National Debt 2008
Economic Crisis 2008
2008 Economic Debacle
Let’s start with the fact that the median US income last year was $50,233 dollars. Now lets add to the fact that the plan of Treasury Secretary Henry Paulson's $700 billion dollar to stabilize the banking system, that every man, woman and child in the U.S. would be owing more than $37,000 each.
This puts the situation in simple context.
Let’s put it another way, approximately 73% of the median income will be needed for this plan. It is beyond obvious that we are going to be paying this off for a long time, and quite obviously our grandchildren.
Henry Paulson’s plan may push the national debt to the highest level since 1954 and possibly causing a diminished demand from foreigners for U.S. bonds as well as potentially other assets. Why would foreigners still be attracted to U.S. assets? How about a worse question will US investors still be attracted to US assets?
Again it seems pretty clear that this $700 billion dollar plan can cause a jump in interest rates prompted by the glut of additional Treasuries needed to finance the plan. Needless to say the dollar has been weakening against the euro and many other currencies.
How can this be a good way to get out of our current economic debacle!
Let’s put it yet another way, Paulson’s plan could drive the debt above 70 percent of gross domestic product and the annual budget gap to an all-time high, possibly exceeding $1 trillion next year. The US is not the only one in this party, just look at several other developed nations have debt levels far higher than that of the U.S such as Japan at 196 percent of GDP and Italy at 104 percent of GDP. Can you imagine if we ran our personal businesses this way…or ran our households in this manner?
The irony is that Paulson said it is ``Difficult to determine'' what the ultimate cost of the plan would be, though he said the objective is to minimize the cost to taxpayers.
Supposedly the money for the Paulson plan will go to buy assets at prices that are depressed. It is unknown what prices the Treasury would pay for them.
Is it possible that these assets could increase in value when the credit crisis ends??
Can the Fed make money doing this? Will the taxpayer ultimately profit?
Your guess is as good as mine- but a point in history was the bailout of Chrysler Corp the taxpayer did profit
Andrew Abraham
My Investors Place
www.myinvestorsplace.com
About the Author
Andrew has been in the financial arena since 1990. He is a Registered Investment Advisor ad affiliate of Abraham Bedick Capital. Since 1993 Andrew has been a proponent of quantitative mechanical trading programs. Andrew's major concern is not only total return on investment but rather the amount of risk that one would have to tolerate in order to achieve returns He focuses on developing quant models that encompass strict risk adherence and correlation. He has been a speaker at conferences as well as an author of numerous articles. Andrew has spent years researching ideas that have the potential to outperform indices as well as maintain fewer draw downs.
The Coming Credit Card Debt Meltdown
The growing level of consumer debt in the U.S. is creating a drag on the economy.
All over the world, people are keeping fingers crossed that the $700 billion financial system bailout works the way it is supposed to and eases the worsening global credit crunch and restores confidence in the markets. But while the government has been focusing its attention on worldwide fallout from the mortgage debacle and the Wall Street greed, another storm is gathering on the horizon.
With all that’s happened since, it’s easy to forget that back in August 2008 the U.S. Treasury Department stepped in to take the reins of Fannie Mae and Freddie Mac, the two government-sponsored home loan banks. With the country facing more than $12 trillion in residential mortgage loans, no one wanted to stand by while Fannie Mae or Freddie Mac goes broke.
But who is watching as the rest of the country goes broke? The U.S. is quickly moving toward the next financial credit crisis—this one involves credit cards, and it could be a problem facing millions of Americans, not just over-reaching homeowners who are facing foreclosure.
Charging the basic necessities
Consumer spending has kept the U.S. economy growing for the last two decades. In addition to shopping for homes they didn’t actually quality for, consumers used their credit cards and revolving credit accounts to rack up more than $2 trillion in household debt. Where they once indulged in high-ticket items like electronics, plasma TVs, autos, and appliances, today they’re forced to scale back and spend more and more on the basic necessities.
When cash-strapped families have a hard time making ends meet because of rising prices, they rely on their only alternative—credit. Consumers are pushing the upper limits on their credit cards in order to pay bills, feed their families, and gas up the car. Some even use their cards to pay their mortgages, and that spells disaster.
The lending industry, now barred from aggressively issuing sub-prime mortgages, has turned its attention to marketing credit cards with high fees, over-blown interest rates, and complex terms hidden in the fine print or written in obscure language. Unwary consumers are setting themselves up for future defaults, and doing it in record numbers.
Dug In Deep
Debt and delinquencies on the rise
Credit card borrowing grew at an annual rate of 4.8 percent in July 2008, up from a growth rate of 3.5 percent in June. But while the volume of credit card purchases continues to rise, on-time monthly payments are falling.
The percentage of people who were delinquent on their credit card payments rose slightly in the second quarter from the same time last year, while average debt per borrower jumped 8.6 percent, according to credit reporting agency TransUnion LLC.
For the quarter ended June 30, 1.04 percent of credit card holders were delinquent at least 90 days on one or more of their cards. That compares with 0.91 percent for the second quarter of 2007, although it did represent a decline from 1.19 percent in the first quarter of 2008.
The decline from the first quarter to the second quarter likely reflected tax refunds and economic stimulus checks. Since delinquency rates tend to be seasonal, they usually go down in the second quarter.
Late fees and sky-high interest rates—some as high as 24 percent or more—keep accumulating and threaten to keep the economy sluggish. Every dollar that goes toward paying fees and interest on credit card balances is a dollar that can’t be spent at the grocers, the hardware store or Starbucks.
How did shopping on credit get so out of control?
Technology has made it impossible to escape the temptation to whip out those credit cards. Television commercials like Visa’s “Life Takes Visa; don't let cash slow you down,” suggests that cash is out of date. With e-commerce, retailers are now open 24/7. Home shopping networks and catalog 800-numbers let your fingers do the shopping.
Credit card companies market to our most basic instincts and appeal to the herd mentality that suggests, “If everyone else is doing it, it must be OK.” And if mere suggestions offered through television commercials don’t do the trick, there’s always the direct approach—an estimated six billion credit card offers hit the mail annually.
Debt and the job market
Consumers have been on a fast moving shopping spree that’s about to grind to a halt. Wages are not keeping up with inflation and too many jobs are going by the wayside.
Higher prices and rising jobless rates are inextricably linked to loan defaults and credit card delinquencies. The U.S. Labor Department reported that unemployment rose from 5.7 percent in July to 6.1 percent in August—a five-year high. Employers slashed 84,000 jobs in August, the eighth straight month of declines, with a total of 605,000 lost jobs for the year.
It’s a vicious cycle. Employers get worried about the economy and their own profit margins and start cutting the workforce. More people have less disposable income and are unable to pay their bills, which leads to more mortgage defaults, more credit card delinquencies, less consumer confidence, and on and on.
But the worst is yet to come. There is a lag between the time someone loses a job and when mortgage loans default or credit card delinquencies appear, so we might just be seeing the tip of the iceberg. Moody’s predicts household credit conditions will continue to weaken through the remainder of the decade, with another 5 million homeowners at significant risk of default.
The Looming Catastrophe
Banks and lenders getting squeezed
Banks, already weighed down with defaulted loans, could face even more troubled mortgages on their books, as well as unpaid credit card debt. Credit card companies like Visa and MasterCard bear relatively little risk for defaults and other payment problems. It’s the banks issuing the cards that assume responsibility for the debt.
Failures are expected to reach such a high level that the Federal Deposit Insurance Corporation (FDIC), the Washington-based agency that insures deposits at U.S. banks, may not be able to insure all deposits—even with protection extended from $100,000 to $250,000 per account under the bipartisan rescue plan now in place. They already raised the number of “problem” banks to 117 in June, up from 90 at the end of March. Ten banks closed down in 2008, the fastest pace in bank closures in fourteen years.
Even before the Treasury Department's takeover of Fannie and Freddie, the two mortgage giants that own or guarantee around $5 trillion, or roughly half of the U.S. home loans, had been on a less than solid financial footing. The more mortgage default rates escalated, the more their capital base eroded.
The government’s $700 billion rescue plan may help curb further deterioration in the markets, or ease the credit crunch affecting banks and major corporations, but not much is being done to ease other credit troubles. The big question: Will growing consumer debt lead to another round of massive losses and write-downs at banks and other financial institutions in the coming months?
Under the radar: Packaged credit card debt
Very little attention has been paid to the fact that, similar to mortgage-backed securities, credit card debt is packaged and sold to investors. The inevitable defaults could lead to big losses, not just for the credit card lenders, but also for pension funds and other institutional investors who are buying the debt.
The securitized debt backed by credit card receivables is a $915 billion industry. Increased defaults could unravel the whole game, just as delinquencies in the housing market brought down the $900 billion in mortgaged-backed securities.
Does this add up to an inevitable recession? You will get as many answers as the number of politicians and economists you ask. (As the joke goes, if you laid all the economists in the world end-to-end…they still could not reach a conclusion.)
Consumer debt going global
While we as nation seem only vaguely aware of this looming credit catastrophe, MasterCard has already set its sights on duplicating its U.S. business model internationally. Poised to take advantage of new and growing access to credit in countries like Brazil, Hungary, Poland, Russia, India and China, the credit card giant is anticipating a projected revenue growth rate of 39 percent.
Easy access to credit may be a compelling, albeit temporary, method to jump-start an emerging economy. It paints a rosy picture and offers promises of better living. But unless the populace of these countries is warned to use credit cards with discretion, shoppers globally will surely be lured into the same mistakes U.S. consumers make — and quickly become saddled with the same kind of debt.
About the Author
Jose Roncal is co-author of "The Big Gamble: Are You Investing or Speculating" which Donald Trump endorsed as "a great read". Many of the author's articles related to finance and the global economic crisis can be found at financialspecuation.com
Filed under Debt Settlement by on May 14th, 2010. Comment. 
Consolidation Debt Government
Credit Problems?
I have more than horrible credit, including a bankruptcy chapter 7, collection accounts, charge offs etc. I have it all pretty much. The government is even garnishing my wages for student loans. Why do I get flyers from banks and financial institutions telling me that they can help me regardless of my credit history, and when I can the first question is: "How good is your credit?" I'm trying to pay off my debts but I want to get a loan and just have one payment. Consolidation companies can't help, bank don't want to lend, I can't get government help cuz they are already garnishing my wages, and credit card would only give me about $500 credit line. I owe way more than that. I owe a total of $30K. Any suggestions as to what my options are.
yeah people that need loans generally dont qualify, its unfair but its reality, if i was in your situation, which i am glad that im not, i would enroll in a credit counseling service, where they manage your debts, settle for less, stop interest charges etc. the service is non-profit and is generally cheap most charging 50 bucks to enroll, they will have you pay them one bill a month and they would distribute them to all the debtors its generally a 3 or 5 year plan
Steer Clear of Consolidation Through Government Grants Scam
You have seen many online ads offering access to government grants you can use to consolidate debt? Be very careful, though the government has many programs to help people solve their Debt Problems, there is not such thing as debt consolidation grants as this contradicts the whole idea of consolidation. If you are offered such programs, you are probably facing nothing but a scam.
Consolidating debt is a process that consists on replacing expensive and/or short term debt with cheap debt with longer repayment programs. Basically, consolidation can be achieved either by negotiating with creditors new loan terms or by obtaining a loan that meets the above guidelines (cheaper and/or longer term) to repay outstanding debt.
Thus, getting a government grant in order to eliminate debt can never be “debt consolidation”. Besides, it is very unlikely that the government would destine money to repay someone’s debt with no guarantee whatsoever that the borrower will not apply for new loans or credit cards.
Government Grants
A government grant is an endowment awarded by government agencies to individuals and organizations that meet certain requirements. Government grants are meant for assisting those who are underprivileged or have special needs. Someone who is deeply in debt does not necessarily have to qualify for a grant for the sole reason of being in debt.
Government grants are offered for those who want to buy their first home, to those who are starting a business and need finance in order to make everything work, to those who want to investigate on certain fields that the government has a particular interest on developing, etc.
Specific Requirements
In order to apply for a government grant you need to meet specific requirements that each grant type has as a qualifying criteria. So, as you can see, offering grants for debt consolidation widely, to anyone that wants to apply has no other purpose than to take advantage of people’s financial difficulties. That financial aid cannot be provided by those who claim they can.
And that’s the main reason why you need to beware of those companies that offer that kind of service. There are many legit online companies offering access to information, links and thorough explanations on government grants. Sometimes they even offer copies of the application forms and models of letters that need to be sent to government agencies. However, none of these companies will claim to offer consolidation through government grants. If they do, you should steer clear of them since chances are you are probably facing a scam.
There Are Trustworthy Government And Private Online Sites
If you are alert enough, you have nothing to worry about. You can do a thorough investigation by searching the net for government grants and read all the information that online sites provide. You will be able to find the government agencies’ sites and private sites too. Within these sites you will be able to find all you need to know to apply for a government grant and as long as you follow the previous advice and be wary of consolidation grants you will not be taken in.
About the Author
Devora Witts is a certified loan consultant with several years of experience in the credit area who instructs people regarding credit recovery and approval for personal loans, home loans, consolidation loans, car loans, student loans, unsecured loans and many other types of loans. If you want to understand Loans After Bankruptcy and Guaranteed Unsecured Loans thoroughly you can visit her site http://www.badcreditloanservices.com
Filed under Debt Settlement by on May 12th, 2010. Comment.
National Debt Limit
Personal Savings Rate and Credit Card Debt in the United States
Have you ever imagined how much of your money is literally going waste as interest payments on credit cards? The average family in the United States is knee-deep in debt with a liability of around $7500 as credit card payments. About $1000 is paid as interest each year by the family to the credit card company. If you include a couple of late payments and over the limit charges, the figure gets embarrassingly high.
Nearly three out of five U.S. households are accountable for the approximately $560 billion in outstanding credit card debt. The total consumer debt including credit card payments and home mortgages are around 6.8 trillion beating the total US national debt, which is around 5.9 trillion. There has been a noticeable decline in the US personal savings rate from 8% in the 1980s to less than zero in present times. There is a colossal increase in credit card debt which has increased by 400 billion dollars in the past decade to an embarrassing figure of $700 billion.
If you have more than one credit card payment to make with a high interest, you can transfer you balance to another credit where you pay zero or less interest. Do this only if you intend to pay the balance in full within the introductory period of the balance transfer. You can also move your balance from a card with a high APR to the one with the low APR. Make sure that you pay the amount in full as you already have to pay less money towards interest.
Make a list of all your credit card debts and the amounts owed on each card every month. Pay off the card with the lowest amount first. Then use that money to pay of the second lowest amount. Alternatively, you can pay off the credit which has the highest rate of interest first and then move down progressively to pay the credit cards with lower rates of interest. This way, you save a lot of money on interest payments.
The best advice, however to get out of your credit card debt and improve your personal savings rate is to stop using your credit cards and use them only in important or emergency occasions. Use the credit card with the lowest interest rate, if you have many credit cards, and put the rest through your shredder. Using the card wisely is the best step to personal money management in a country like the US which dwells in a lifestyle of credit card usage.
About the Author
Daniel Cohen recommends Find Credit Cards for comparing different Citibank credit card applications. See http://www.findcreditcards.org/issuer/citibank.php for more information.
Credit Card Debt-Bomb
There is something not right about credit cards.
Have you ever sat down and really thought about how they work?
A credit card is a loan. It is linked to a piece of plastic that facilitates loan draw downs in most retail outlets and businesses world wide when you spend.
Unlike a traditional loan, a credit card loan does not require fixed repayments of either interest or principle. Instead, the customer is required to make minimum payments. Lets assume for example that the minimum payment requirement is 2.5% of the outstanding card balance per month.
The interest rates on credit cards, due to their unsecured nature, are usually between 10% and 25%.
The fundamental flaw with credit cards is that they enable a consumer to live beyond their means, and to avoid paying any interest until either years or decades down the track when they max out the card. Even worse, the actual maxing out is determined not by when the consumer reaches their original limit on their first card, but rather when the consumer maxes out their total position and is unable to access new funds via any new cards, balance transfers, etc.
Credit cards are the ultimate enabling device for debt addiction. I have sympathy for all addicts, because whether you want to blame the addict, the enabler, or the regulator, one way or the other all addictions result in destruction for the addict, enabler and regulator (society!). Everyone loses.
Take alcohol. If liquor-land issued credit accounts to alcoholics, what are the chances they would recoup their 'investment'? And in actual fact, if regulators allowed this, society as a whole would pick up the costs via the cost to the health, policing, courts, social security and other systems. This is why we regulate markets - we can't always leave it up to a free market company to decide what is right and wrong, and we as a society end up picking up the tab (consider James Hardy and asbestos). In fact free market companies often do not act in their own self interest! Consider sub-prime lending.
Credit cards are enabling debt addicts to live beyond their means without having to make any interest repayments or face reality.
If you crunch the numbers you can see that even the ideal scenario for a credit card issuing institution is disturbing and socially undesirable.
Step 1 - Maxing your first card
How much credit can you handle?
Imagine that I want to spend $2000 a month but I only earn $1000 a month. Lets assume that I put my $1000 a month net pay on my credit card. This will cover via the 2.5% credit card standard minimum payments on a limit of up to $40,000.
You can see that under this ratio, if you put all your income onto the card and then spend from there, you can fulfill the minimum payment requirements for a card that is 3.3 times your annual net income.
When do you pay the interest?
I have no doubt that the bank would book the interest on a credit card as income the minute they print the interest charges on the statement. However, there is no requirement for the customer to pay the interest until at the card is maxed out. And further, the bank has only made profit equal to the interest if in the future they are able to get the card completely paid out. If the consumer goes bankrupt, the bank didn't really get the interest.
Imagine for a month, the interest is $1000 and the client has at least $1000 in available credit, and makes a $1000 payment onto the card. The customer then spends $1000 on the card. The interest has not been paid by the customer. As long as you have available credit, the interest simply accrues on the card and as long as you keep depositing money and spending, you don't have to pay any interest until you are out of credit.
This can go on for years, depending on how much your spending exceeds your income by.
When will you max out?
Assume that the bank will give you a credit limit based on your ability to meet the minimum repayments. If you put your whole net pay on the card, maxing out even with one card is an ugly affair. But it won't happen for quickly. The music will play for quite a long time before it stops and you have to look for a chair to sit down on.
If you ignore interest then someone who is putting $1000 per month on a card but spending $2000 per month will max out in 40 months.
If interest rates are 10% it will take 35 months.
If interest rates are 20% it will take 31 months.
This example is for someone who is spending double their income. If you had a card with 10% interest, and only spent 50% more than you earned via the card, you would last 62 months before you max out.
Remember - you don't pay the interest out of your own money until you max out.
How bad is maxing out, really?
Maxing out is seriously bad, if the bank will lend to you based on your ability to make the minimum payment.
If you have been able to borrow 3.3 years net income on your card, then at a rate of 10%, you will eventually have to pay 33% of your income in interest.
Now ask yourself. What is the chance of someone who has been spending 150% of their income for the last 5 years, adjusting their spending to now live on 67% of their income?
It is even worse the higher the interest rate! If you have to pay 20% interest, then 66% of your income is going to be interest payments. What do you think is the chance of getting someone who has been spending 150% of their income to now spend 34% of their income?
NOT BLOODY LIKELY!!
Now, some readers will object to my assumption above that the bank will lend you 3.3 years income on one card.
Firstly, the exact numbers don't matter - the point of the exercise is to examine how a credit card works and to predict whether they will lead in the future to banking profits or losses.
Secondly, this becomes a lot easier to imagine when you consider achieving those numbers via multiple cards.
And finally, 3.3 years income on one card is not a magic number. Having one years income on one card is still bad, and will still eventually require 20% of your income to go to interest payments.
Step 2 - Beyond Maxing out - introducing multiple cards
The introduction of a competitive market place and multiple cards is the really scary part.
I mentioned before that the banks record the profit on the credit cards when they print the interest charges on your statement - even though you don't actually have pay it; you can just keep borrowing and spending.
The only reliable way for a bank to record interest charges would be to record them when the card balance is paid to zero - but this doesnt happen in all cases.
The fact is the credit card market is extremely competitive, and every bank wants a slice of the action.
A market correction should be taking place at the point where a customer maxes out their one and only credit card.
This should mean that the customer is forced to stop living beyond their means, and is forced to start repaying the debt and interest.
However, facing reality and cutting spending from 150% of your income to 33% of your income is rarely the second step.
The second step in reality is a choice between
1) Having the bank increase the limit on your card
2) Getting a card with another bank
Both are easy and have the same effect - delay the pain. Delay reality.
As a result of the fact that the banks continue to increase credit limits, and issue cards to people without knowing how much they owe other banks, the day where the customer finally maxes out their card and faces the reality that they are completely stuffed is being pushed further and further into the future.
Do I have any stories either from my own experience or the experience of my clients to back this up? Of course I do. I'm going to leave out discussion of mortgages in this matter, because we are just discussing credit cards. But surely you can see how, if you had a mortgage that you couldn't afford to pay, you could use credit cards to keep you going backwards without having to face reality about your mortgage and lifestyle for as long as the banks are prepared to keep increasing the limit and issuing other cards.
Due to rampant credit card fraud, which deserves another article in its own right, I won't name names or put in exact figures. But this really happened.
A real example of credit card madness
A person I know moved to a house. At this house they started receiving mail from one of the world's largest banks addressed to a person that never lived at the property. They reported this fraud to the bank and the police. Repeatedly.
The next year, the person responded to an online offer to get a credit card balance transfer at 4% for life - to lend to their own business as a loan - since 4% was at the time roughly equal to the rate of inflation, and therefore they considered it free money.
The bank released the balance transfer before identifying the customer. This was to the same address that the bank had been defrauded previously. The amount was large.
A year later, the bank, having just been bailed out by its government, offered to increase the credit limit by 400%, despite the fact the customer had only paid minimum payments which were very small. This new credit limit would be greater than the average Australian take home salary - and was equal to 100% of the net salary of this individual according to their previous tax returns. The customer already owed a lot of money to other banks at the time.
If this customer wanted to spend $500 a month more than they earned, even at a 20% interest rate, it will be five years before this new card was maxed out.
Does anyone really believe that this customer will not be able to get an increased credit limit within that five year window or additional card(s) to delay the day of maxing out even further?
The fact that the banks are tripping over each other to do balance transfers to increase the debt of debt addicts is irrefutable. If you are reading this on articles base.com, there are probably a whole lot of paid commercials on the right hand of your screen encouraging you to do balance transfers to "get out of debt"!
Where this is all heading
1. For addicts
This credit card circus is heading to a massive day of reckoning for both the debt addicts, and their lenders.
The addicts are going to inevitably reach a point where they will have to file for bankruptcy, because the debts will be so big it is impossible to pay them off or service them. Why on earth would someone who has been living beyond their means spend 15 years paying off their loans at 10 or 20% interest rates, when bankruptcy will wipe them out immediately and still enable them to earn enough money to live on?
2. For banks
For banks, it is sub prime all over again. But when will crunch time be? I don't think that this problem is going to manifest at all in the next few years, unless we take action now to stop it. I think that this problem, will build over another 5-10 years and then cause mass bankruptcy and banking losses, which will get picked up by tax payers.
At this point, when the lenders and investors do their sums on the exposure and loss coming, they will dump bank stocks and stop lending to banks.
This is where the governments will step in and guarantee everything. Governments allow banks to be free-market in the good times, pay bonuses to executives etc, but they step in and bail out banks at the first sign of trouble. This is because banks are really a public good.
By the way governments don't have any money. They redistribute money from tax payers. You are paying for all the bail outs we have already had - and you will pay for the credit card bailouts of tomorrow one way or the other.
3. For people with manageable debt
For people who are not in so deep it is a hopeless situation, there is still going to be a decade of deleveraging ahead. During the last decade the majority of people have lived beyond their means. At some point there is going to need to be a decade of repayment - a debt deleveraging decade.
How to stop it
Stopping this problem is not difficult.
My proposal is regulation.
Assuming that banks are imperfect, and that they are a public good where the tax payer picks up the tab when things fail, we should regulate to stop this problem growing.
The problem:
1) There is no restriction on how much credit card debt a bank can issue someone.
2) There is no reliable way for a bank to know how much debt (including credit cards) someone already has
3) There is no reliable way for a bank to know how much income someone really has.
Action Required:
1) Limit the amount the bank can lend
My proposal is to either make it illegal for a bank to issue more than 1 years net income to consumers via any debt instrument except mortgages & car loans, or alternatively, in the event that lending exceeds this amount, require the bank to hold the equivalent amount in Gold as a capital reserve and to forbid the bank from recognising the interest income that is being capitalised against the loan from being reported as profit.
If we don't do this the bank could currently record unrealised paper profits on credit cards, issue more shares to the public to get more money (or borrow overseas), and then pay big dividends to their shareholders funded by the new shares issued. Everyone would think they are super profitable, and not realise how toxic the whole situation really is. Is this what is currently happening?
2) Create a national debt register via the tax office
The tax office is already setup to collect information from banks via an individuals tax file number. They are using this to report on interest income and to audit tax returns for missing interest income.
This program can, and probably already is, be expanded to report the closing balance of every loan a customer has via the customers tax file number.
The problems banks have, is that they do not have any reliable source to see what a customers real debt position is. They have to ask the customer. This is like liquorland asking an alcoholic if they are an alcoholic before they supply them with alcohol. Self diagnosis doesn't work, and a person who is desperate to get a new loan will sign anything to get one, including a fraudulent application (remember subprime?).
If the tax office had a record of the debt position for each individual, a national debt register, an electronic system could be created to verify a consumers stated debt position with the real one. Further, the consumer will be able to get a report from the tax office system to give to a bank to show their position, and the banks can verify the report with the tax office to be sure it hasn't been cooked.
The banks should be required by law to verify their customer's debt position using a national debt register.
Why the tax office? This information has other uses and I would bet you that the tax office is already moving in this direction for their auditing program. They want to be able to have a computer compare someone's spending habits against their income, to determine if an audit should take place. This can only be reliable if they know the movement in the persons debt, so they can see if the spending was funded by undeclared income, or if it was debt funded.
3) Income
The banks need to be able to reliably verify someone's income. But whch measure of income? In reality it is the person's disposable income that matters.
The banks need to be further regulated and forced to seek additional confirmation as to someone's income. Filling in a form on a website, or posting a copy of a payslip is not enough.
Banks should be required by law to see someone's tax office notice of assessment. They should be able to verify with the tax office that the information provided is authentic.
Further, the debt reporting system could potentially include minimum repayment obligations, and help a bank work out what someone's real disposable income is after meeting their pre-existing payment obligations.
Of course, as discussed, in reality, credit cards would create confusion because in effect, they don't actually require any repayments until you are so maxed out that no one is prepared to increase your limits or issue new cards. And no one really knows when that point is.
Conclusion
Our credit card system is fundamentally flawed.
In effect, a debt addict does not have to make any repayments until their cards are completely maxed out and they can not get any more limit increases or new cards.
We need to urgently put a cap on how much credit card debt a bank can issue to one person.
We have a chance now to limit the losses that banks are going to incur as a result of the defective product structure and regulatory environment.
The amount of the loss that is coming is increasing every day.
The sooner we take action to end this madness, the smaller the bill that the tax payer is going to pick up.
About the Author
Adrian Pinkewich is CEO of Now Accounting and Tax Express www.nowaccounting.com.au www.taxexpress.com.au
Filed under Debt Settlement by on May 3rd, 2010. Comment.
Government Debt Help
I need help paying a government hospital debt, any suggestions of who might be able to help? ?
My suggestion would be to try and make a monthly payment arrangement with their billing office..
Best of luck.
How You Can Benefit From Government Debt Help
Government debt help refers to one of these two conditions. It can refer to the strategies that a government can apply to help itself get out of outstanding and overwhelming liabilities. On the other hand, it could refer to the help that a state may extend to its citizens who have bad debts to help them recover form the situation. When the state comes in to help its people, recovery is more guaranteed.
In most cases, this help comes to the people through consolidation loans. This means that people are given some form of financial advantage, despite having poor financial records and rating. The loans do not discriminate against anyone, they are given regardless of financial background. The reason the government would like to do so for its people is mostly because when many people are unable to repay their liabilities, it generally reflects negatively on the general economy of the given state.
Most of the people who benefit from government debt help happens to be students. This can be explained by the fact that, these individuals do not earn an income and therefore repayment of their educational liabilities becomes a tricky affair. Government help comes in handy through a number of programs, the most common one being consolidation of bills.
The other way out of liabilities is the management program, which basically helps one to manage their finances in future. The idea is to assist individuals to go through financial counseling and come up with workable plans that can help them manage their finances. The companies that offer these services do so at affordable rates and lower monthly payments.
About the Author
Peter Gitundu Creates Interesting And Thought Provoking Content on Finance. For More Information On How To Manage Loans, Read More Of His Articles Here GOVERNMENT DEBT HELP If You Enjoyed This Article, Make Sure You SUBSCRIBE TO MY RSS FEED!
Filed under Debt Settlement by on Apr 28th, 2010. Comment.
Debt And Credit Financing Pdf
Status of Different Micro-finance models in India
Status of Different Micro-finance Models in India
Vikas Singh, Jagjeet Kumar Mittal, Atul Kumar, Abhishek Narain Sharma
ABSTRACT
In recent years Microfinance has attracted widespread attention for its developmental Impact for the poor, but it too has multitude of issues and complications. This research project has adopted a mix of empirical and theoretical approach with the objective to identify a comprehensive range of implementation and impact issues of microfinance and make detailed deliberations over these for the chosen area‐ i.e. Allahabad, Sitapur, Kanpur and its adjoining region. (A typical northern Indian agrarian setting).This paper will seek to examine what is the current status of the different microfinance models in India and how they are contributing in achieving the financial inclusion. A comprehensive field survey in real‐life setting of the donors, the practitioners and the beneficiaries (the groups) through various means such as formal and informal talks, on‐site questionnaires and audio‐visual means has been performed. The deliberations are focused around examining the implementation issues; the economics behind the issue, the complications involved thereon, the impact‐ individualistic and wider context, providing practical solutions for the problems and the case for including health and education among its domain of services.
Introduction
By micro-finance we mean to say that provision of financial services to poor or low-income clients, including consumers and the self- employed. Micro credit (or loans to poor micro enterprises) should not be confused with micro finance. Micro Finance is relatively a bigger term which addresses a broad range of services especially financial and banking needs for poor people. Microfinance exists as a collection of banking practices centered on providing access to basic financial services to poor people, particularly in developing countries. The form in which it has developed and evolved proves it as a reliable and consistent organizational mechanism for providing access to financial services to the poor.
A small initiative which started in 1976, as experimental lending to poor households in the village Jobra (Bangladesh) which later came to be known as Garmin Bank is a widely acclaimed example which bring forth a methodology that brought a paradigm shift breaking the preoccupation of banking channels thus demonstrating the possibility of eradicating poverty and having enormous implications. Essentially in terms of practice it revolved around providing small loans (typically without any collateral) and accepting small to very small deposits and similar financial services as it is progressing. Microfinance presents a series of exciting and acknowledged possibilities for extending market thereby reducing poverty, gender empowerment and promoting social change. India has christened as a developing country with its characteristic demographic unction's and skewed distributed income structure certainly a rip case for implementing it and so it has happened albeit, on the national scale. The forms, features and working pattern that exist with MFI's can clearly be categorized similar to that in South India and those working in North India. Regional demographic features such as literacy, occupation, group dynamics, existence and prevalence of institutions and regional pressure group characteristics may explain this distinctness. However, Allahabad district may be considered as a typical representative of North India, especially that of Central India. The extents to which MFI's have spread and covered the district obviously pronounce that there is lot of work that needs to be done. Every event/process to assess the shortcoming or gaps for identifying and explaining the cause for that as well as for becoming supportive of its expansion necessitates for examining the issues related with the microfinance practice. It exhibits direction and trends, which helps in locating the loopholes and the way forward. So was the objective of our project. Further it also take time to compare whether these trend are consistent or deviating from the national trend or global trend for that matter.
Various models for micro finance
The SHG model
The self help group model has evolved in the NGO sector. A variety of models arise out of NGO nurturing among which SHGs have become the most popular.
SHGs are small informal groups comprising of membership of 10-20 persons. The composition of membership is mostly exclusively male or exclusively female. The members are self selected with a liberty to choose their group depending on their level of affinity with the other potential members. The group meets regularly at an appointed time and place and carries out its financial transactions of savings and credit. The roles and norms of the group are determined by the members themselves. The NGO provides them with support services, training and developing linkages.
However, there are certain features of SHG that need to be looked into:
- The group promotion process is long and the poor have to wait for long periods.
- The amounts available in the beginning are very small and all the members cannot take loans at the same time.
- The functioning of the group relies completely on group dynamics which are very difficult to build in.
- Conflicts arise on seemingly trivial reasons which can lead to the break-down of the group and it is difficult to rebuild it.
Despite these few disadvantages SHG still is a popular model for micro finance in India.
Federated SHG approach
The federated SHG approach builds upon the unique features of SHG based micro finance and contributes to factors that improve the sustainability of SHGs. Federations increase the opportunity offered by the SHGs, expands empowerment through leadership building and addresses the component of security through insurance services. Federations usually come under the Societies Registration Act. PRADAN and MYRADA, two large NGOs that pioneered the concept of SHGs.
The Grameen Bank Model
The grameen bank methodology which was a case of exceptional success first evolved in Bangladesh and was launched by many other organizations in India with slight variations. Some of the features are as follows:
- Homogeneous groups of 5 members are formed at village level
- The field worker facilitates the process of group forming
- All the group members undergo a 7 day compulsory training
- Some groups undergo the group recognition test
- 8 joint liability groups affiliate together to form a centre
- The centre meets every week at a defined time and a bank assistant attends the meetings.
Group discipline is enforced through peer pressure. Collateral is replaced by peer pressure. The incentive to timely repayment is repeat loans and continuous access to increasing credit from the bank. A field worker maintains a check on loan utilization.
Non Banking Finance Companies
The NBFCs has emerged as a nearest substitute for those MFIs who want to go the for-profit route. Since getting registered as a bank is costly and the local area bank idea has not been pursued beyond the initial approvals, the NBFC route is increasingly being chosen by profit driven MFIs. They can also enter the capital markets. Since the poor are bankable and lending to them can be commercially viable it is not necessary to depend on low cost funds to lend to them. Secondly, since the amounts required are huge, the financial markets are the only way to mobilize resources. This would mean mobilizing debt at market rates of interest. The for-profit NBFC route is currently the best way to operate in the capital markets. For regulatory purposes, NBFCs have been classified into 3 categories:
(a) Those accepting public deposits,
(b) Those not accepting public deposits but engaged in financial business
(c) Core investment companies with 90 per cent of their total assets as investments in the securities of their group/holding/subsidiary companies.
Methodology
I. Comprehensive literature survey, general and specific for understanding the development of MF, economics of microfinance, the trends and issues as emerging in this field (National and Global scale) and the implication of various MF models.
II. As the most important component for reaching the objective of the project we performed a detailed scientific survey of the microfinance institution (SONATA), NGOs (MANVODAYA), SHGs and Banks (Bank of India, Kasmanda Sitapur) working in Allahabad and Sitapur (such as Naini and Karchana in Allahabad and Kasmanda in Sitapur) and the members of the groups/SHG's whom they are serving. Later on, the statistical and general inferential analysis of the data as obtained from survey provides some rather interesting findings which would certainly be helpful in modifying the ways of microfinance already working and the way forward for those venturing to enter.
The Selection of the Study Area
The study areas selected were
1. Sitapur district in which individual study of SHGs were carried out to form the very base of the study. All these SHGs were promoted by an NGO MANVODAYA.
- Allahabad district in which groups were taken whose having lent by sonata MFI.
Areas covered- Naini, Bahadurpur and Karchana Block.
- Kanpur district which has two federations:
(a) Jagriti Mahila Samiti (b) Boond Bachat Sangh, Kulgaon.
Both these federations are promoted by the NGO Shramik Sansthan
Sample: ‐
Following points were specially taken care of:
a. SONATA (an MFI institution) which having presence in Allahabad was consulted (Formal Talk session and detailed questionnaire).
b. To study the bank linked SHGs model, specific locations (such as Kasmanda in Sitapur and Kanpur) was selected and a specific NGO which having presence in that location was consulted along with its promoted SHGs (Formal Talk session and detailed questionnaire).
c. Groups / SHG's as served and inhabited in different pockets of the region as chalked out are included in survey.
d. Rural and urban to semi‐urban areas in regard to group members inhabited and working there should be properly represented in the survey
e. Members of various age groups, income level, and with varying literacy levels are properly taken into account.
f. As many as 20(5 Bank linkage SHGs and 15 MFI promoted) groups dispersed into various pockets were surveyed, beside to understand the federation model of microfinance, two federation were surveyed too. Three members, on an average, three members from each group were chosen for questionnaire based survey. In addition to this, focus group discussions were conducted when some additional group members from the SHGs were present. Finally, data on loans and member characteristics were gathered from internal records of each group.
Means and Measures
a. Specifically designed comprehensive Questionnaires (enclosed in Appendix)
b. Questions were orally asked to the members and responses were marked in the questionnaire by the survey team members. Although it was time consuming but necessary for bringing out any meaningful result to the whole endeavor.
c. Team members also gone through some formal & informal talk sessions with the group, during and after their weekly meetings with the MFI agents.
d. Sessions were video graphed: ‐ This on the one hand facilitate ourselves to dig out every minute inferences, especially in regard to satisfaction level, economic and social impact, in consultation with our project guide (as on some occasion they were not able to be present there physically) and on the other hand arouse the eagerness among the group members (SHGs) to take part into these sessions.
Background: The NGO, the MFI, the Federation, Groups and their Members
It has seen over the year that the basic principles of group formation are generally common to most of SHGs in India. However, great variations were found in the practical implementation, nature and objectives of the agencies promoting these groups (such as which would be target group, what would be internal policies of the group and what would be the size of group). We have hereby described in brief the models used by our selected NGOs, MFI and Federations which we have chosen for our study.
Current Growth Pattern of SHGs Bank linkage programme (NABARD Promoted)
The SHG – Bank linkage programme launched by NABARD in 1992 continues to be the predominant Micro Finance model. During the year 2006‐07, 6, 86, 408 new SHG were credit linked with banks as against 6, 20, 109 during the year 2005‐06, taking the cumulative number of credit linked SHG to 29, 24,973 (Table 1 and 2). The phenomenal reach of the programme has enabled an estimated 409.5 lakhs poor households to gain access to MF from the banking system as on March 31, 2007.
Table 1. Growth pattern of SHGs
Year
No's of SHG
Growth (%)
Cumulative
1992‐1999
32995
-
32995
1999‐2000
81780
148
114775
2000‐2001
149050
82
263825
2001‐2002
197653
33
461478
2002‐2003
255882
29
717360
2003‐2004
361731
41
1079091
2004‐2005
539365
49
1618456
2005‐2006
620109
15
2238565
2006‐2007
686408
11
2924973
(Source: NABARD Annual report)
CASE STUDIES
Case 1. JAGRITI MAHILA SAMITI
Goal
Implementation of all government and non-government schemes at all local level especially through SHG.
Management Model
From each SHG a person is selected as a member of the general body of the federation. Since there are 165 SHGs in the federation, therefore there are 165 such members. From these 165 members, 9 members are selected in the governing board of the federation, which administer the federation. Out of these 9 members, 3 are selected as the President, Secretary and the Treasurer, who are also responsible for accounting.
Modus Operandi
The federation facilitates the SHG. The governing board produces the whole proceedings of the federation before the general body once in a year. Also the future plans, which had been chalked out by the board, are presented.
The federation charges a fee of Rs.910 every year per SHG. The breakup of the fees is as follows:
- Federation member-Rs. 200
- Book writer fee-Rs. 360
- SHG Audit –Rs. 200
- Stationary-Rs. 150
The fee of Rs.910 is regular and is paid by all the SHGs as mandatory money which in turn is utilized for their own benefits. Till now no SHG has been found to be a defaulter in payment of this fee.
Intermediary Role
Federation acts as an intermediary in providing services for Cattle Insurance, Agriculture, Group Meeting, and Audit etc.
Extension and Marketing services provided
The federation has not been able to achieve success in marketing at the individual level but has been hugely successful in providing insurance facilities to members of the SHG. Cattle and household insurance facilities have been provided to the SHGs. Local needs and resources are taken care of by the federation. Various initiatives like pickle making, vermiculture were launched.
The federation for proper maintenance of the account of the SHGs now keeps book writers Medical aids distributed at the subsidized and reasonable rates, which are verified has been a huge initiative taken by the NGO itself. Since 2000-2004 self-development projects focusing on the training and development of the women SHGs was launched.
The federation is also actively involved with developmental activities of PACS and Panchayats. From 2004-2007 formation of PACS and panchayats was done. From 2007-till date there are 2 workers, which are continuously involved for the support in the upcoming projects. TARAKSHAR program launched for education of women and children. Sewing school was developed and promoted. HELPAGE INDIA initiative was launched which focuses on the self sustainability of the SHGs.
Maturity Level of the federated SHGs
Average size of the SHG was 12 members per SHG whereas the average age of the SHG was 11 years. The number of SHGs enrolled in the federation was 165, which has a total of 1855 members. The federation covered over 40 panchayats.
Credit Linkage
The federation is linked to the U.P Baroda Grameen Bank. The bank gives loan to the SHG members. The interest rate charged was 9% for regular payers and 10.25% for non-regular payers. The grading was done by the bank on various parameters for determining whether the payer is regular or non-regular. If more than 85 marks out of 100 is obtained then the recovery is categorized regular and if less than 85 then the recovery is categorized as non-regular.
Need of the SHGs to join the federation
Initially before the formation of federation projects the SHGs were formed but they were not sustainable in the long run. Joining the federation transformed the SHGs from a self-sufficient unit to a self-recognizable unit. The SHGs joined the federation to indulge in income generating activities vigorously. The federation also encourages the SHGs to increase their volume of business and maintain sustainability. Joining the federation gave them a bigger platform to initiate an activity and was supported by other federation members. Joining the federation helped in better access to funds.
Reach in the District Administration
Initiatives were taken by the District Magistrate on being approached by the federation members to help them in inheritance of the land. DM Kanpur Dehat had helped them in the building of the roads in their villages and also solving sewage problems. Some federation members are also contesting elections at the Panchayat level.
Loaning Status
Table 2: Purpose wise loaning status
S.
No.
Loan Purpose
No. of persons
Amount of the loan
(In Rs.)
1
Medical needs
50
284968
2
Education
6
42400
3
Self consumption
165
1180348
4
Agriculture/Animal husbandry
733
5643676
5
Income generating activities
238
3163016
6
Other
49
314165
Quarterly Report
Average loan size =Rs. 8564
Minimum number of persons took loan for the education purpose
Maximum number was observed in the agriculture/animal purpose.
The loan size for income generating activities is found to be 1.5 times the average loan size.
Case 2. BOOND BACHAT SANGH, KULGAON
Evolution of the Federation
Rashtriya Mahila Kosh was not ready to provide loans to those people who were living below poverty line and who did not have BPL certificates certified by CDO. Owing to the complexity of the loaning procedure and an urge for an independent source led to the formation of federation on 30th Sep 2002.
Objectives
- To inculcate habit of saving in poor women.
- To bring them out of the clutches of the money lender.
- To provide loans to manage household cash flow crisis during emergencies.
- To provide loans for income generation activities.
- To provide business development and business upgradation services.
- To make sure the loans available to the poor.
Federation Management Model
Number of SHGs enrolled by the federation was 170.The federation is currently promoted by the NGO Shramik Bharti. SHGs are divided into four clusters on the basis of geographical area. Each cluster had three main representatives
- Leader
- Secretary
- Federation representative
Leader and Secretary were largely responsible for looking after the work pertaining to the SHGs. At the cluster level one representative from each SHG meets once in a month on a fixed date. Out of these representatives members are chosen which look after the working of the cluster and hence represent the cluster as a whole. Since the federation was divided into four clusters there were a total of twenty members which represent the federation advisory committee.
Out of twenty members two were selected by voting who represented the board, which altogether comprises of five members. The other three members are the Chairperson Trustee and two persons chosen by the Chairperson Trustee himself.
Status Pre-Federation
When the federation was not formed the source of money to the members of the SHGs was through:
- Inter loaning among members.
- Through financial institutions like SIDBI, HUDCO, RMK (Rashtriya Mahila Kosh) established by World Bank.
Of these the major source were the financial institutions esp. RMK which charged 6% rate of interest on the loans given. Another 1.5% was charged for the training purpose.
Financial Modeling
Saving
An SHG had following two kinds of saving
- Compulsory
- Surplus
- A compulsory saving of Rs.1000 per annum is supposed to be deposited with the federation.
- If there is any surplus the SHG also deposits the surplus.
- On both kinds of savings the SHGs are paid an interest of 6% per month.
Saving of SHG pre federation was Rs.3083 per SHG whereas saving of SHG post federation was Rs.12676 per SHG per annum
Loan distribution model
- The loan granted to a SHG was 8 to 10 times the compulsory saving of that particular SHG. For example if an SHG is 10 years old then the compulsory saving of that SHG will be 10×1000=10,000 Rs. Hence the maximum loan granted to that SHG will be 10×10000=Rs.1.0 lakh.
- The loan sanctioned to the SHG is at the rate of 12%.The SHG in turn lend this to its member at the rate of 18%.
- On repayment of loan the SHGs are entitled for fresh loan.
When a SHG is not capable of providing loan to its member then it approaches the federation. The SHG fills the form on behalf of the member who wants the loan. The form entails the details of the loan like purpose of loan, amount etc. The loan is sanctioned by the cluster members who approve the loan on the guarantee of the SHG. The loan repayment will be on behalf of the SHG.
At last 2 members out of the 5 chosen members should be present at the time of sanctioning the loan. The document is then sent to the Sr. Group Organizer who endorses the same by verifying the loaning status and track record of that SHG.
The loan repayment is splitted according to the amount of loan in installments as follows:
- For loan up to Rs.5000 the maximum installments fixed are 10.
- For loan from Rs.5000-Rs.10000 the amount of repayment was Rs.500/month
- For loan greater than Rs.10000 a maximum of 20 installments is fixed
Saving Status
The average saving per member per year was observed to be Rs.891. During the last financial period (2008-09) it was observed to be Rs.548. This also comes from the fact that the average saving per year per federation increased from Rs.1324171 during 2007-08 to Rs.2155058 during 2008-09.
Interest Analysis
1/3rd of the interest received on loaning the SHGs was used for the general working of the federation like stationary, rent, stock, training, and auditing. The part saved was distributed as profit.
Loaning Status
Direct loaning is not being done by the financial institutions to the federation. Instead the loan is given to the NGO promoting the federation. 15% of the applications for loan were for meeting medical needs,8% for repayment of existing loans, 20% for social purposes like marriage etc, 20% of the applications were for consumption purposes like house repairing etc, where as 38% of the loan is used for income generation activities.
Efficiency and Sustainability Indicator
OCR (Operational Cost Ratio) is defined as the cost incurred by the federation in maintaining a loan portfolio of Rs.100. OCR on analysis was found to be 9.3%
OSS (Operational Self Sufficiency) is defined as the ratio of operational expenses over operational income.
OSS on analysis was found to be 190%
Constraints and Issues
- Lack of proper infrastructure for conducting meetings. Extreme weather condition during summer and winter acting as a impediment in regular holding of meetings.
- Federation was not capable of providing extension services due to lack of leadership.
- No marketing interventions. Federation was not involved in marketing of products produced by SHGs. This would have gone a long way in attaining sustainability of federation as well as SHGs.
Important Findings of the Survey & Analysis of the same
The major reasons for low penetration of financial products like health insurance, crop insurance, remittance facility, and other financial products among the SHG members are:
- 1. MFI's are unable to develop new innovative products for the poorest of poor and they are merely acting as micro‐creditor in Allahabad region. This is quite evident in other parts of India; though it is found in the study that those which are linked to the SHGs Bank Linkage programme are far better than those promoted and financed by the MFIs.the reason for these could be several and few majors ones we found out during our talk with NBFCs are:
- Lack of risk sharing among different players from lenders: banks, insurance companies, financial intermediaries, and other financial institutes due to high risk associated with micro‐finance.
- The SHGs which are developed on Bank linkage model are generally get subsidy from government programme (programme like SGSY, DWCRA etc).
- Lack of financial incentives provided to MFIs listed as NBFC and other institutes by Indian government in the form of tax incentives, reduced excise & custom duty on IT solutions (both hardware & software), which can help MFIs in early adaption of latest IT solution helping them in improving operating efficiencies, improving service to its clients, developing new financial solutions, improving its reach thereby achieving the economies of scales which will ultimately help in reducing interest rate for the poor and access to better services.
- High transaction cost involved in handling financial products like insurance & remittance facility is another reason which is forcing MFIs not to enter into uncharted territories.
- Although micro‐finance is growing at 30‐35 percent annually according to various sources like Intellecap, it is still unable to attract highly talented and skilled individual, who can reshape the entire industry.
- And, last most micro‐finance companies are reluctant to test new financial products and are happy to merely act as micro‐credit provider, the reason for this is lack of risk sharing between different players and lack of government incentives.
- 2. Second, it is due to the low level of financial literacy of the members and "Cole & Fernando, (2008) reported that financial literacy is very important determinant of finance", as shown in figure (1) the literacy level of interviewed members is quite low, making them unable to comprehend the benefits and cost issues of complex products like health insurance, crop insurance, and other financial products. The poor in Allahabad and surrounding region are not even aware of these products and the only insurance product sold to them (in this case members of Sonata Finance are charged Rs 100 per year) is to cover the loss of MFI in case of any unfortunate happening to the group member.
3. Though Microfinance's penetration is growing at a much higher speed, still they haven't succeeded in changing the saving behavior of the people. It is found in survey of the 50 member of the different groups promoted by SONATA MFI in Allahabad region that 4% of the people still don't have any saving other than what they have in group saving, 50% people have their saving in form of gold, 32% people have their savings in bank and around 14-15% people use the service of chit funds for their saving.
4. The average earning per day of the 42 & 32 % of respondents were in region of Rs 50– 100 & Rs 100‐150 and only 20 percent of the respondent have average earning per day below US $1 as evident from the figure. From this we draw out conclusion that the microfinance (read microcredit in context of Allahabad and surrounding region) hasn't reached the ‘poorest of poor', the segment of poor i.e. approximately 300 million people in India who are in dire needs of credit at low interest rates to save them from the hands of local moneylenders, and other financial services like saving, remittance, and insurance. The low interest capital can help these "poorest of poor" to move out of "poverty trap" by investing the capital into income generating activities like dairies, tea‐shops, and grocery stores.
Conclusion
From the research various conclusions can be drawn but our interest was in the following main areas. First of all the participation of research institutions in the microfinance sector is very low as compared to the other developing countries. So in order to develop microfinance sector it is necessary to promote these institutions to come forward and take initiatives to develop new instruments, products and models for the upliftment of this sector.
One more important thing which we have found is that use of ICT is still very low in this sector which is needed to be improved. Because in current situation one cannot think of growth without ICT. But there is one problem with the implementation of ICT in microfinance sector. The end users of this sector are not techno-savvy and mostly come from the bottom of pyramid. So in order to implement ICT first of all the government has understand that everyone has right to computer education and everyone should get it.
Recommendations
To move approximately 300 million people in India, who are below the poverty line out of ‘poverty trap' and serving the ‘poorest of poor', it's imperative for MFIs to move to next wave of growth in microfinance and not restrict themselves to microcredit lending only, and develop innovative financial products keeping in view the interest of the ‘poorest of poor' so that the actual benefits can percolate to the people who really need them. While analyzing the findings of our survey, we are recommending few important suggestions:
- Training SHG members (especially of those who borrowed from MFI) to enhance their financial literacy and earning power.
2. Changing the repayment schedule and made it more flexible.
The changes which are required to be made are explained through the following model.
Training:
We can forget for some time to provide credit facility and saving mobilization to the poor but it is injustice to provide credit without any training and input to the poor people. It is well accepted fact that a credit will not attain its objective, until and unless it will use in right way and it can be achieve only if the people will get a proper training. Generally the poor continues with their family occupation, many a times related with their cast to which they belong, particularly in northern India. Traditional knowledge and skills as gained through generations, certainly has importance, but not able to a good sustenance. Large scale mechanized production has let it down. In short, role of training for better occupational efficiency can hardly be overemphasized.
Additionally, following factors goes in favor for providing training: ‐
1. The model which is adopted by the MFIs is not including NGOs or any other social service group as intermediary and so to provide some sort training or better implements is grossly untouched, though it is found that most of the MFIs work as a consultant and lender both for the borrower but still the number of such MFI is very low. On the other side illiterate and poor people can neither explore other available avenues nor may have access to it. So there is ground for linking providing micro credit facilities & related occupational training.
2. Members of group (Linked to a MFI) feel the need of occupational training and better implements, whether they are with their traditional occupational or have ventured into some other area, while the member of group which are facilitated by an NGO feels the need for a personnel who can do the documentation work on behalf of them. For that a better way is to choose a person from a group itself who is enough educated to do the document of work for not only his own group but also for the other group as well.
Quick Repayment
- Repayment schedule should start from the very next week of borrowing.
- Repayment rules should remain same irrespective of the growth status of the SHG.
- Better training should be given to ensure additional income. It will ensure timely return.
- Repayment installments should remain of the same size throughout the outstanding of the loan amount and must not vary with time.
References
- Tor Jansson, IADB, Micro-finance From village to wall street.
- Bansal Hema (2003), "SHG – Bank Linkage Program in India: An Overview", Journal of Microfinance, Vol. 5 No's 1.
- John Weiss, Heather Montgomery and Elvira Kurmanalieva: Micro Finance and Poverty Reduction in Asia: What is the Evidence? (ADB Institute Research Paper Series No. 53 December 2003).
- Lucie Gadenne, Veena Vasudevan, Institute for Financial Management and Research Centre for Micro Finance, Working Paper Series No. 18, November 2007 (How Do Women in Mature SHGs Save and Invest Their Money?).
- Dr. Kimberly Leonard (Impact of Micro-finance on poverty, Income inequality and entrepreneurship).
- Priya Basu (World Bank) and Pradeep Srivastava (NCAER, India), (Scaling up Microfinance for India's rural poor).
- NABARD, Annual Report 2008-2009 (http://www.nabard.org/FileUpload/DataBank/AnnualReports/Annual_Report_2008-2009_ENGLISH_100809.pdf).
- http://www.microfinanceinsight.com
About the Author
Author is a student of MBA-IT 2008-2010 of IIIT Allahabad. He is a B. Tech in Electronics and Communication from Uttar Pradesh Technical University, Lucknow. His major subjects in MBA are IT, Finance and Marketing.
KNow Your Rights
It’s time to take back your dignity from the bill collectors. I live in central Florida and a month or so a tragic story unfolded, centered around a family also from central Florida. I don’t know all the facts but it was apparently financial in nature. The family recently filed bankruptcy and was about $85,000 in debt. The father had lost his job, got another one and then lost that one as well. The father snapped at some point and shot his wife and two teenage children before shooting himself. It was heartbreaking to say the least. But nothing is so bad to end it all. Financial hard ship can be devastating, and starting over can be overwhelming, but you can still prevail with your faith and hard work.
Bankruptcy will allow you to take control of your finances again. But the most important thing to do is take control of the creditors calling you. If you have not taken a few moments you need to read the Fair Debt Collection Practice Act. You can find it at http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre27.pdf.
This will give you the ammunition you need to fight back against the creditors who will flat out ignore your rights and lie to you.
Here are a few things that you can do to take control of some of these “blood suckers.” I know that’s strong but what else can you say about some of these collectors. Okay here we go.
(1) Have fun- you must turn the hardship and situation into something that simply has a little lighter side to it. I know we have all seen the Seinfeld episode where the telemarketer called Jerry at dinner. Jerry then said “can I get your home number and call you back?” Exactly, they don’t want to be called at home either much less during dinner.
(2) When the collector calls, put them on hold for a few hours, seriously if you just put the phone down no one else can call. Try taking the call using a different accent; whatever gives you some joy. Tell the collector to hold for one moment, make some banging clicking noises and then come back on the line and say sorry about that I had to turn on my tape recorder, go ahead what were you saying? I bet they change their tune. I am not saying that you need to do this to dodge your bill collectors; I am only saying to do this to simply take back your life and work out your debts on your time not theirs.
(3) Actually, the best thing to do is call your bill collectors every Monday or whatever day works for you each week. You can give them an update. Call them before they call you, even if you can’t pay; the communication goes along way.
(4) Next time they call you, put them on notice. Tell them to never call you again, then when you hang up send them a “Cease and Desist” letter with certified return receipts, letting them know that you no longer want to be contacted by phone. Tell them you are utilizing the rights afforded you under the Fair Debt Collection Practice Act and that you want all communication as outlined in the act to be by U.S. mail. Violation of this request can result in possible civil and criminal actions.
(5) Trap Call. This may be over kill but you can get a 30 day free trial by going to trapcall.com. It cost $25 per month which is a little steep for personal use but the free trial may be all you need for 30 days. For small business it is sure a great use of $25. Here is what they do; you sign up then put in your cell phone number. Trap call will then intercept all phone calls made to your cell phone, I think it has to be a cell phone but you can check. Since many people today are using a cell phone for their home number I felt this was worthy of discussing. Once you have set up the service you can manage your calls through the site. Anyone that calls doesn’t experience anything different. But it is completely different. First, if anyone leaves you a message, trap call will transcribe it and send it you via text message which is a cool feature. If a bill collector calls you that is annoying then you can go to your mange calls and place that number on the “black list” and the next time they call, if you don’t answer, they will get “the number you have dialed is no longer in service please check the number and try again.” That’s right, it will announce an “out of order” message every time you allow a black list number go to your voice mail. If someone calls and you press ignore on your phone they will get nothing. They will actually think that their phone didn’t go through correctly. You can press ignore every time and they will simply just loose the call. You can also use the feature to record all your calls, anytime someone calls you, a record option is available. If you ever have someone call you from a private number you can select ignore, and while the caller hears ringing, you will see the name of the caller. Never talk to another bill collector again, giving you the ultimate piece of mind.
Remember, you do have rights. Know your rights and don’t allow any bill collector to intimidate you or abuse your rights. Stand up for your rights.
All my best,
James
About the Author
www.whoisJamesDicks.com -For more than a decade, James Dicks has been one of the nation's leading educators on the subject of Real Estate, Stocks, Options, the Foreign Exchange Market and empowering investors to handle their own investments.
James is living his dream by helping investors and businesses overcome the hurdles of reaching their financial goals. Millions of people have heard James’ message of diversification, money management and financial freedom and thousands have attended one of his many free workshops. Increasing investment knowledge is James' goal and he strives to reach this goal by using a common sense approach that investors of all types can utilize on their road to financial freedom.
Filed under Debt Settlement by on Apr 27th, 2010. Comment.
