Thursday, March 14, 2013

And thus great institutions are born

I was in the interior villages of Tamil Nadu, off Thanjavur yesterday, visiting the offices of KGFS (Kshetriya Gramin Financial Services ), an organization that works for bringing “financial inclusion” to the remotest villages where even the nearest public sector bank-branch may be several kilometers away. What I saw of the work being done by KGFS impressed me tremendously, and I have grown much richer with the experience.


But I guess it is better to begin at the beginning.  My friend (and batch-mate from IIMA) Nachiket Mor who heads the IFMR Trust invited me to have a look at the rural financial inclusion initiative of the Trust, to see if I could help in any way given my interest in the subject of Personal Finance.  He referred me to Bindu Ananth, the President of the Trust. When I was on a visit to Chennai the day before yesterday I went across and met Bindu and two of her colleagues at their office in the IIT Research Park at Taramani. I got a brief of the activities from them and then took the train to Thanjavur.  Ganesh, the head of Thanjavur operations accompanied me on the branch visits. A brief view of what I saw and understood follows.


IFMR Trust, which works in other areas of finance as well, has a separate arm for Rural Financial Inclusion.  That’s the term that best suits what they do, for they are not a bank, they are not a micro-finance institution, they are not money-lenders in the conventional sense, but they offer several of these products and services to their constituents. Under the umbrella organization of IFMR called KGFS, they have established ‘branches’ in remote villages. The criteria for opening a branch is such that it has to be far away from the nearest town, have at best a population of 5000 to 10,000 in the 5 km radius around the branch (which the branch strictly does not breach in terms of reach), and very likely has as its catchment people who earn only through daily wage labor, or tilling their small land-holdings, or running small businesses.


Each branch (and all of them I am told, look the same – I visited two of them) has two or three ‘wealth managers’ who are locals (mostly women) , 12th standard pass being the minimum qualification, with adequate computer and software support including biometric identifiers for real-time identification of people through their fingerprints, scanners for instantly photocopying documents and storing them, dedicated communication towers (reminded me of National Stock Exchange when they set up) hooked up to their central computers, and an indigenously designed software to enroll participants and keep track of all transactions.


The population being served by the two branches I visited (both about 30 km from Thanjavur,  remote rural hamlets, but as always in Tamil Nadu, with excellent road connectivity) is about 5000 people living in five villages.   The services being offered are loans against gold, loans for business needs, loans to Self Help Groups, term life insurance, personal accident insurance, bank savings accounts and recurring deposits.  For the insurance, KGFS has tied up with an insurance company, and the bank accounts are opened with Axis Bank for which KGFS is a correspondent.  Money transfer facilities, only for enrolled customers, is also offered in a tie-up with Western Union. So far so good. But then this is not very different from any financial services organization that you see, except for the remoteness of the location. The real differentiator is in the way these services are offered.


A customer cannot just walk in and demand a loan. He or she first needs to enroll. The ‘wealth manager’ at the branch has this software which prompts her to ask and fill in all the relevant questions about the individual’s profile. A typical profile that I saw looked like this. Both husband and wife work as agricultural laborers earning daily wages. The husband get Rs. 200 per day, the wife about 150 per day, and each of them manages to work about six months of the year. That is an annual income of 42,000. They also have a small land holding from which they net about 6,000 per year. Their cow yields them about 5000 annually, and they have a goat as well. They have one school-going daughter. Their assets, apart from their house worth 1.5 lakhs, includes 10 grams of gold, their land holding worth one lakh, their cow and their goat and the clothes on their backs. The software is designed to capture all this, including ‘valuing’ the cow, and valuing their house based on whether it is made of mud or concrete and what kind of roof it has. About Rs. 3.5 lakhs in assets, and 55,000 per annum in income. Expenses per year are about 35,000. Being ‘upper middle class city bred’ I am not used to such low numbers, but I was assured that this is par for the course.  Their goals include getting their daughter married six years from now, and amassing capital of one lakh rupees to start a small business.


All this is fed into the software by the wealth manager at the branch, and the software then generates a detailed report. This reports lists out assets, incomes, expenses, along with allocation ratios, projects out their income for the next few decades, and throws out a bunch of other analyses as well.  It also has a concept  of “Human Capital” which assesses the remaining lifetime earning potential of the individual based on which insurance coverage is recommended. The report is discussed among the staff of the branch, and then the customers are educated about their financial profile.   The products on offer are explained to them, and unnecessary consumption loans are discouraged. No product is “sold” merely to make commissions. Needless to say, when it comes to covering life, only term-life policies are even discussed.


The service extends to when it is really required, i.e. at the time of a crisis or calamity. In case of death , KGFS extends some money immediately to the family for the funeral, and then reaches out after the usual two-week mourning period to help them fill up the necessary forms for claiming the insurance.    After a severe cyclone in the region a couple of years back, KGFS offered suo motu extra loans to all their customers and a moratorium of a couple of months for repayment.


The whole institution is truly driving towards working for the customer, ensuring that she does not fall into the debt trap which is very common in India, offers her advice, guidance, and counseling without any motives guided by self-interest, is there at her side when there is genuine need, and in short, is the true ‘friend for life’ that a lot of financial institutions claim to be in their advertisements. The incentives at every level are not geared to mere ‘sales’ or product-pushing.  Every member of the staff I met from the CEO downwards is driven by a sense of purpose, of wanting to do something good, of making a difference to society.  Every customer who walks in is treated with respect –  I observed that they were all addressed as ‘Sir’ or “Madam’ and  not talked down to – which given the circumstances and the profile is very rare.


And all this is being done without sacrificing profitability. The interest rates are very reasonable given the costs, both of obtaining funds, as well as the costs of running branches in such remote locations. They started about six years back and are now spread out with more than a hundred branches, mostly in Tamil Nadu,  and also in Uttarakhand and Orissa.  The model is highly scalable with knowledge being institutionalized and made part of the process on a continuous basis.


The people who work there are driven by a cause larger than themselves, while getting paid a decent wage. The customers who come will never forget that this is one place which treats them like decent human beings, genuinely cares for them, and does not look to exploit them in any way. The founders (Nachiket, Bindu and the rest) are providing a vision that keeps challenging the whole organization to do better and serve more.  Benefit to society and customer foremost, with complete personal touch and connect; scalability and process using the latest technology; profitability that ensures the equity holders’ interests, all these are part of the ethos.  That’s the stuff that organizational dreams are made of. I actually saw that in operation. I don’t know what Nachiket had in mind when he asked me to see how I could add value to them, but I certainly benefited from the experience.


I learnt a lot, and was somehow deeply humbled by the experience.  I suspect that  what I saw is only the initial stages of an institution that will grow much bigger in time, and like all great institutions, inspire others  to emulate it.


Friday, March 8, 2013

Ways to save on Taxes in fy 2013-14

Ways to save on Taxes


Now that the new financial year is round the corner, it’s good to see what options are available to us to save on our taxes. Not many, we all know, but let’s look at what little there are!


Let us first talk about the famous Section 80C.  Under this section you are allowed to deduct up to Rupees one lakh from your total income.  The tax you will save of course depends on your marginal rate – if you are at the highest rate, you will save about 30% of this amount.  To get something you always have to give up something – in case of 80C investments you agree to lock-in periods.


Some of the items allowed under this section, you may have already “spent” on or it may have been done for you.  Add up your contribution to PF for the year ; add any contribution to Voluntary Provident Fund with your employer if you have opted for it; tuition fees for your children; and principal repayments on your home loan. Add the premium you pay on your life insurance policies or ULIPs. If you have paid any amount on your own towards cost of purchase or construction of a residential property, add that too.


Now that you have done all that, if the sum exceeds Rupees one lakh you can stop, since the limit for Section 80C investments has been reached. If you have some money left from the limit, you have some options.


You can look at investment in Equity Linked Savings Schemes (ELSS) with a lock-in period of three years.  This comes with a good potential upside but has market risk attached. Or you can invest in Public Provident Fund (PPF) that will yield you around  8.5% p.a. currently – this is highly safe since it carries the guarantee of the Government of India. You can spend on insurance (I shall not use the word invest here – insurance is not an investment) – you would be well advised to stick to pure term insurance plans – the premium is deductible under Section 80C. You can invest in five-year (locked-in) Fixed Deposits with a Bank.


That’s all there is to it! There are a couple of other options like National Savings Certificates (no real advantage here – you can skip this option) and Post Office Savings scheme (too much hassle – skip this too).


Over and above the tax deductions available under Section 80C you have some other sections that you could take advantage of.  You have the new Rajiv Gandhi Equity Savings Scheme where if you are a first time investor in equity or mutual funds, and your annual income is less than twelve lakhs, you can invest upto Rs.50,000 for three consecutive years. You will be able to deduct 50% of the amount invested from your total income for tax purposes. Under Section 80D, Medical insurance for self, spouse or children up to Rs.15,000 is allowed as a deduction – you get an additional Rs.15,000 for premium paid for insuring parents. Section 80E allows a deduction for interest paid on loan taken for self, spouse, or children for the purpose of higher education.


The interest you earn on PF or PPF is fully exempt from tax – other interest is not.


You can also avoid paying taxes on capital gains from sale of long-term capital assets in certain cases. That is outside the scope of this article, but do check the provisions if you are selling any capital asset.