Impact investing and its measurement – second guest post by Vineet Rai

Vineet Rai is a close friend and founder of Aavishkaar Venture Management Services ( that manages several socical impact funds. He has also set up several other institutions like Intellecap, Intellecash and Intellegrow that serve related dimensions of social and impact investing. I played a not-so-small role in the setting up of the first Aavishkaar Micro Venture Capital Fund. At some level, that was the seed that has grown into this big tree under Vineet’s dynamic and passionate leadership. At another level, considering Vineet’s earlier jobs with GIAN (Grassroots Innovations Augmentation Network in Gujarat in the 1990s), he might well have achieved what he has (and what he will, in future) now, with or without the Aavishkaar Micro Venture Capital Fund 1.

This blog has carried one of his guest posts earlier this month. Here is the second one. This blog is very pleased to host him.


The Brooking Blum Roundtable (held in early to mid-August 2013) was a discussion around Private Equity, Impact Investing and Development.  This was a gathering of 40 speakers from across the globe and included Madeline Albright , Former Secretary of Foreign Affairs, USA, Strobe Talbott, Her Deputy of State,  Richard Blum, Cofounder TPG and Trustee of ASPEN and Brooking Blum, Kemal Dervis, Ex-Secretary-General of UNDP,  Mary Robinson, Ex-President of Ireland and currently UN Special Envoy to Great Lakes Region, Elizabeth Littlefield, the President of OPIC,  Rajeev Shah, Administrator of USAID and some ordinary mortals that included people like me.

Some of us were given an opportunity to lead specific sessions and I was asked to speak on Private Equity and Development, I made the below points. Below are my six points for you to read and reflect.  Public responses are welcome rather than the private one and would encourage a discussion around these points.

My first point is to emphasize on some obvious statements “All Investments create impact” and “Impact Investing is distinct from commercial investing”.   Based on current definitions and the broad positioning around impact investing, its look scarily similar to commercial investing.  Both use entrepreneurial initiative to build institution that generate returns and create impact.  The current definition of Impact investing that attributes “intentionality” as the defining metric to segregate them is inadequate, subjective and weak.

My second point is that drawing the distinction between commercial investing and Impact investing based on outcome metric of return and impact is flawed.  The key distinction actually lies on the input side and not on the outcome side.  My definition of Impact Investor thus is “Investor who can innovatively rework the risk – return paradigm, merge a frugal investing thesis and manage to invest in hitherto commercially un-investible sectors, geographies or enterprise and generate reasonable returns and impact”.  To achieve the above would require fund manager to scout, invest and mentor large number of geographically dispersed entrepreneurs in challenging environment and underdeveloped ecosystems  forcing him to innovate the fund economics, his expenses, and the exit models as also to live up to outcome measures on returns and impact.

My third point is that Impact Investing is geographically and developmentally contextual.  In the underdeveloped world, the distinction between Impact investing and commercial investing may not be that stark. In developing and transitioning economies, impact investing might focus more on challenging geographies or issues of exclusion to bring people within the national mainstream while commercial investing would focus on tried and tested risk mitigated areas. The developed world may need Impact Investing to address challenges emerging out of dysfunctional markets. The key point is for effective impact investing local understanding is critical and patience is a virtue that cannot be ignored.

My fourth point is linked to impact measurement.  We need to look beyond the current practice of summing up the impact of underlying enterprises as the measure of impact for funds.  The  metric should include kind of “risk” investor took,   kind of geographies they invested in, the fund economics and its sustainability, innovations they supported on ownership, business models and exits.

My fifth point is related to the role of philanthropy in Impact Investing.  Philanthropic capital has a catalytic role to play in building and supporting the ecosystem needed to let Impact investing thrive.  However, it may be important for philanthropic institutions to make sure that in trying to build a sustainable world they are not investing in and creating unsustainable impact funds.

My final point is that Impact Investing has to go a long way to prove any correlation with issues concerning poverty alleviation beyond anecdotal references.  It is important that we collectively pause and think about the risks and consequences of over hyping this emerging innovation.

Does India need more banks?

‘Business Standard’ carried a news-item on the FinMin pressing the RBI for the issue of new banking licenses, ASAP. For good measure, it invoked the name of Raghuram Rajan too. Find it here.

I wonder if there is any shift in the position of Raghuram Rajan. In April 2011, he is said to have opposed the issue of banking licenses to Indian corporations. Very sound. I would still hold on to it. Let me be clear. There is nothing in the BS news-item to suggest that RR has changed his stance. I am merely posing the question, for re-validation.

This has been the time-line on the issue of new banking licenses:

August 2010: RBI releases a discussion paper. Full discussion paper here.

Dec. 2010: RBI releases gist of comments on the discussion paper

Aug. 2011: RBI releases draft guidelines.

The underlying premise behind the consideration of the issue of new banking licenses was this statement by the then Finance Minister in his budget speech in 2010-11:

The Indian banking system has emerged unscathed from the crisis. We need to ensure that the banking system grows in size and sophistication to meet the needs of a modern economy. Besides, there is a need to extend the geographic coverage of banks and improve access to banking services. In this context, I am happy to inform the Honourable Members that the RBI is considering giving some additional banking licences to private sector players. Non Banking Financial Companies could also be considered, if they meet the RBI’s eligibility criteria.’ [Link]

The underlined emphasis of the first sentence is mine and that has been effectively demolished by the rising strains in Indian banks’ balance-sheets. Therefore, the whole exercise could now be abandoned? Instead, should the focus not be on strengthening governance, morality, banking and risk management practices in the Indian banking, corporate and political spaces?

Of course, the inclusion of ‘morality’ and ‘corporate’ and ‘political’ is deliberate and certainly, these are not within the realm of RBI (or even that of God, as  far as India is concerned). The key point is that, given the gaping holes and weaknesses exposed by the nexus of bank credit decisions and India’s cronyism, new banking licenses could well be put on hold. After all, even if depositors are protected, given India’s political and financial culture, new banks are a fiscal risk.  For instance, we do not know the ultimate beneficiary of bank loans to ‘Deccan Chronicle’. Effectively, Indian taxpayers have funded the ultimate beneficiary through the Indian banking system and ‘Deccan Chronicle’. India cannot afford to continue to do so.

If banks compete in the same space for business in corporate and in urban India, then banks will take excessive risk to offset margin compression. That is what happened in the US between 2003 and 2007. Banks will run up bad assets in the process and would need to be re-capitalised. That is another source of fiscal risk.

RBI Deputy Governor Subir Gokarn has opined that Indian banks will find it ‘challenging’ to raise capital to meet Basel III standards. His full speech is not yet uploaded on the RBI website. So, we do not know what prompted him to say so. Nonetheless,we agree with him. On a risk-adjusted basis, holding equity capital in Indian banks has to make sense for investors. Given political pressure and opacity of loan transactions, it is not clear if investing in Indian banks’ share capital makes sense on a risk-adjusted basis.

Assuming that this blog post by TGS does not throw the issue of the issue of new banking licenses into the deep freezer, the next important question is whether new bank licenses in India will address the issue of financial inclusion. Indian Micro Finance Institutions (MFI) cannot accept deposits. That is, they have no savings products. They have only debt to offer.  Mr. Mohammed Yunus argues against MFIs seeking private capital. Indian regulations have left them with little choice.Will reforms in that area help India’s financial inclusion goals or will issuing new banking licenses address financial inclusion? My question, doubtless, indicates my bias in favour of the former.

Prof. Vaidyanathan has written an excellent piece on the kind of economic reforms that India needs. In that piece, he has tried to piece together data on how credit flows in India and to whom. Unsurprisingly, much of the credit flows to the private incorporated sector which only has a relatively more modest share in India’s manufacturing and services output.

Of course, that may not be their fault. India’s laws place heavy boulders on the road of SMEs becoming big. No wonder the corporate sector share of GDP remains small. True reforms are about removing those boulders. I guess T. N. Ninan agrees with Prof. Vaidyanathan on this.

In his latest column , he wrote:

The short point is that the economy’s problems have not been caused by the lack of investment from abroad.

Tailpiece: When the Finance Minister talks about the focus on the poor being the reason for non-implementation of structural reforms, he is not making a circular argument as MINT Quickedit claims. He is making a non-argument. True economic reforms are pro-poor.

Poverty Economics

I have read the ‘Foreign Policy’ article that contained excerpts from the book by Abhijit Banerjee and Esther Duflo. It would not be fair to comment on their work without reading the book. But, one could be excused for walking away with the impression, on reading the above article, that the poor remain poor because they could not care less.

That would be an unfortunate interpretation and probably not the right one either.  As a devleopment practitioner and a civil servant told me recently, there are information gaps, input gaps and cognitive gaps.  There are clearly systemic failures.

Imagine a poor household with several children, no running water and electricity.  Assume further that the housewife is pregnant with another child. She has to go to the health centre to get her iron and folic acid tablets. What energy would she be left with to go there after making sure that her husband is fed, sent off to work, kids are bathed, fed, clothed and sent to school, assuming that the household has the resources to do all of this, in the first place.

This friend told me that only 13% of all women in India in the pre-natal stage – regardless of income, education and status – consume the prescribed iron and folic acid dosage.  Clearly, not all of them were too lazy to do that. There must be clear and compelling reasons for them not to make that effort.

That said, cognitive failures do exist. The culture of the day – for the rich and poor countries and societies  – is instant gratification over delayed gratification.  Why should the poor be exempt from that? Therefore, there is merit in teaching them – as there is merit in telling even the well-off about delayed gratification  – the virtues of putting in efforts today that would deliver pay-offs some time down the road.

This is where the admirable life-skills enhancement programme designed by my good friend Bharath Krishna Shankar could deliver invaluable benefits down the road. [Disclosure: I am one of the Trustees of the Aparajitha Foundation that he had set up for this purpose]

In Kenya, children who were given deworming pills in school for two years went to school longer and earned, as young adults, 20 percent more than children in comparable schools who received deworming for just one year. Worms contribute to anemia and general malnutrition, essentially because they compete with the child for nutrients. And the negative impact of undernutrition starts before birth. In Tanzania, to cite just one example, children born to mothers who received sufficient amounts of iodine during pregnancy completed between one-third and one-half of a year more schooling than their siblings who were in utero when their mothers weren’t being treated. It is a substantial increase, given that most of these children will complete only four or five years of schooling in total. In fact, the study concludes that if every mother took iodine capsules, there would be a 7.5 percent increase in the total educational attainment of children in Central and Southern Africa. This, in turn, could measurably affect lifetime productivity.

Better nutrition matters for adults, too. In another study, in Indonesia, researchers tested the effects of boosting people’s intake of iron, a key nutrient that prevents anemia. They found that iron supplements made men able to work harder and significantly boosted income. A year’s supply of iron-fortified fish sauce cost the equivalent of $6, and for a self-employed male, the yearly gain in earnings was nearly $40 — an excellent investment.

These paragraphs are eye-openers in many ways.  Some interventions are simple and must start early. Second, explanations for some seemingly complex problems might be less complex and might lie some time back in the past.

In spite of simple solutions – like deworming and consuming iodised salt – the authors report that …

in Kenya, when the NGO that was running the deworming program asked parents in some schools to pay a few cents for deworming their children, almost all refused, thus depriving their children of hundreds of dollars of extra earnings over their lifetime.

One line of thinking that this opens up is not that we need to drum up or dream of more expensive solutions for poverty-elimination and more esoteric ones such as the ‘Right to Food’, etc., but deliver basic care more imaginatively and effectively  such that the poor – for whom the solutions are meant – would embrace them.

It is interesting that a World Bank report called ‘Voices of the poor’ released at the turn of the Millennium – in the pre-twitter, pre-facebook, pre-blog world – did not get the attention that this book of AB and ED have got. Here is the link. Perhaps, it is worth checking out that report out to see if the messages of AB  and ED as to the rationale of the poor are consistent with what the poor themselves have told the World Bank staffers.

Something similar to how folks at Econstories dish out economic wisdom?

Further, as my civil-servant friend pointed out, this attitude towards ‘delayed gratification’ does raise some questions about the wisdom of cash transfers. I must admit that. That is, they might simply spend it on the HERE & NOW. But, this friend had some safeguards in mind. With those safeguards, it is worth trying. Tried without those safeguards, it could fail and if it failed, it would be the end of the idea of ‘cash transfers’ in lieu of expensive and inefficient system of subsidies now in place in India.

Finally, no matter how much we all write and discuss, if policy is paying only lip-service and has no real sensitivity for the concerns of the aam-aadmi, India would not make a dent on poverty. Why is the NAC silent on export bans on farm produce?

Somehow, it seems appropriate to recall these wise words of Friedrich August von Hayek:

To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. [More quotes here]

I saw these words flash by my screen as I watched the latest episode of Keynes vs. Hayek. Thoroughly enjoyed it. Highly recommend it.

Canonical bailouts

Amy Kazmin has written a good piece in FT on the ongoing saga of Indian microfinance. Read it here. Accept my apologies if it is behind a subscription wall. She concludes as follows:

if a competitive market is starting to deliver credit to people who have never had access to it, that also places a greater emphasis on the sector’s social role.

It is not that difficult to establish that, in finance, there is no competitive industry. It is oligopolistic. Competition, if any, induces them to take more risks at the expense of all other stakeholders except the executives concerned. We have more proof of it, in Europe and, of course, in the US.

Barry Eichengreen usually does not get angry. He is mild-mannered. He and I were co-speakers at a conference in Singapore organised by ‘Business Times’ newspaper, in November. He is also self-deprecating. Asked if he was bearish or bullish, his laconic reply was that Nouriel Roubini was his student!

His article published in a German newspaper, well translated by another famous economist Kevin O’ Rourke, is available here. He is angry. You should read it yourself and draw your own conclusions. In the past, IMF bailouts used to go to repay the lenders to sovereign nations while the borrowing nations imposed budget cuts and austerity on their population. The poor were hurt the most. Of course, if the borrowing governments did not mend their ways, they would be shut out from international capital markets. While there is a grain of truth to that, borrowers and lenders both make mistakes. But, usually, the punishment falls on the borrowers. The lenders get away scotfree. They repeat their mistakes all over again because they know that they would be bailed out. The game is rigged in their favour from day one.

(You may like to read Kevin O’ Rourke himself here and Wolfgang Muenchau in FT on thinking the unthinkable in Europe)

It is now being re-enacted in Europe. It is sickening. It is not as though there is no other way. Iceland did it. I do not agree with Paul Krugman all the time. But, this piece made sense. Iceland guaranteed bank deposits but not other creditors, depreciated its currency and is now on its way to recovery. Why is this not possible for Ireland or Portugal or Spain or Greece?

Answers are to be found in political economy, the identity of the lenders (think German, French, American and UK banks), their clout and their ability to take losses and remain afloat, etc. Now, you must be getting the picture.

Look at this article from the FT today. The Federal Reserve has released data on their USD3.3 trillion dollar support to the global financial system or, shall we say, the Western financial system. I have not gone through the spreadsheet yet. This article says that Goldman Sachs approached the Fed 84 times for funds and Morgan Stanley did some 212 times!

One would think that, given this massive debt (literally and otherwise) that Wall Street owes the taxpayers, the governments would be able to walk all over them. We have seen the opposite of it in the last two years. What is going on?

If one does not wish to attribute criminality or venality to policymakers, the only explanation that seems to make sense is this:

These institutions are still far too fragile to take any form of tighter regulation. They need to be protected from harming themselves and the rest of the economic system (but why does that extend to a ‘wink and nod’ approach to compensation in the banking system still eludes me) for a long period. In other words, policymakers know more than we do and what they know is not pretty at all.

Can they succeed in ‘muddling through’ to good health? They are hoping. But, I am not keeping hopes up. They are not omnipotent. Well, banish that thought. What they do will have and is having unintended consequences. That could come in their way of kicking the can down the road and hoping for the best. Once the game is up, either because commodities prices or any other shock occurs, the unravelling would be swift and big. There would be no backstop then.

Given that the stakes are this high, one should not be surprised that asset prices are staging completely counter-intuitive and big rallies on flimsy news. Propping up asset prices and making them rise at all costs is the only light at the end of the current ‘muddle through’ tunnel. But, the costs are not going to be small and they pack a punch. Think commodities, think oil and think inflation.

If the costs do not arrive sooner, then what Sebastian Mallaby says in his article in FT would happen, perhaps a little later:

The message from this data dump is that, two years ago, these too-big-to-fail behemoths drove the world to the brink of a 1930s-style disaster – and that, if regulators don’t break them up or otherwise restrain them, they may do worse next time.

We would not have believed it even if some one had fictionalised such brazen behaviour on the part of financial institutions and such craven behaviour on the part of the public sector. It is now canonical that public sector would orchestrate bailouts of private sector risk-taking and losses at the expense of the public. Welcome to 21st century capitalism!

William White and Microfinance

William White’s comments on the presentation by Reinhart & Reinhart at the Jackson Hole conference in August 2010 (ht: Naked Capitalism) are well worth the read. Yves Smith over at Naked Capitalism has highlighted the key paragraphs from White’s comments. So, I do not have to repeat them. But, what I would do is to clarify further the remarks by Mr. White on one aspect: He writes that many macro-economic slumps have not been preceded by periods of high inflation.

I would go one step further. I think that many macro-economic slumps have been preceded by periods of remarkably low or benign or quiescent inflation. In fact, that seems almost like a pre-condition. Of course, I am not saying anything original. It has been said by Harold Minsky that stablity begets instability. Low inflation lulls policymakers into maintaining low interest rates. Given their anti-inflation framework – fighting inflation is also a proxy battle between capital and labour – policymakers are on the side of capitalists. But that  could change in a few years.  That is a topic for another occasion and a bigger post or column. But, the low interest-rate policy breeds and feeds asset price bubbles. They burst eventually. The, the mop-up operations are launched and the cycle starts all over again.

Based on the above, it follows logically that countries should be, forever, in high inflation to avoid macro-economic instability later! That does not seem right. The only answer is to have policymakers lean against the wind. Most policymakers would nod their heads vigorously at this. They would have nodded more vigorously in the immediate aftermath of the crisis. As memories fade, the resolve weakens. Witness the behaviour of Asian central banks now. It is no different from their behaviour in 2007-08. So, we are doomed to experiencing booms and busts except that they might be even more frequent than before. Already, they had become frequent in the last twenty years.

But, policymakers are not alone in this respect. In fact, it is ingrained in human nature. Notwithstanding the memories (still relatively fresh) of subprime mortgage crisis in the United States, look at what has happened in the world of microfinance.  One microfinance institution in Nicaragua has collapsed and that too after converting itself into a bank (name change from Findesa to Banex as it became a bank).  Check out the blog posts here, here and here.

This is a good report to read as well. The report, commissioned by CGAP, covers the payment and default crisis in microfinance in four countries – Nicaragua, Morocco, Bosnia and Herzegovina (BiH), and Pakistan. India is mentioned as a box-item for its nascent/latent ‘potential’ to join the above list.