result in high defaults
• In case of dispersed, mobile, urban population it may not be as easy
• The correlation of defaults within the groups of same village is very high; this may happen when the entire village is facing natural calamity and is not in a position to repay the loans
Reality check
It is important to do some reality check with practical examples across world to put in context the theory described above.
An example of victory: Grameen bank in Bangladesh started by Prof. Muhammad Yunus in 1976 is a leading success story in the world of microfinance. The bank has 7.86 million borrowers, 97 percent of whom are women; it serves in 84,388 villages, covering more than 100 percent of the total villages in Bangladesh . It was awarded noble peace prize in 2006. The bank has been profitable in most of the years since inception, except 3 years.
An example of debacle: A microfinance institution named Corposol in Columbia started in 1988 and had loan portfolio of $ 38 million in 1995, but it collapsed and went bankrupt in 1996 . Few explanation for this were; aggressive growth on mangers to extend credit to new clients, quality of loan was not monitored, internal controls were poor which resulted in higher delinquencies and defaults.
Beyond Loans: As seen worldwide it is important for microfinance institution to think beyond extending loans. It is important to think microfinance as ‘financial inclusion’ which would mean providing micro-insurance, micro-savings, micro-credit, etc. to the un-bankable population.
Indian Context: The Indian microfinance sector is expected to grow ten times by 2011 to a size of Rs. 250 billion . A few known names in the industry are SKS, Spandana and Basix. The industry currently is concentrated in Southern states and is restricted to lending only. This is because the law does not permit acceptance of deposits by micro finance institutions in India. There are some major developments that are in the pipeline. The Union Cabinet is likely to soon approve the Micro Financial Sector (Development and Regulation) Bill, 2009 which seeks to make NABARD the sector regulator. The new Bill entrust the function of development and regulation of the micro financial sector to the National Bank for Agriculture and Rural Development (NABARD), a subsidiary of the Reserve Bank of India. The passage of the Bill would result in the regulation of the micro-finance organisations not being regulated by any law for the time being. It also has a provision where it would permit the microfinance institution to accept deposits from its clients and hence inculcate a culture of thrift among un-bankables.
Objective: It is important to understand the objective of microfinance institutions. Though it seems that it is more social and that these institutions are not for profit, it is not the case. The objective can be either social (can be referred as ‘outreach’ objective) or profitable (can be referred as ‘sustainable’ objective). Institutions with social objective are formed to help the masses at large. Institutions like Grameen are living examples of the same. The founders of such institutions have a passion to help the society at large and they are formed with not for profit motive. However this is just one side of story. There are many organisations that look microfinance as business opportunity and hence start with profit objective. The profit made is the difference between the cost of borrowing and cost of operations (lending + operations). Approximately the lending rate is 30%, the borrowing rate is 12% and the cost of operations is 15%. Hence there is a 3% spread that is available to microfinance institutions . Please note, we are not passing any value judgements as to whether any objective is good or bad; both the objectives are totally valid and there have been success stories as well as failures in both the cases.
Conclusion
It would be naive for any finance professional to ignore this industry in today’s context when ‘bottom of the pyramid’ is talk of the day. It has the potential to throw various opportunities for all of us in terms of job prospects, consulting assignments as well as entrepreneurial opportunities. Hence it would be useful to have some basic knowledge about this industry; and its mechanics. I hope this article is able to provide a glimpse of the same.
IntroductionThe question that sowed the seeds of microfinance; Can you do business with ‘un-bankable’ clients? By un-bankable clients we mean people who are very poor and do not have any assets that can be used as collaterals. Banking with such people is risky and hence we do not find commercial banks lending or dealing with them.
But is it so easy to eliminate such huge masses from financial system just because they are risky? The recent financial turmoil due to subprime crisis has shown that the so called ‘non-poor’ (people like many of us) are equally risky if not more. Microfinance was invented through innovation in the process of market creation that reduces the risk. It is interesting to note the mechanics of how microfinance institutions operate to understand the innovation, but before that let us dwell in the types of risk that a bank will carry if it extends loan to un-bankable population.
Types of risk
The word ‘risk’ as used in common parlance means a source of danger or possibility of incurring loss or misfortune. Hence when a bank denies a rural labourer (un-bankable person in our case) for a loan, the rationale provided is lending in this case is risky. (The reason that person is taking a loan could vary from setting up his own small shop to renovating his home to getting his children married). What risk are we talking about? A risk that the bank may not be able to recover the loan and it has no collateral; hence it is risk of the loan going bad. The causes for the loan going bad are lack of information about the borrower, and hence inability of bank to distinguish between a good and a bad person based on loan application form and lack of collateral to enforce repayment. Hence we see two major risks that the banks face:
1. Adverse Selection: Neither banks nor other institutions have adequate information of credit-worthiness of the un-bankable population. Hence if banks were to extend loans to them they would need to charge high interest rates to compensate for bad loans from the pool of loan made to un-bankable people. However as the interest rate goes up, a good un-bankable person would avoid taking loan and hence the pool of un-bankable that comes to take loan will become worse. This is similar to ‘market of lemons’ as coined by George Akerlof. Hence the first risk is that to cover for bad loans / defaults the bank would need to charge high interest rates for un-bankable population and if it does that the pool of un-bankable that comes to take loan becomes worse and default increases, the basic cause being lack of information.
2. Moral Hazard: Even if the bank can get some information on credit- worthiness of un-bankable population and it starts extending loans assuming that a few of them would default there is always a risk of moral hazard. When a few people default, other people who ideally would not like to default will always be tempted to delay their payments or default on their loans as they have nothing to lose. Since there is no collateral in all these cases if from a pool of hundred un-bankable people taking loan, one of them defaults, the other ninety nine have nothing to lose, if they default and hence they are certain to default. The bank in this case carries a risk of 100% default due to moral hazard
The next time we see an old Hindi movie, where a village money lender charges exorbitant interest rates from poor people think about the above two risks; namely ‘adverse selection’ and ‘moral hazard’. It is very easy for us to sympathise with the poor person and consider the money lender as villain; but he is only trying to cover the above two risks, he may not be as bad as we think him to be.
Mechanics of operation- Group Lending‘Group lending’ has become synonymous to microfinance operations. A microfinance institution goes to a village and asks the potential borrowers to form groups of 3 – 10 among themselves (depending on the policy of micro finance institution). The lending is first done to only one of the members of a group and repayment is often weekly. Only after the repayment of first loan is completed to certain extent, a second person gets an opportunity to take loan and based on his repayment the third gets his opportunity and the cycle continues. However if the person who takes loan defaults; there is a clause of ‘joint liability’ which makes the other people in the group jointly liable to make the loan good. In case other people do not make good, they would not be extended any credit in future. If one finds it difficult to understand this concept; think of ‘VISI or VISHI’ that is run by many people in our community. The concept of group lending and joint liability is somewhat similar to it.
It is astonishing to see how this simple mode of operation reduces the above two risks of adverse selection and moral hazard to a great extent:
1. Adverse Selection: This risk as described above was due to lack of availability of information with the bank (lender) about the un-bankable borrowers. This was because banks were dealing directly with each borrower. By creating this simple concept of group lending, the lender is now dealing with a group of borrowers and not individual borrowers. Further the group is formed by the villagers who have information about the credit-worthiness of each other better than the bank. Hence while the groups are formed with an understanding of joint liability, each person will ensure that only good people i.e. people with intention of making regular payments form group together. Hence the problem of lack of information is solved automatically for the bank, though the bank remains as ignorant about credit-worthiness of each borrower as before. As this reduces defaults, the interest automatically comes down and hence the pool of un-bankable borrowers becomes better; exactly reverse of what happened earlier.
2. Moral Hazard: This risk as described above was due to lack of any collateral which would mean that the lender may not be able to recover anything in case of default, which is further aggravated by the fact that even if one person in the pool defaults, there is a very high likelihood that all the borrowers will default as they are dealing with bank individually. However with clause of joint liability in group lending, in case anyone of the group of 3 – 10 members defaults than other people need to make that good, else they would not be extended any credit. Hence the onus of recovery now shifts from the bank to the group that borrower belongs to. In this case the other members of the group would help the person who has taken the loan in his work so as to ensure that he does not default. There is also peer pressure and loss of face in case of default; which ensure that the borrower repays the loan instalments as per schedule. It once again surprises us the way in which a simple group lending with joint liability solves the problem of moral hazard; and the bank still does not have any collateral to protect him against default, yet the defaults reduces dramatically.
It is easy for us to believe that group lending is always good; but let us pen down some specific advantages as well as disadvantages of this mechanism.
Advantages:
• Convenient to borrower as the lender comes to his village
• Convenient to lender as the transaction cost is reduced as he is dealing with group
• Reduction of two most important risks; viz. Adverse Selection and Moral Hazard
• Creates a market without any extra information or collateral
Disadvantages
• Collusion by all the group members might result in high defaults
• In case of dispersed, mobile, urban population it may not be as easy
• The correlation of defaults within the groups of same village is very high; this may happen when the entire village is facing natural calamity and is not in a position to repay the loans
Reality check
It is important to do some reality check with practical examples across world to put in context the theory described above.
An example of victory: Grameen bank in Bangladesh started by Prof. Muhammad Yunus in 1976 is a leading success story in the world of microfinance. The bank has 7.86 million borrowers, 97 percent of whom are women; it serves in 84,388 villages, covering more than 100 percent of the total villages in Bangladesh . It was awarded noble peace prize in 2006. The bank has been profitable in most of the years since inception, except 3 years.
An example of debacle: A microfinance institution named Corposol in Columbia started in 1988 and had loan portfolio of $ 38 million in 1995, but it collapsed and went bankrupt in 1996 . Few explanation for this were; aggressive growth on mangers to extend credit to new clients, quality of loan was not monitored, internal controls were poor which resulted in higher delinquencies and defaults.
Beyond Loans: As seen worldwide it is important for microfinance institution to think beyond extending loans. It is important to think microfinance as ‘financial inclusion’ which would mean providing micro-insurance, micro-savings, micro-credit, etc. to the un-bankable population.
Indian Context: The Indian microfinance sector is expected to grow ten times by 2011 to a size of Rs. 250 billion . A few known names in the industry are SKS, Spandana and Basix. The industry currently is concentrated in Southern states and is restricted to lending only. This is because the law does not permit acceptance of deposits by micro finance institutions in India. There are some major developments that are in the pipeline. The Union Cabinet is likely to soon approve the Micro Financial Sector (Development and Regulation) Bill, 2009 which seeks to make NABARD the sector regulator. The new Bill entrust the function of development and regulation of the micro financial sector to the National Bank for Agriculture and Rural Development (NABARD), a subsidiary of the Reserve Bank of India. The passage of the Bill would result in the regulation of the micro-finance organisations not being regulated by any law for the time being. It also has a provision where it would permit the microfinance institution to accept deposits from its clients and hence inculcate a culture of thrift among un-bankables.
Objective: It is important to understand the objective of microfinance institutions. Though it seems that it is more social and that these institutions are not for profit, it is not the case. The objective can be either social (can be referred as ‘outreach’ objective) or profitable (can be referred as ‘sustainable’ objective). Institutions with social objective are formed to help the masses at large. Institutions like Grameen are living examples of the same. The founders of such institutions have a passion to help the society at large and they are formed with not for profit motive. However this is just one side of story. There are many organisations that look microfinance as business opportunity and hence start with profit objective. The profit made is the difference between the cost of borrowing and cost of operations (lending + operations). Approximately the lending rate is 30%, the borrowing rate is 12% and the cost of operations is 15%. Hence there is a 3% spread that is available to microfinance institutions . Please note, we are not passing any value judgements as to whether any objective is good or bad; both the objectives are totally valid and there have been success stories as well as failures in both the cases.
Conclusion
It would be naive for any finance professional to ignore this industry in today’s context when ‘bottom of the pyramid’ is talk of the day. It has the potential to throw various opportunities for all of us in terms of job prospects, consulting assignments as well as entrepreneurial opportunities. Hence it would be useful to have some basic knowledge about this industry; and its mechanics. I hope this article is able to provide a glimpse of the same.
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