As an addendum
to Dan’s eminently readable post on the sub-prime crisis and its lessons on Indian microfinance, also on the consequences of the sub-prime crisis, here’s
Kate McKee of CGAP.
For the microfinance world, this sub-prime crisis brings into relief a lot of issues that microfinance practitioners and policymakers have been debating for a while:
- How much do clients really understand about their loans?
- Are clients ready for more complex instruments?
- When does lending become predatory or reckless?
- What kind of consumer protection do we need in the microfinance sector?
I guess we don’t really have the complete answers to these questions. But one thing which is becoming increasingly clear to me is that credit can sometimes be a substitute for other financial products which are not available in the market, at least for the low-income community. Survey after survey has shown that people borrow for health emergencies, wedding expenses etc, which are much better financed through savings or insurance. Until we figure out how to offer these products to low-income communities, I doubt that the problems above of reckless lending and financial literacy will be solved.
Here’s another article on the sub-prime fiasco and the financial fall-out for microfinance … Morgan Stanley, the subject of the article, was at the forefront of facilitating capital for MFIs by being one of the arrangers of the Blue Orchard Loans for Development last year. Recent sub-prime woes probably means that we shouldn’t expect any complex financial innovations for microfinance any time soon. To quote the article “Wall Street firms are digging out from the mess they made after financing home loans for America's poorest, so it's not surprising that they are now more reluctant to securitize loans for the world's poorest.”
14 comments:
It is probably true that microfinance loan are among the most simplified products available in the market, given that repayments are quoted as weekly installments, usually in round figures. In fact, at times, the repayment terms and the interest rates are tinkered around with to come up with a round figure weekly repayment sum.
The products are also sometimes simple (bordering on naive) in their assumption that people need credit and credit alone will suffice to meet all their needs. Thus, there are standardized products, which are simple to handle - for the organisation as well as for its clients.
While a finer understanding of clients' needs and their understanding could lead to better products, it seems unlikely that it will reduce reckless lending - since that is determined more by the overall environment. For example, there was apparently a lot of reckless lending by organisations in a bid to disburse massive fund inflows in 2006. There could also be reckless lending when lending institutions compete with each other in scaling up their operations and garnering greater market share. Clients' ability to make an informed choice and upto an optimum level are constrained by the levels of financial literacy - which in any case cannot be dealt with in the short run. At this point, though, it is also not clear whether regulating the sector will help.
Sorry - no solutions there :(
In the IFMR Trust's KGFS work we are struggling to define what appropriate financial planning for a household would look like. If for example we were to convert group meetings into financial planning meetings what exactly would we do there?
There is also an interesting post from the founder of Self-Help that some of you may find interesting. In these times of crises, a lender exclusively focussed on this client category is reporting foreclosures of less than 0.5%!
The link is: http://www.ssireview.org/articles/entry/15_minutes_with_martin_eakes/
Please do check it out.
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We all get bombarded every day with mails, morning briefs as to which stock we should pick and how will be the market trend today. Every time the brokerage houses will send the stock market tips> as if we all are playing a gamble and need the tricks as to how we can win it. And anticipating as to how to do stop loss and at least will make smaller profits. What most of the investor do is they consider short term trading as the long term investment and believe as to how it can be doubled in a day. Buying a stock just because the price is low and some stock market tip you received that this will boom in the market today. What most of us do is that we all trade with money which we can’t afford to lose but the market always says that invest only that money which is in excess to you. All of these are the big mistakes which we commit every day in spite of being reminded every time that we should complete our home work for the next day.
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Investors jump to penny stocks as they immediately boom in the market due to rumors what need to understand is that the Penny stocks are very risky , and on this basis make your strategy as to which one to pick from that lot and how much to invest . The portfolio of the investor should be constructed in such a manner that it allots weight age to different sector and the sizes of the stocks so that the diversification is there and the risk can be mitigated. Therefore the weight age of penny stocks in one‘s portfolio should not be more that the 15%. This is to minimize the losses and to accumulate the profits also.
Keep a watch on the industry of the particular stock. Most of the stock behaves according to their industry trend. Thus if in the budget the government committed to play large role in the infrastructure sector , all the stocks will go react as per the budget and the whole sector recorded the jump of 12% on the next day. But it might be the case that the industry is booming and the stock is going down, therefore along with Industry, Company information is also vital.
Past performance of any company doesn’t not hold true or affect its future performance. Many of the Indian stocks which were heavy weight in the past few years and were considered the blue chip companies in this market are either bankrupt or have become extinct in the market. Thus continuous performance analysis and evaluation is important.
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