Nava Chakras of Rural Financing ( Part 1 of 4 )

A question was posed by a fellow mate from the same finance industry, about the practicality of detecting frauds. He explained himself with an example.

A customer was assessed by them, and found fit to be financed. Based on their policies and credit norms, the customer was evaluated for 80% Loan to Value on a particular asset ( let's say a truck ). 6 Months later, this asset had to be repossessed. As my friend analyzed the case, he found it to be a Non-starter, viz., not even one single installment had been paid.  However, he also found additional information emanating which were not recorded at the time of assessment, being put up after the default began.

Yet what he was perplexed about was - If the base papers were taken and we could go back in time and take a re-look at the profile of the customer, would the decision be different ?  In this case, NO. His conclusion was that, he would land up funding the customer again even if the papers were submitted afresh, setting aside this repossession history.

Is it possible to detect intentions / frauds / triggers / tell-tale signs at the time of Field Investigation itself in any Rural Finance Proposal ?

It was then that I spoke to him about the NAVA CHAKRAS of Rural Financing ( 9 Chakras / Wheels of Rural Financing ). He was so glad and happy with this answer, that he requested that I journal this in my style for use in times to come. A Humble attempt is made to record the essence to make it an easier read. Yet our discussions were so intense that a fair attempt has been made to cover all perspectives without focussing too much on who said what ...

MOOLADHARA

 Home work / Ground Work / Knowledge of Domain

"The Skeletal Structure"

I remember my early days in Rural Financing, when most of us felt diffident about extending credit or finance. Years have passed now. Opinion has changed to feeling that this is the safest lending ground.

What confidence can do in terms of knowledge, either by connecting to the grass root levels or making a concerted effort to acquire sufficient knowledge, is infinite.

Typically, dissection and logging of industry wise, labour skill wise, resource availability wise data by Village, Grama Panchayat, Taluka, Block Level or even Pin code wise is extremely wise.

One may ask if this possible ? To give a more objective answer, many algorithmic solution providers run Rule Engines based on such data that has been collected. It is a one time effort. Changes are very gradual, and since you would be part of that eco-system, data on change would be available within your own organization once you get into it. Yet the first step in any new geography needs to have been taken this way. Thereafter repetitive iterations will become part of the system / process.

For companies who are already established in the Rural Space, assigning a specific task force to get this alignment done is the way forward.

To know for sure if you are aligned or not, call an agri practioner who is not known to you or your organization, and explain your organization and its objectives. Request him to ask 3 questions related to your trade aligned with agri practices to any executive or grass root level operator. If all three questions are answered with 80% or greater levels of accuracy, you are aligned. If not, you need to get aligned.

LESSON :            

1. Unless we know something about the domain and the geography of operation, it will be difficult to validate what the customer tells us during the initial visit.

2. The Feed Information / Database for all the others CHAKRAS to function is this     one. Unless our information is right

3. For those interested in getting their Rural Financing right, investment of time in     this Chakra is very very essential.

               

SVASTHISTANA                -             Branches / Network / Point of Connects / Reach

"The Reproduction"

This refers to the number of branches, network, visibility and determines Reach by Customer. This underlies the fact that proximity to the customer aids business. Proximity is also a function of field placement - where we have marketed ourselves and how easily accessible are we in that place.

This is one large point of debate that we have had with particular reference to Rural Financing. The large school of thought is that PROXIMITY does make a difference given the competitive environment and turmoil phase that the Agricultural Sector in India is going through. Yet to be fair to all schools of thought, here are 2 other schools of thought : 

Online Financier (Algorithmic) ideology

Customers don’t care one bit where your business is located, but they do care about getting their product reached to them on time. 

The Agent Model Financier Ideology

In a war, numbers alone confer no advantage. Do not advance relying on sheer military power.

Yet, the personal touch, ability to convince, feel of proximate availability, psychological perception of "Quick", does give the Rural customer additional comfort and the numbers (business wise) empirically evidence echo this evaluation.

LESSON :            

1.           Algining Organization Strategy to Market Reality is very important

2.           Being present physically in all locations needs to be strategically planned

 MANIPURAHA -             Need Assessment / Offerings / Utilization

"The Digestive System"

To make this point amply clear, I narrate a case ( names, crops or indicators have purposely been camouflaged to safeguard interests ). Yet this case brings forth the point being made and hence used.

There was a flourishing village, which was very known for the exquisite quality of their crop quality and produce. The soil was so good and rich with minerals that any crop sown would have a good yield. Yet one particular crop had an added advantage. The entire village culitvated this crop - let's call it CROP A.

Acres and Acres of Crop A were grown. Population was low, and acreage of this crop was high. Crop A had a higher gestation period. Over a period of time, the financial world took notice of the crop and its potential and made exquisite offerings.

The initial rounds of lending under Kisan Credit Card and Agri Term Loan started performing very well. This encouraged the GREEDY financiers to feed more and more into the system. Supply exceeded Demand in Finance at one particular point in time and within two months Demand started exceeding Supply again. The finance industry was very happy.

However, in the new avataar, 2 changes happened. The demand for finance amounts far exceeded previous requests, and thereafter NPAs started rising. CROP A was blamed. CROP A became a negative crop.

What was done was symptomatic... Nobody stopped to analyze the two phases.

Phase 1 was when the crop was in gestation and the owner / farmer had truly spent money towards development of the crop and hence in that phase money matching his spends was extended to him as CREDIT.

Phase 2 was when the market realized that CREDIT was available, and started finding newer uses for the funds. The financier's metric of assessment had moved from use to repayment history / track. The user lacked experience in the new investment and lost money. Financier did not bother what the customer wanted to use the money for and hence lost money. The whole system was ulcerated with GREED.

LESSON :            

1.           Assessing the Need of the Customer is Quintessential

2.           Experience of the customer, Use of funds, Customer Equity are all critical               indicators.

3.           A prudent customer never seek more than 60% of his project as debt. If use of              funds is towards a project where debt / loans exceed 60% of outlay, it is red              flag.

4.           This is the money generation CHAKRA. If assessment here do not perceive               prosperity, ab initio, it is better to stay away.

To be continued in part 2.....