HUMAN RESOURCE CHALLENGES IN MICRO FINANCE INSTITUTION – A INDIAN PERSPECTIVE

HUMAN RESOURCE CHALLENGES IN MICRO FINANCE INSTITUTION – A Indian PERSPECTIVE

1. HUMAN RESOURCE MANAGEMENT (HRM)

Human Resource Management (HRM) provides an institution with an effective work force in order to meet its mission. Effective human resource management uses systems and tools to bring together: the right number of people, with the right attitude and skills, in the right place, at the right time. The goal of human resource systems, tools and activities is to help the individual employees who make up your MFI to be successful at their jobs and to work well together. In order to accomplish this goal, Human Resource Management (HRM) must be an integral part of the strategic plans of MFI. HRM in the context of microfinance into six broad categories:-

1. Human Resource Planning

2. Human Resource Policies

3. Recruitment and Selection

4. Salary, Benefits and Incentives

5. Performance Management

6. Training and Development

These functional responsibilities are influenced by the external context in which MFI operates and well as MFI’s internal strategies, goals, mission, and institutional culture. It is also important to include a process of review and evaluation to ensure that your systems and tools continue to be appropriate as MFI evolves. Each of the six HR functions plays an important role in the effective operations of MFI.  These functional responsibilities are influenced by the external context in which MFI operates and well as MFI’s internal strategies, goals, mission, and institutional culture. It is also important to include a process of review and evaluation to ensure that systems and tools continue to be appropriate as MFI evolves. Each of the six HR functions plays an important role in the effective operations of MFI. Throughout this toolkit, you will learn about these functions and how, when applied appropriately, Human Resource Management can propel your institution toward Success. Why is Human Resource Management important? institution requires two major resources to operate: capital and people. The microfinance industry gives significant attention to the financial issues of operations. While finance is essential, it is only a tool in the hands of your people. Money does not manage itself; people manage it. Human Resource Management tools and systems are critical in finding, training, managing, motivating, and developing a team of staff who will effectively carry out MFI’s mission. By building strong, well functioning human resource systems and tools, institution will be poised for growth, ready to manage the challenges of an evolving environment, and responsive to the needs of your clients. All institutions are comprised of an interdependent network of individuals. In order for MFI to be successful, the individuals within it must be productive, efficient, and effective. Attention to the management of these individuals can not only enhance the success of the individuals, but can encourage a team effort capable of reaching goals beyond what one person can do alone. All employees, regardless of their position in MFI, need the same things to be successful. Everyone needs to:-

1. Identify with MFI’s mission

2. Understand their role, and how that contributes to the mission

3. Know specifically what is expected of them

4. Have the capacity, resources, and environment which make success possible

5. Receive encouragement, constructive feedback, and opportunities to develop and improve

The work of Human Resource Management is to implement systems and tools that will provide these key elements to help the individuals within MFI to be highly motivated and successful. When individuals are

Successful, MFI will be successful. Who is responsible for HRM? Ultimately, the responsibility for Human Resource Management activities rests with each manager. If a manager does not accept this responsibility, then HRM activities will only get partially done. Maximizing the potential of the human resources available within MFI is directly dependent on a manager’s skills and abilities to manage staff. Leadership and good staff management skills are essential to provide employees with what they need to be successful. HRM systems and tools can provide a good structure but will not guarantee success. Effective staff management hinges on each manager’s ability to provide leadership and relate to staff. This toolkit will briefly address critical staff management skills in Staff Performance Management Process, Development and Training. The role of HRM staff within MFI is to support each manager with strategies, systems and tools for the effective management of their staff. Just like the Finance Department, Human Resource Management is a support service with “internal clients”: staff and managers. This concept may seem contrary to what you might expect. Many staff within MFI might assume that the designated HRM staff person should complete all HRM functions. While this is true for the development, administration, review and monitoring of HRM systems, in order for those systems to be effective, your managers must understand their role and responsibility in using those systems and tools for effective staff management. How does HRM evolve as the MFI grows? From the beginning, it is important to put HRM systems in place so the MFI will be ready to cope with the administrative burdens that increase as more employees are added. Institutionalizing these structures during the start-up phase will help to ensure that effective Human Resource Management practices are ingrained into organizational culture. These HRM structures would include but not be limited to recruitment and selection procedures, personnel policies, orientation and training for new staff, and staff performance management tools. At the beginning, these systems and procedures do not need to be complicated or elaborate. They can evolve as the MFI grows. Regardless of size, putting HRM systems in place at the beginning will help Human Resource Management to evolve along with your MFI.  Small MFIs (up to 20 staff) , for start-up MFIs with up to 20 staff, the functions of Human Resource Management are usually shared among various employees. For example, the finance department may administer salary and benefits. Organizational chart for a Small MFI, illustrates how HRM tasks are typically divided in a small MFI. In most start-up MFIs, the Executive Director is involved in all HRM functions, such as recruitment, termination, salary, etc. As such, HRM naturally plays a strategic role in institutional planning and design. This senior level involvement is an excellent way to formulate and establish institutional culture. An effective Executive Director will mentor and empower staff to take on these Human Resource Management functions over time.  For Medium MFIs (20 to 49 staff), As the MFI grows beyond 20 staff, the complexity and importance of Human Resource Management increases. During this stage, one staff position (usually on a part-time basis) should be designated to work on HRM administration.  This part-time HR Administrator may report to the Manager of Finance and Administration, or another senior level manager as appropriate. This transition can be difficult and may evolve over time. A good place to start is to define HRM tasks that can be done by a current employee who has complimentary duties in another role. As your MFI grows, this role will gradually expand and the transition into a full time HRM position may seem a very natural progression. During this growth phase, it is common for HRM activities to become administrative and lose some of their strategic importance, especially if the HR Administrator does not report to the Executive Director.  At this stage in a MFI’s life cycle, many MFIs hire an outside HR expert or consultant to help in the further development of polices and procedures. An expert can assist in the design and staffing of an appropriate HRM department and can train the HR staff. As with all experts, it is important to find a qualified practitioner who is experienced in the challenges of Human Resource Management in microfinance institutions. Large MFIs (50+ staff), For large MFIs with more than 50 staff, the management of human resources becomes more involved; therefore, a whole department within the organizational structure may be dedicated to work on HRM issues. A very general guideline is to have one full time HR position for every 50 to 75 employees.

 Depending on your size, the HRM department may have several staff, some of which are specialized in a specific Human Resource Management function. For example, it may have a Trainer or Recruiter on staff. The manager of the HR department should be a senior and experienced manager who reports to the Executive Director, and participates in the senior management meetings. It is through this representation and senior level responsibility that HRM regains credibility and strategic importance within the MFI and has the necessary support to facilitate the success of the institution. If a MFI has aggressive growth and expansion targets, it may be necessary to hire additional HR staff to support this growth. Contract HR hires can be considered.

2. HR CHALLENGES IN MFIs

During the past one decade or so microfinance has caught the fancy of development practitioners worldwide. In India, microfinance2 gained momentum in early and mid 1990’s with emergence of Basix, SHARE and SNF as major players in microfinance. Between 2000 and 2003, a number of new players (primarily Spandana and SKS) with innovative business models emerged on the microfinance radar of India. Their spectacular returns and scaleable business model attracted the attention of commercial banks like ICICI Bank, HDFC Bank and ABN AMRO Bank. Most of these banks set up dedicated microfinance lending cells and started looking microfinance as a business opportunity rather than part of their priority sector obligation. Microfinance gained further momentum after 2003 – sector growing for more than 100% from year to year. A number equity funds (national and international) and banks started aggressively looking at Indian microfinance as business opportunity. Riding on this new wave, a number of new MFIs came into existence (eg Ujjivan, Swadhar, Sonata, Bandhan, Arohan and KAS Foundation). Some of older MFIs, who were conservative in their growth plans earlier altered their plans drastically and started planning aggressive expansion. The growth momentum is expected to continue for a few more years, given the plans of the commercial banks, equity funds and the MFIs. Total outstanding portfolio of all Indian MFIs taken together along with the expected growth has been presented in Table 1.

The total outstanding of the MFIs is expected to be to the tune of Rs10, 000 crores by March 2009.

Table 1: Growth in Microfinance Outstanding3

year	Outstanding (Rs Crores)	year	Outstanding (Rs Crores)
Mar-02	200	Mar-06	2300
Mar-03	300	Mar-07	4000
Mar-04	400	Mar-08	7000
Mar-05	1100	Mar-09	10000

The number of employees presently working in the microfinance sector is over 18,000 and this number is expected to increase to over 45,000 by the March 2009. Although, the microfinance sector still covers only a fraction of the estimated total demand of over Rs60, 000 crores in India; in terms of human resource requirement, this is still a significant figure.

Table 2: HR Requirements in Microfinance

year	HR Requirement	year	HR Requirement
Mar-02	3430	Mar-06	18400
Mar-03	4252	Mar-07	26446
Mar-04	4685	Mar-08	38250
Mar-05	10648	Mar-09	45158

Two Types of MFIs: - MFI- A & MFI-B

MFI-A was started as a conscious attempt to provide financial services to the underprivileged segments of the society. The promoter of this MFI was a social entrepreneur who, after experimenting with many alternatives in the field of development intervention, was fascinated by the role of microfinance in poverty alleviation. The promoter was well-educated, had about 10 years of experience of working in an NGO, was informed of the risks and complications involved in the microfinance business and was committed to build a professional organization. The promoter took up the challenge, designed a good operating methodology, designed its products well, set up good accounting system and MIS and built strong internal controls. MFI-A started somewhere in mid-nineties, now has a portfolio outstanding of Rs100 crores with a client base of 200,000 and staff strength of about 800. Most of this portfolio growth has come during the past three years. MFI-A is planning to grow aggressively during the next three to four years and is targeting a portfolio outstanding of over Rs500 crores and a client base of 1 million by March 2010.

MFI-B was an NGO for the past two decades doing many community development activities like health, education and enterprise promotion. It also had a small programme for formation of SHGs and promotion of thrift as well as credit for these SHGs. In early 2000, MFI-B obtained loan funds from FWWB for on lending to these SHGs. The loan portfolio in March 2001 was about Rs10 lakh. There was no separate staff for its microfinance programme. In 2002, MFI-B obtained loan funds from SIDBI for on lending to its borrowers. The microfinance programme of MFI-B received major boost in 2004 when it was linked to ICICI Bank and its loan portfolio increased sharply. MFI-B was promoted by a community leader (CEO of the original NGO) who decided to catch the microfinance bandwagon realizing little what could be complications involved in doing this. Huge un-met demand for financial services in its operational area, coupled with nearly unrestricted supply of funds from the commercial banks, gave rise to temptation to scale-up fast. Growing acceptance of microfinance as ultimate solution to poverty alleviation among the donor community validated the actions of the community leader.

Today, the loan portfolio of MFI-B stands at about Rs10 crores with about 25,000 clients and 150 staff. MFI-B is planning to rapidly increase its portfolio size aiming at a loan portfolio outstanding of Rs100 crores by March 2009. At this level the organisation will have over 1,000 employees. MFI-B has weak accounting system, MIS and internal control systems. It struggles to get its financial statements prepared in time for the annual audits; no periodic financial statements are prepared. The MIS of MFI-B consistently reports a repayment rate of over 98%, but the recent rating report of the organization indicates suspect portfolio quality citing problems in lending policies and MIS. MFI-B does not have any internal audit systems or operational and financial analysis systems. There have already been unconfirmed reports of misappropriation of funds as well as ghost clients.

3. HR CHALLENGES IN PLANNING, RECRUITMENT, DEPLOYMENT IN MFI-A

MFI-A has good operating procedures, excellent MIS and accounting system, adequate control systems and good overall management systems but is still facing major HR challenges. Promoter of MFI-A has been its CEO since the beginning. He now has extensive experience in microfinance and has attended most of the national and international trainings available for microfinance and has been to almost all the major microfinance destinations in the world (Bangladesh, Peru, Bolivia and Indonesia).  His main responsibility now is to interact with the funders and oversee the functioning of the organisation. He also takes most of the strategic and policy decisions but finds very little time for this and this has led to very little innovation in the field. Head of Operations was once a field staff, became a Branch Manager after two years of his recruitment, became an Area Manger in next two years, became a Divisional Manager in the next three years and is now the Head of Operations for the past couple of years. Before he became the Head of Operations, the CEO used to handle this function. Head of Finance has been in this position for the past 10 years. He is a Master in Commerce from the local university and has mostly learnt on the job. He does not have great communication skills and the CEO mostly handles communications with the funders and the donors. Heads of other departments (IT, Internal Audit and HR) have also been with the organization for past a number of years and have mostly learnt on-the-job. All of them are mostly postgraduates from the local universities and do not have any professional qualification. The volume of operations of MFI-A have increase immensely over the past one year and these heads of operations have been finding it difficult to handle increasing complexities of operations. The CEO is finding himself overburdened with the increasing pressure of work but is not sure what to do. The second line of leadership of MFI-A is extremely weak. The MFI-A tried to hire a few management graduates (fresh graduates from IRMA and XIMB) at the senior management level but had a bitter experience – they left in just about one year. Following are the current practices of MFI-A in planning, recruitment and deployment functions.  In Planning, The MFI-A has a moderate system of HR planning. Most of its HR planning focuses on the number of field staff and the people in the middle management. This planning is mostly quantitative in nature to determine how many field staff recruitments it will have to do in the next a few years and how many promotions it would require. There is hardly any planning for the incentive structure, motivational issues and training needs. Developing and organizational structure and a second line of leadership is almost out of the planning radar of MFI-A. In Recruitment, MFI-A has to recruit mostly its field staff, for which it advertises in the local newspapers. It conducts a written test, test of public speaking and group interview for selecting candidates. It has well-laid out criteria for the qualifications and experience for the field staff. Most of the field staffs selected has higher secondary qualifications while some of them may be with graduate degrees. Through, check on the background of the candidate is carried out before appointment letter is handed over to him/her. As discussed above, there is no policy for selecting staff for the middle and senior management levels. Most of them have been promoted from the ranks and have good understanding of the processes and policies of the organization. The management graduates from IRMA and XIMB were recruited during the campus placements in the institute In Deployment, The MFI-A has a very structured system of induction for its field staff. All the new recruits are subject to four days of rigorous classroom training where they are told about the mission and vision, organizational structure, processes and procedures and basic concepts in MIS and accounting system. At the end of the training they are handed over a detailed operational manual and job description. After this classroom training they are sent to some branch of the MFI and are attached to one of the experienced field staff for two months. The new recruit assists the experienced field staff in his/her duties and learns on-the-job. After this training period the new recruit is placed in another branch with regular responsibilities of the field staff. There is no structured training for other category of staff. They occasionally attend trainings sponsored by the lenders and the donors. The IRMA and XIMB graduates were put straight in charge of operations after an exposure stay of one week in a branch.

4. HR CHALLENGES IN PLANNING, RECRUITMENT, DEPLOYMENT IN MFI-B

MFI-B has been struggling to find right people for its microfinance programme. The community leader is still the CEO of MFI-B. He has master’s degree in sociology and does not have much understanding of finance and business. Over the past three-four years he has attended all major national as well as international microfinance trainings. He also had exposure visits to most of the prominent MFIs in India and Bangladesh. As MFI-B has been involved in many other development activities, the CEO devotes only about 40-50% of his time in microfinance. Head of Operations is a postgraduate in social work from one of the reputed universities in India. He has been with MFI-B for the past over 10 years. Earlier he was head of the education programme. When the microfinance programme of the organization started, he was given additional responsibility of the microfinance programme. When the volume of operations in the microfinance programme increased, he was made the sole in-charge of the microfinance programme.  He has attended several training programmes conducted by the national level training institutions. He has also visited couple of reputed MFIs for exposure visits. The Head of Finance looks after all the programmes of the MFI-B. He is a postgraduate in commerce and has over 10 years’ experience in handling accounts and finance of large-sized NGOs in India. His main responsibility is to maintain repayment schedules of the lenders and to send them periodic reports. He is also responsible for the external audit of the financial statements of the organization. There are no other functional heads. The Head of Administration looks after general administration and HR issues. Senior field staff of MFI-B has mostly been with the organization for a long time. They were hired for other development projects but as and when the projects ended they were absorbed by the microfinance programme of the organization. The organization has recently recruited a number of field staff due to significant increase in the scale of operations. Workload has been increasing and recent ratings as well as assessments have pointed out weak HR as the major area of concern. CEO is afraid of hiring management graduates as his friends in other MFIs did not have good experience with them. He is not sure what course of action he should be taking now. Most of the energy and time of MFI-B goes in managing complications of the MIS and accounting system as well as audits due to ever-increasing demand of reporting requirements for audit, rating and funds mobilization. HR has been a neglected function and today it virtually consists of only payroll accounting and transfers.

Following are the current practices of MFI-B in planning, recruitment and deployment functions.

In Planning, There is virtually no planning for HR. Planning is restricted to ascertaining the requirements of field-staff for the next two-three months. No planning is carried out for the organizational structure, second line of leadership, motivational issues, compensation structure, training and development of staff. In Recruitments, Most of the recruitments are carried out for the field staff. Advertisement in the local newspapers (60%) and the references from the existing staff (40%) are the major sources of manpower in MFI-B. Preference is given to the staff who has previously worked with the MFI-B on one or more development projects. Recruitments are based on a written test and an interview. The organization does not have clear criteria for recruitment. There is hardly any background check carried out of field staff to check their employment history. Supervisory staffs of MFI-B are mostly drawn from the other development projects of the organization. They have mostly been absorbed in the microfinance programme as and when the other projects got over. In Deployment, There is systematic training for the staff at any level. Staffs that are new to the organization are given two-day orientation where the history, origin as well as mission and vision of the organization is explained. For staff taken from the other programmes, there is hardly any training or orientation given before deploying them on to the microfinance programme of the organization. Staffs are occasionally sent to the microfinance trainings sponsored by the funders and donors.

5. Conclusion

It has been widely accepted that the Human Resource is the most important and critical resource in MFI has. In private and public discussions MFIs have always raised the issue of inadequate and untrained manpower. At the same time, it has been one of the most neglected managerial functions in the MFIs. At current growth rates, the MFIs would find it difficult to manage performance unless a systematic approach to HR management is adopted. MFIs can use some of the insights and issues highlighted in this paper to improve their HR practices.

written by ajay kumar

ajay.mrim@gmail.com

RECESSION ,,,,,,,,,,,,,,,,,,,,,

RECESSION

Definition: - 1.

A period of general economic decline; typically defined as a decline in GDP for two or more consecutive quarters. A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. A recession is generally considered less severe than a depression, and if a recession continues long enough it is often then classified as a depression. There is no one obvious cause of a recession, although overall blame generally falls on the federal leadership, often either the President himself, the head of the Federal Reserve, or the entire administration.

Definition: - 2.

In economics, a recession is a business cycle contraction, a general slowdown in economic activity over a period of time. During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes, business profits and inflation all fall during recessions; while bankruptcies and the unemployment rate rise. Recessions are generally believed to be caused by a widespread drop in spending. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

Definition: - 3.

1. Drop in price or rate.
2. To reject for insurance coverage or credit.

Unemployment: - An economic condition marked by the fact that individuals actively seeking jobs remain unhired. Unemployment is expressed as a percentage of the total available work force. The level of unemployment varies with economic conditions and other circumstances.

A recession is characterized by:

1. Rising unemployment (often unemployment is a delayed factor) i.e. it takes time for unemployment to rise, but, even when the economy is recovering, it takes time for unemployment to fall.
2. Rising Government Borrowing. A recession is bad news for the government budget. A recession leads to lower tax revenues (lower income tax and corporation tax revenues) and higher government spending on unemployment benefits. The UK is forecast to borrow £60 billion, a recession could make this borrowing even worse in 2009. This borrowing means higher taxes and higher interest payments in the future.
3. Falling Share Prices. Generally a recession leads to lower profitability and lower dividends. Therefore, shares are less attractive. Note share prices often fall in anticipation of a recession. e.g. the recent falls in share prices are largely because the market expects a recession soon. During the actual recession, share prices often increase in anticipation of the economy recovering. Note also, falling share prices don't always mean a recession, falling share prices can occur for many other reasons.
4. Lower Inflation. Typically a recession reduces demand and wage inflation. This should result in a lower inflation rate. However, this recession is complicated because of rising oil prices. Therefore, the forthcoming recession may actually occur simultaneously with higher inflation - a term known as stagflation. But, a recession will definitely reduce demand pull inflation pressures and encourages price wars on the high street as firms seek to retain consumers.
5. Falling investment. Investment is much more volatile than economic growth. Even a slowdown in the growth rate (economy expanding at a slower rate) can lead to a significant fall in investment.

Recession?  Depression? What's the difference?

There is an old joke among economists that states:  “A recession is when your neighbor loses his job.  A depression is when you lose your job”. The difference between the two terms is not very well understood for one simple reason: There is not a universally agreed upon definition. If you ask 100 different economists to define the terms recession and depression, you would get at least 100 different answers. I will try to summarize both terms and explain the differences between them in a way that

Depression: - Before the Great Depression of the 1930s any downturn in economic activity was referred to as a depression. The term recession was developed in this period to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913. This leads to the simple definition of a depression as a recession that lasts longer and has a larger decline in business activity.

The Difference

So how can we tell the difference between a recession and a depression? A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe.  By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2 percent. If we use this method then the Great Depression of the 1930s can be seen as two separate events: an incredibly severe depression lasting from August 1929 to March 1933 where real GDP declined by almost 33 percent, a period of recovery, then another less severe depression of 1937-38. The United States hasn’t had anything even close to a depression in the post-war period. The worst recession in the last 60 years was from November 1973 to March 1975, where real GDP fell by 4.9 percent. Countries such as Finland and Indonesia have suffered depressions in recent memory using this definition. Now you should be able to determine the difference between a recession and a depression without resorting to the poor humor of the dismal scientists.

IMPACTS OF RECESSION

Unemployment
The full impact of a recession on employment may not be felt for several quarters. Research in Britain shows that low-skilled, low-educated workers and the young are most vulnerable to unemployment in a downturn. After recessions in Britain in the 1980s and 1990s, it took five years for unemployment to fall back to its original levels.

Business

Productivity tends to fall in the early stages of a recession, then rises again as weaker firms close. The variation in profitability between firms rises sharply. Recessions have also provided opportunities for anti-competitive mergers, with a negative impact on the wider economy: the suspension of competition policy in the United States in the 1930s may have extended the Great Depression.

Social effects

The living standards of people dependent on wages and salaries are more affected by recessions than those who rely on fixed incomes or welfare benefits. The loss of a job is known to have a negative impact on the stability of families, and individuals' health and well-being.^] A  drastic slowing of the economy. The Americans, who are good at making precise definitions, often apply the term to a situation where gross national or domestic product has fallen in two consecutive quarters. A recession would be indicated by a slowing of a nation's production, rising unemployment and falling interest rates, usually following a decline in the demand for money. A popular distinction between recession and depression is: 'Recession is when your neighbour loses his job; depression is when you lose yours.'
How does the recession impact :-
1) Savings
In a recession, private sector savings tend to rise. This is because people become more nervous to spend. The spectre of unemployment encourages people to save more and spend less. However, the rise in private sector saving may be offset by a fall in public sector saving (i.e. government borrowing increases to try and stimulate the economy)
2) Consumption
Consumption will tend to fall because people are worse off.

3) Investment
Investment will fall. Usually investment is highly cyclical. Therefore, a recession causes a bigger % fall in investment than consumption. Confidence is very important to investment so in a recession, investment tends to dry up.
4) Government spending
Automatic fiscal stabilizers will cause government spending to rise. e.g. in recession, government have to spend more on unemployment benefits. Also the government may pursue expansionary fiscal policy to try and increase aggregate demand e.g. spending on infrastructure projects.
5) Aggregate demand
There is a lot of talk about recession at the moment. There is a general understanding recessions are bad, but what does it actually mean to be in a recession and how does this affect the average consumer? The definition of a recession is negative economic growth for two consecutive quarters. This means a fall in Real GDP, - lower National income and lower National Output. However, it is worth noting some people talk of a recession, even when growth is very low.

Recession in insurance
Insurance sector is one of the fast growing sector in India, lot of players are around now these days like Birla Sunlife, HDFC Insurance, HSBC Canara, Star Union Dai-ichi Life Insurance, Reliance Life, DLF etc beside that lot of service provider companies are providing solutions to them like Mastek, TCS, EDS, CSC, CTS, Solecorp etc. All companies are trying to follow the benchmark & Industries standards of MNC’s.
Global Economy Slowdown, Global Recession, Cash Flow Crises, Pink slip well-known jargons are now these days. Is this true, Insurance Carriers & IT companies in India are also struggling to balance their funds. Big companies, Dream Companies, Blue Chip Companies, Top 100 companies have applied cost cutting majors, giving a reason of economy slowdown & Recession. Giving pink slips to employees, however Indian Companies have never paid global salaries to their employees, so why Cost cutting, Salaries cut downs, reduce cost, reduction in the infrastructure etc.
If you see last Q1,Q2 & Q3 results no company claimed the losses. Why in Q4 cost cutting majors? Let me list out the mistakes committed by companies in the past during good times and the cost of such mistakes are being paid now by Import & Export, Banking, Insurance, Software companies etc including their helpless employees.
1. Many Companies, in both manufacturing and services sectors, have acquired foreign companies at very prices, at double or triple times of their company values. For that they have borrowed large funds to acquire white elephant. At those times, the Indian companies were in a high and had illusions of making their companies into global empires with in no time.
2. Many Indian companies have diversified and have invested money in different domains like, Asset Management, Financial services, Telecom etc. where they were not experienced.
3. Many companies in software services sector, in their greed for growth & in their ambition to be counted upon in the rat race, have created large bench of unproductive employees.
4. Many company did not preserve the profit generated during the good times for rainy days. Hence when the business cycle turned down, these companies have no preparation and no contingency plans in hand to boldly face the situation.
The Best thing is that India is fewer sufferers compared to several other countries. Thanks to Indian public sector banks and special thanks to RBI to not permitting exotic derivative & foreign financial products to enter in India. Hence we can say there is only slow down in India and not a recession. A recession is defined two consecutive quarters of negative growth. India is still expected to grow about 6.5 to 7% in FY’09 and by about 5.5 to 6% in FY’10 (compared to the 8 to 9% growth in the last four years).

Insurance companies traditionally have thrived more on investment income than core underwriting business. Competitive pricing and below par risk rating have been protected by shrewd investment decisions. Current global recession and consequent economic crisis has put a lid on this maneuverability. Falling prices in real estate sector and nose-diving stock markets have already depleted shareholders’ equity and moved the investment portfolio of insurance companies in red zone.
There are several issues that need to be debated. Where does insurance industry stand today amidst current crisis? What the future beholds for the insurance industry? Can it sustain itself on underwriting results alone? How deep the investment losses would impact the balance sheet and consequential stability of the companies? There are no straight answers, yet indicators and pointers provide an overview of the situation.

Current Scenario

Insurance industry follows closely the fortune of the financial sector and is directly impacted by the movements at the macro-economic level. Economic growth spurs insurance activities and a recession creates manifold problems for the insurance industry. Recession is an outcome of slowdown in economy and is evidenced by successive periods of negative growth in production.
Current recession actually started in late 2007 when subprime crisis reared its ugly head though manifestations became visible only in 2008. Several significant casualties have been reported, e.g. AIG, Lehman Brothers, Washington Mutual, Merrill lynch, Citigroup, Freddie Mac, Northern Rock, Bradford & Bingley and many others have either failed or are in bad shape due to severe losses. This situation has led to liquidity crunch worldwide and cash flow has dried up. Consumer confidence is shaken and the demand for products and services are at abysmally low level.

Cause-Effect on Insurance Industry

Unlike banks that were dumbstruck by the end of third quarter in 2008 due to the unfolding saga of financial crisis, insurers have shown rather remarkable resilience and in all probability would be declaring year-end results on a positive note. First nine months of performance may see them through despite massive investment losses in the last quarter of 2008. This situation however is short-lived and Insurers are bound to feel the heat sooner than later.
New construction and infrastructure projects have dried up and ongoing projects have been stalled due to inadequate cash injection in the market. Banks are not releasing installments to firms even on limits which were agreed prior to this crisis. This has impacted the engineering class of business in the insurance sector. Inquiries for CAR (Contractors’ All Risks), EAR (Erection All Risks), Machinery Breakdown and Equipment Insurance have almost dried up in the last few months. Construction, infrastructure projects by governments and energy projects by private as well as governments have either been shelved or being delayed and insurance industry will have to live without large premiums from the project insurance for some time.
Continued recession shall have impact on property class of business too. Cost-cutting in the corporate sector may lead to reduced expenditure on insurance. Falling market prices of property shall further bring down the premium volume on property insurance. Business Interruption or Loss of Profit premiums also shall go down due to reduced profit forecasts for most corporate.
Life insurance sector is likely to see even bigger erosion in volumes and profits. Employee benefit schemes, Workmen’s Compensation, Medical Insurance, Group Life and Personal Accident Insurance, etc. are likely to take maximum hit. With the investment portfolio almost gone, most unit-linked policies, Pension Funds and other investment backed insurance products shall show negative NAV (Net Asset Value) and consumer confidence shall further nosedive. Policy holders are already requesting cancellation of their policies in order to preserve cash in this moment of crisis. All this doesn’t bode well for the insurance sector. Retail insurance sector has similar problems. Low consumer confidence and stringent lending norms for retail customers by banks have led to reduced demand for products and services. Automobile companies are struggling to keep afloat due to negative sales growth. This directly affects motor insurance premium. Travel industry including airline companies are witnessing lower traffic resulting into reduced travel insurance premium. Reduced sale of property is resulting in reduced premium income on mortgage insurance and householders’ insurance.
Declining international trade and consequent reduction in export and imports have resulted in inflated inventories and consequent redundancy of work force has increased job loss claims. Reduced international trade has also impacted marine cargo and marine hull insurance businesses and premium incomes have dropped substantially. There are other issues too to ponder. Insurance industry is likely to see multiple bad moral hazard cases as depressed market conditions may lead to payment defaults and corporate frauds. Such situation stimulates claims on fire losses, business interruption losses and losses arising out of Directors’ and Officers’ liability litigation. Madoff and Satyam Computers are two recent examples to prove the point.

Shareholders’ and Regulators’ role

Continued depressed market and resultant decline in premium volumes (and consequently reduced profits) is likely to put pressure on the management of insurance companies. As they struggle to satisfy their shareholders by providing similar returns as in the past, this could lead to rate cutting, imbalanced portfolio and compromised underwriting. A prudent board and shareholders of the insurance companies would do well to advise the management to concentrate on quality rather than volume business so that bottom lines are at least maintained.
Regulators too, have a big role to play under such extraordinary circumstances. Supervision needs to be thorough rather than routine. Emphasis should be on ratios and reserves rather than procedural issues. Solvency ratio and liquidity ratio must remain healthy and technical and other statutory reserves must be robust. An eye on reinsurance market and regular advisory would supplement the supervisory efforts. Countries where regulation is non-existent or weak, respective governments have to step in before it is too late. World has understood the significance of solvent insurance industry by witnessing the way US treasury handled the AIG crisis. Failing banks followed by failed insurance companies can spell doom for the entire economy.

How To Survive a Recession

With many predicting a recession in the US, the average consumer may be worrying how a recession might affect them and what they can do to insure against the negative effects of recession. These are some of the effects of recessions and how to deal with them.

More difficult To Borrow-  In a recession banks are less willing to lend. This is particularly a problem at the moment, because of the concurrent credit crises which is reducing the availability of loans. Solution: Avoid taking on any unnecessary debts. The debts you have try to reduce and consolidate into a lower interest rates bearing account. On the positive side, in a recession interest rates are likely to be lower, meaning lower interest payments for mortgage holders.

Unemployment. This is the main concern over a recession. If output does fall, there is likely to be a fall in demand for labour. This problem is often concentrated in those sectors most affected by the recession. For example, in the current climate, jobs related to finance and the housing market are more at risk than say the manufacturing sector. Solution: If you fear unemployment, start thinking what you might do as an alternative. Is it viable to consider working on a second income, such as online business. Do you have unemployment insurance to cover mortgage payments. If not, it would be worth taking insurance out now. Don't panic. Firstly, the unemployment may not occur; there is nothing to be gained by worrying over what we have no control other.  If are made unemployed, the best solution is to be flexible in looking for work. Consider new avenues and skills that you could learn. Also recessions will be short lived; a period of temporary unemployment does not have to become permanent.

Falling profitability of Business. If you are a small business owner the effects of a recession can be keenly felt. Lower profits could even threaten the survival of the business. Solution: Look for ways to minimize costs without compromising the business. There are always ways to cut costs and increase inefficiency. Some economists even go so far as to say that recessions are a good thing because they force the economy to become more efficient. If your business is particularly affected by the downturn, look to see whether you can diversify to reflect the changing economic environment. For example, if you specialise in selling luxury goods with a high margin try including some new product lines which appeal to people's desire for frugality. A fall in profits is likely to be cyclical. therefore try to plan a financial plan to borrow at a low cost for the difficult years.

Falling Stock Market In a recession, stock markets are likely to fall as lower profits reduce dividend payments. Try to diversify your investment portfolio. In a recession, commodities such as gold often do well. Even in a recession, there can be good investment opportunities.
Also bear in mind that stock markets can often be forward looking. For example, stock markets have fallen sharply since the start of the year in anticipation of a recession. When a recession comes, stock markets often don't fall any more.

Consumer Confidence  Often the worst aspect of a recession is the affect on consumer confidence and people's fear about the future. Bear in mind, the media often exaggerate the extent of a downturn in the economy. The media like to highlight sensationalist stories. However, it is often not as bad as it is made out to be. Keep a calm and detached attitude and just make the best of the current situation.

Any Benefits of a recession?

Lower interest rates. Good for borrowers  Lower inflation rates. Good for savers

Sometimes difficult times can force us to reevaluate our financial situation. It can make us look for new business avenues and new ways to cut costs and spending. Although it may be temporarily unpleasant, the important thing is not to panic but try to make the best of any situation we find ourselves in.

Can a Recession Really be a Good Thing?

It is argued by some people that a recession can benefit the economy, at least in the long run. The reasoning is that falling revenues force firms to become more efficient, e.g. cutting unnecessary costs e.t.c. In a recession, inefficient firms will go out of business and this shake up is necessary to weed out the inefficient and provide incentives for firms to be as profitable as possible.
Problems of Recession - Why A Recession is Bad

A recession will make it difficult for new firms who have just entered the market. Most new firms have high set up costs, therefore, a downturn in the economy could make them close down. However, this does not mean that they are inefficient. It just means they are new and struggling to get established..

Increased Monopoly Power. If a recession causes the smaller and newer firms to go out of business then the larger dominant firms will gain more monopoly power. In the long run this will lead to less choice and higher prices. This is a definite disadvantage of a recession. When the Chairman of Ryanair argued recessions would be a good thing, maybe he meant - a good thing for Ryanair, as it may involve new firms going out of business leaving him more market power.

Hysteresis. This is the argument that the past is a predictor for the future. Basically, if you have high unemployment, then it is more likely to have high unemployment in the future. If people are made unemployed in a recession, it may take a long time for them to find work again. When they are unemployed they lose skills, become demotivated and become less attractive to employers. Note after the recession of 1981, Unemployment remained stubbornly high in the UK, even into the boom years of the late 1980s

Fall in Productive Capacity. A recession can damage the productive capacity of an economy. Firms can go out of business and therefore shut down their resources. Furthermore in a recession, there will be a significant fall in investment, this can harm the long term development of an economy.

You don't need a recession to weed out inefficient firms. If markets are reasonably competitive, inefficient firms will be forced out of the market anyway.

Conclusion:-

A recession is unnecessary to increase economic efficiency. The long term future of an economy can be best helped through stable growth, which avoids the extremes of boom and bust economic cycles.

written by ajay kumar
ajay.mrim@gmail.com
09889286712