Direct Benefit Transfer - G2C in India

India is among the top three global economies in the number of digital consumers. With 560 million internet subscriptions in 2018, up from 238.71 million in 2013, India is the second-largest internet subscriptions market in the world. [1]

The Government of India runs large-scale benefits and subsidy programs for its citizens.  To ensure accurate targeting of the beneficiaries, digital verification to eliminate duplicates, ghost recipients, and fraud. Direct Benefit Transfer (DBT) was started on 1st January 2013. DBT is utilized to eliminate losses and inefficiencies in the disbursement of benefits and subsidies across wages, food, fertilizer, cooking gas, power, and other areas. Direct Benefit Transfer is already showing the changing landscape of the government-to-citizen (G2C) payments system.

Requirements

• To further expand the reach of such digital payment programs, banking infrastructure needs to be enhanced by ensuring sufficient bank branches, banking correspondents, the post office, and Common Services Centres to make it easier for citizens to access payments to them.
• Rural customers typically maintain low bank balances, are geographically spread out, and have low transaction volumes. Given the low levels of women's digital engagement, easy access to banking infrastructure for cash in-cash out services remains a necessary condition to enable. However, the private banking correspondent business model has chronically suffered from low profitability and a high level of agent attrition on account of unattractive remuneration.  

There has been an attempt made by the National Council of Applied Economic Research (NCAER) in the past for DBT readiness of states/UTs to pursue G2C and government to bank/business solutions through the use of ICT for effecting cashless in-kind transfers. (DBT_Presentation_NCAER (dbtbharat.gov.in).

Pros

• DBT eliminates inordinate delays, multiple channels & paperwork involved in the existing system.  
• This is a better way to help the poor than providing them under-priced grain, fuel, and essential public services. A poor household with cash via DBT can access and choose a private-sector provider and not just be dependent on a monopolistic government provider.
• Targeting the poorest has the obvious advantage since the marginal value of money is highest since they have the least money.   
• The per-person costs of delivering transfers have fallen rapidly in many places due to advances in last-mile digital payment infrastructure.

Cons

• The DBT model has been seen as a substitute for state action. The state has to build implementation capacity and grievance redressal mechanisms as many beneficiaries are used to interacting with frontline workers or local government officials for scheme-related grievances. 
• While it may not be mandatory to link an Aadhaar Card with a bank account, for now, it appears that there is no escaping the process. Aadhaar seeding is necessitated for receiving Direct Benefit Transfers (DBT). This protocol followed by government officials has led to an increase in exclusion errors, denying genuine beneficiaries their entitlements.
• DBT system has no mechanism to strengthen transparency and accountability at the local level. Technical errors such as age, spelling, and a host of other data points plague the system. People with incorrect names, and mismatching dates of birth, end up unable to avail of any welfare scheme that they are otherwise eligible for.
• There has been an assumption that the economy will become burdened with these schemes leading to inflation and price distortion. Data again does not support this argument as it showed better economic participation and thus a net boost to the local economies where the schemes were implemented. DBT can be indexed to adjust with inflation.
• Complexity increases if Aadhaar is seeded in multiple bank accounts of beneficiaries. There are several cases like the money transferred to account holders died a few years back, and money could not get transferred due to the closure of accounts which are issues to be resolved with NPCI and banks. 

Conclusion

DBT is no magic bullet as the reduction of poverty in India requires much more than solutions such as direct cash transfers. DBT is techno-enabled, transformational effort to fix the delivery system that is broken with corruption. Several studies have investigated the returns to investing in payments infrastructure relating to DBT and found them to be ‘large and positive’. In the new development, e-RUPI is launched by GoI to bring the ease and simplicity of UPI to the social security platform of DBT. 

References:

1. Indian telecom services performance indicators, Telecom Regulatory Authority of India, as of December 2013, September 2018, and March 2018; Analysys Mason, as of January 09, 2019.

Equity Investment - Learning

“Never invest in a business you cannot understand.” - Warren Buffett

Experience is a bad teacher as it gives the test before lessons. I have invested last year amid the SENSEX meltdown (Portfolio in Aug 2020) and (My Investment Universe). The wealth was created in the bear market (60% upsurge). I have tried to document personal decisions and convictions from the experience in the equity market. Any stock market is driven by herd mentality and kept afloat by confidence. The system is inherently a closed-feedback loop. Hence, sharing experiences matters.

My investment philosophy is really simple: invest in great businesses. My diligence is also focused on finding the sources of the competitive advantages of these companies, their track record of dealing with technological disruptions, and the wisdom of their capital allocation decisions.

Lessons

1. The long-term target is to own 10 to 20 stocks in the portfolio. I have trimmed down the portfolio from 34 to 21 stocks. No individual stocks make up over 15% of my portfolio. Good business with a moat is the primary focus of investment thesis and then cheap valuation.

2. I have purchased only 70 shares of Adani Gas during April 2020. Adani Gas has a massive debt since it is in the expansion phase. The stock skyrocketed to 10X. Too fast growth is always suspicious and always sucks the money out of the retail investors! Hence, I am sitting on the onetime decision and pondering over the investment thesis.

3. I couldn't understand the digital transformation wave in the IT industry last year. I sold Sonata Software and TCS during their surge in July 2020. Wrong move. Platform-based business models will pave the way forward for the future. Digital Revenue share is an important parameter in the digital transformation story to be tracked for the retail investors. The unicorn will emerge in the sectors that are underserved in terms of technology. The larger risk lies at the other end: giving up on a good business in pursuit of a perfect one.

4. ITC: Genuinely undervalued or value trap? I assume it's a value trap. I am not investing in Ciggarate and Liquor stocks. Hence, exited from ITC shares.

5. Don't risk on the back of borrowed conviction. I invested in Borosil Ltd under the assumption of the vaccine story. I was caught in the sucker rally and suffered the loss after the bounce fizzled out. Borrowed conviction ends up with misplaced confidence in flawed methods, throwing our judgment into a downward spiral.

6. I took an exit from the FMCG sectors. There is tremendous growth in the private labels and penetration has been achieved in the urban and rural market. FMCG companies have longevity about them but they are also reporting a decline in volume growth and focusing on value growth. I had purchased Nestle and Britannia at the peak of the valuation last year. Yet, I have exited from them because of a change in the investment thesis. 

7. Businesses shouldn't be much prone to regulatory changes and if that happens we must read their impact on the business. Understanding the business is the most important aspect of investing. I invested in City Union Bank without an understanding of the banking sector. The financial loss eventually happens even when the market was under-recovery. Any financial institution that has SMEs as lenders suffer during a major recession due to market consolidation. I didn't apply this insight despite knowing the economics behind that I suffered from the ‘optimism bias’ and overestimate my likelihood of experiencing good events and underestimate the likelihood of things going bad. I took an exit from CUB stock with minor losses. The important thing is to keep your winners & sell your losers.

8. I have a fair share of miscalculated entry and exit time. Data overload creates exaggerations in sentiments and patience gives away. I took an exit from Pfizer too early without guessing 2nd wave. Not reacting to the first piece of information that hits you is an asset and a highly undervalued one. A more complete picture, better information, and newer perspectives emerge with time, and holding one’s horses can end up being very profitable. I had exited from Vinati Organics, Info Edge, ITC, and Ashok Leyland too early with no gain despite buying them at a low valuation. 

9. CDMO and CRMAS are going to be such a big investment opportunity for India in the next decade. Investors have now the opportunity to take a long-term position in Pharma and Biotechnology sector innovators. I have allocated 30-35% of the capital in the sector. 

10. There is a huge boom happening in the Chemical sector but it is outside my circle of competence, Hence, I am not invested in them. The circle of competence can be expanded gradually by learning from people that have different interests and also are into investing.

A website like Screener helped in understanding numbers. Thanks to Sajal Kapoor for insightful tweets, SOIC- School of Intrinsic Compounding for astounding good business analysis, IIC Alpha Series (Free Videos of sectoral analysis), Saplings Capital for undervalued tweets, and Marcellus PMS for sharing the investment thesis in the large caps. The emphasis on reading annual reports and earnings call transcript brings CCCF (conceptual clarity, contextual familiarity). The most important lesson is - never knowingly misguide someone and block off a few hours each week in your calendar for relevant reading. Whilst there will be difficulties along the way, but wealth can only be created with patience in equity markets. Patience is backed by your conviction & your conviction (Allocation)is backed up by your understanding of the business. 

Future of SHG Federations

A few days ago, I read a blog post (Understanding Collective) and a working paper (The current and potential role of self-help group federations in India) on the SHGF (Self Help Group Federation).  I have the privilege of working with Chaitanya and the NRLM program for promoting community-based institutions.  I am sharing my insights from reading literature and working with SHGF. This was long overdue with the promise made to Dr. Sudha Kothari madam. 

A brief outline on SHGF before diagnosis: The role of SHGFs has varied by state, promoter organization as SHPIs (government, multilateral, or NGOs), and program maturity. SHGFs play diverse roles, their common goal is to strengthen SHGs, route the finance to SHGs, build their capacity and make them organisationally sustainable.  SHGF is usually set up in three tiers (SHG, village cluster, and federation). SHGFs engage in financial intermediation. SHGF acts as the host organization for the SHG in terms of channeling the grants/loans to the SHGs. SHGFs as an institution has significantly contributed to the leadership development & economic well-being among women members. 

As an observer, my view is that the SHGF movement has been going downhill in the last 10 years. Let me share the rationale behind the statement. 

1. SHG federations were a necessary measure during the late 90s and early 2000s. This was required because the SHG-bank linkage program by NABARD was in the early phase. The penetration of the commercial bank branches was low. Currently, India has the largest network of bank branches in the world, and most villages are within quite an easy distance of a branch. There has been a doubling of the branches per 100,000 adults in the last 10 years only. The figure below is a representation of access to banking services in the major economies with bigger geography:

Source: World Bank

2. The human resource at the SHGFs comprises a Manager, Accountant, and Field Representatives that are underskilled and underpaid. Hence, the attrition rate of trained staff is very high.  There is a minimum expenditure of INR 6-8 Lakh in managing SHGF assuming membership of 150-200 SHGs and outreach of 40-50 SHG by a field representative. The present scale of operations in the SHGF is not financially sustainable with an operating margin of 4-6% and a turnover less than INR 1 Crore. There are additional fees imposed such as one-time registration, annual membership fee, processing fee, service charge audit fee, and penalties imposed. Mandatory and voluntary savings compose a major part of the corpus generated internally but are not sufficient to increase the operating margins. New SHGFs raise credit from mature SHGF at an interest rate of 18% per annum hence further reducing the operating margin and increasing the cost of capital. Hence, SHGFs have still not achieved self-sufficiency. Most of the costs of the SHGFs are borne by the Self Help Promoting Institutes (SHPIs).

3. SHGs are always read to pay for financial audit and training fees from their corpus. SHGs get credit at an interest rate of 21% per annum from SHGF. Except for the loan service charges, credit linkages with the bank is a much cheaper source of credit for the SHGs. Other than that, few SHGFs ask for 5-10% of the security deposit as collateral with the federation. Hence, the variance of interest rate provides SHGs incentive to explore the cheaper source of finance. 

4a.  National Rural Livelihood Mission (NRLM) has been implemented by restructuring Swarnajayanti Gram Swarozgar Yojana (SGSY) effective from April 2013 in a mission mode. NRLM has emerged as the key element for delivering financial services to the poor in a sustainable manner and has witnessed phenomenal growth due to mainstreaming SHG Bank Linkage. Bank Mitras are delivering branchless banking services in Sub-Service Areas and reducing dependence on SHGF.

4b. Pradhan Mantri Jan-Dhan Yojana (PMJDY) is also known as the National Mission for Financial Inclusion, was launched in August 2014. Despite the 18-20 % dormancy rate in the savings account, the accounts are building a credit history for the customers. The implementation of Direct Benefit Transfer (DBT) in the social welfare scheme has further expanded banking services to the underserved population.

5. Promoting an SHGF is much more difficult and requires a much longer hand-holding period varying from 7-10 years (need evidence). Grants to SHPIs are given for building the institutional capacity but there is a dearth of grant support directly to SHGFs similar to the lines of Matching Equity Grant to FPOs.  

Source: NABARD SMFI 2019-20

6. SHG members look for a cheap and quick source of credit rather than investing time in their membership demands. The service time between loan demand application and loan sanction varies from 15-30 days for SHGFs hence they face intense competition from banks and MFIs in the fast loan delivery. SHGFs demand loyalty from SHGs for loan disbursement in face of competition from MFIs and Banks. Loyal customers are arguably the most important factor in repeat business and provide opportunities for more sales. But, this is very difficult to achieve in the plain vanilla loan product. 

7. A SHGF is a registered legal entity. They are registered as- 1. Trust Fund [Public Trusts Act, 1882 and Indian Trusts Act, 1920. Applicable in Maharashtra as Bombay Public Trusts Act, 1920], 2. Cooperative Body (Society): Societies Registration Act, 1860, and 3. Mutually Aided Society: Central Multi-state Co-operative Act, 1984. This was facilitated by SHPIs earlier due to low compliance orientation and ease of operation for the community institutions. Lower statutory compliances have created huge suspicion from commercial banks and created immense difficulty in raising capital from mainstream financial institutions. 

8. On one hand, MIS is a major concern in SHG federations while the recent developments in technology have transformed banking from the traditional brick-and-mortar infrastructure. Increased penetration of mobile phones, retail digital transactions, growing adult population in the country, entry of Payments and Small Finance Banks, and Fin-Tech players have changed the financial landscape. Over the last decade lower transaction costs, quick decision-making, customer orientation, and prompt provision of services have typically differentiated NBFCs from banks. This has been supplemented with a reduction in the cost of promoting new SHGs because of the pre-existing SHG ecosystem. With the emergence of digital banking, the financial market for the poor will evolve by the launch of innovative financial products even in the rural market. 

A CGAP study of 2011 has already estimated: SHG is not a good model for speedy disbursement of credit, but it is a good model for lowering the risks of borrowers as well as lenders. The SHG model, with lower interest rates and risk, is most appropriate to financially include the poor, while the product offered by for-profit MFIs is appropriate for the non-poor who need credit. 

Similar to the case, SHGs with good credit records will break away from SHGFs are freed from the traditional collective, and have started to reorient themselves in a new manner. As I have argued earlier in the future of the SHG movement: The affluent clients will drift towards JLG while the SHG movement will continue to reach out to vulnerable and marginalized people who own little or no land, are predominantly illiterate, and lack access to formal sources of financing.

What will happen to well-performing SHGFs? They can be transformed into Producer Organisations for providing various support services to primary producers. Various SHGFs are now exploring ways to make their way in entrepreneurship and reach markets. SHGFs can explore the banking correspondent model but recent pilots on using self-help group members as bank agents showed some encouraging results in terms of the number of transactions and the percentage of active accounts. SHGs will ride the wave of digital financial inclusion with investment in ensuring a smooth transition from manual to technological platforms. SHGs are already viewed by government agencies as the last-mile delivery vehicle. Matured SHGs will provide competition to SHGFs with volume and value growth to the financial products in the rural areas.

Markets are designed for an overall reduction in intermediaries. The emergence of financial intermediaries is seeing business opportunities in the vast untapped market and reducing the inefficient players. Any intermediary has to show that it serves a purpose and its value outweighs its cost. SHGFs will be supported by GoI, NABARD, and other donor agencies for last-mile outreach in the social schemes. Yet the future looks bleak for SHG Federation in the market!

Personal Finance - Insurance, Debt and Pension

This post is in the continuity of the personal-finance series where earlier blog post: Personal Finance - Investment was published in May 2020.

RBI published a very important ‘Indian Household Finance Survey’ in August 2017. The report highlighted that:

• The average Indian household holds 84% of its wealth in real estate and other physical goods, 11% in gold, and the residual 5% in financial assets. A disproportionately high share of wealth allocated to physical (i.e. non-financial) assets, such as gold. 
• Under-investment in long-term insurance and pension products. Households can move up between 0.4 pp (percentage points) and 1.6 pp by taking on insurance to avoid the burden of emergency credit associated with medical costs
• Disproportionally large reliance on unsecured debt, mostly from non-institutional sources (e.g. moneylenders).

The need to finance adequate consumption during retirement is a huge issue, and when combined with the low penetration of insurance, households appear vulnerable to adverse shocks later in life. Even the middle class doesn’t even recognize how bad public healthcare and costly private healthcare is for the bulk of the Indian population.

The basic rule for personal finance is - "Keep Insurance and Investments separate." The financial services industry is one black hole for retail consumers.The mischievous cross-selling at private financial institutions on the supply side, and consumers' lack of financial education on the demand-side compounds the problem to a great extent. 

Which financial products you need? Most people just need five simple products in life. Fixed Deposit as a Liquid Fund, Index fund, Home Loan, Term & Health insurance. All of the investments commences only after sufficiently covering oneself with sufficient Health, Life insurance cover, and liquidity to manage at least 6 months of living cost. For any financial product, keep a basic checklist: What is my investment? When?  If yes, put numbers and dates. When does the return start to come in? Is the amount guaranteed in writing? What amounts are expected and on what dates?  Is the return based on an assumption? What is that assumption?

Few insights can be used while taking decisions for pension and insurance.

1. Do NOT buy a bundled life insurance policy. Reasons: Poor life cover, Poor returns, and Heavy losses in case of withdrawal. Pensioners and new parents are the most vulnerable targets for the agents. Look for a Term Insurance with optimum cover i.e. 200 times monthly expense.

2. It is never too early to start saving for retirement. National Pension Scheme can be used to close this gap at the microscale. Under the scheme, The government of India contributed INR1,000 per year to each account, for individuals that contributed themselves between INR1,000 and 12,000 per annum. Equity investments are already discussed in the previous post on personal finance.

3.The medical inflation rate in India is around 15-20 % annually which is much above the general inflation level. This means that a single hospitalization can exhaust the lifelong savings! More can be read here. Summary:

• Take Health Insurance
• Reveal the right information and never hesitate to go for a medical test.
• Avoid Third-Party Administrator and Copay clause while exploring health insurance plans.

4. Settling a debt must be the first priority. To debtors, creditors are like dictators. Always look for a lower interest rate and cut back big expenses.

5. Plan a Budget: When there is difficulty in managing the finance, a budget should be used as a tool for the allocation of the money according to the priorities both in good and bad times.

6. Emergency Fund: A family must have 3-6 months worth of living expenses stowed away in an immediately accessible bank account.

In a recent webinar with Monika Halan, an authority on personal finance in India, three questions were discussed in detail. How big should one’s retirement pot be at the age of 40, 50 & 60? How does one asset allocate one’s retirement across various physical and financial assets? How should one think about life insurance and health insurance in the context of his/her own long term savings plan? She told them in a concise manner that can be viewed on youtube. I will recommend the readers to read the book "Let's Talk Money" and weekly columns of Ms. Uma Shashikant to plan personal finance more carefully.

Who is a social intrapreneur?

Management is the noblest of professions only if it’s practiced well. There are deep rewards in building up people and businesses. I identify myself as a social intrapreneur based on the behavior traits and initiatives displayed. What I lack is the endurance to iterate and scale an impact model. I was a useful professional at what I do, and was able to contribute decently, but not the man who carried the team. That changed in Rajasthan as I explored potential inside me and gradually a spark to siege the initiative.

Leadership at the top levels of not-for-profit organizations tends to steer towards monopolization and loyalty culture. And the time of the leaders is mostly consumed in raising funds rather than building robust programs. That is why leaders always try to handhold individuals who demonstrate an 'entrepreneurial mindset'. The answer to this particular problem is quite clear - to create intrapreneurs. This scenario gives ample place to managers who can manage as well as build the program.

Very simply put, individuals who display self-awareness, innovate within an organization, and take the initiative to solve a particular problem are termed social intrapreneurs. They can be termed as change agents who use existing infrastructures and organizational capabilities as levers to deliver social value on a large scale.

Traits of Social Intraprenuer

1. Social intrapreneurs tend to lead with facts and data when they communicate. They are more business-oriented when dealing with others. They maintain a loose affiliation with the organization and often raise their voice when trying to make a point.

2. Social intrapreneurs are avid learners. They are eager to explore new opportunities and try new things. They struggle with issues to stay focused in their initial years and& are not always effective in managing their time.

3. Social intrapreneurs possess an ability to pivot at the right time and adapt to a changed market situation.

Evolution Path

Rather than rewards and punishments, influencing social intrapreneurs requires more elaborate strategies. For a budding intrapreneur to be molded with instructions from superiors, it requires providing information and arguments in support of such requests. The journey of a social intrapreneur can be mapped in these five phases:

• Domain Generic Activity: Productivity enhancement and System establishment
• Technical competency development and Building networks of similar-minded
• New Project under portfolio through a pilot-scale program
• Effectively leveraging partnerships and scaling up the program and
• Building a team and mentoring the next generation

An organization should think over innovations that solve a problem, simplify service, and reduce costs. And if there is an inability to integrate them into the existing portfolio a social intrapreneur can create a separate program that has a real chance to capture the imagination of the people.

Nudge the organization towards a personal vision

Successful adaptation of entrepreneurial attitudes and strategies inside of a non-profit/ profit organization is a tough task due to their bureaucratic structures. Also, organizations are biased for action hence time and attention of the top management tend to be more limited, and decisions are made quickly.

To tackle this problem, social intrapreneur uses a hybrid model of assertiveness in pitch and, creating a business case with shreds of evidence. A lot depends on the culture of the organization rather than business models, and strategies. Hence, a social intrapreneur invests time in dialogue with the stakeholders. It requires patience to build a case as stakeholder consultation on disruptive changes means iteration with the original idea. Pushing a big idea is a rather complex and delicate process and it doesn’t happen by just sharing a presentation. The cultural understanding helps in aligning personal vision with the voice of advocates of systems change. 

This is followed by the creation of concept notes, financial implications, targeted donors, and refining the same presentation several times, before rolling it out in public. Yet a new program can have transformative effects positive and negative and can bounce in unexpected directions. The journey to positively impact the lives of fellow humans is more rewarding than financial rewards, the promise of daily joy, or intellectual adventure.