About Deepak
Venture Capital and M&A advisor, Entrepreneur, Startup enthusiast..

2 Responses to The Social Investment Conundrum – Deepak Srinath

  1. Kishore Bobba says:

    Great article Deepak!
    As a member of the micro loan community for the past 12 years, you raise great points. The issue that people like I have to contend with is being called a loanshark and other nasty names for providing a service that would otherwise go unserved. Regulators have and continue to place regulation that is destructive to the micro finance industry by placing maximum interest rates caps, in many cases the cap is set at 36%. Now that might sound like a lot, but Federal Depository Insurance Corporation (FDIC) launched a small dollar loan campaign a few years ago. The idea behind the plan was to run people like me out of business. Well three plus years later the FDIC program is failing and demand for our product has never been stronger. Consumer groups continue to complain that 36% is an absurd amount to charge borrowers for a micro loan. First question, why don’t most banks offer micro loans at 36%, if there is soo much money to be made? Is it because of the costs involved with issuing a micro loan? A loan for $100 costs roughly the same for a lender as a $10,000 loan would cost. People who complain about the high rates of interest ignore this fact and that at 36% a $100 loan would generate $3 a month in interest. They also ignore the fact that atleast 25% of borrowers will potentially not repay. Did I mention overhead and acquisition costs? Interest rates and Annual Percentage Rates are horrible ways to evaluate pricing for micro loans, but this is the argument that consumer groups will use, I believe it is purely out of ignorance. Let me give an example of what I mean. It takes roughly 2.5 pounds of cotton to make one pair of jeans. A pound of cotton costs roughly $1.50, for simplicity porposes lets say the total cost of cotton for that pair of jeans is $5.00. Consumer groups would ignore the sewing, marketing, packaging, shipping, and other costs and advocate that pair of jeans is sold for $7.00 and generate a return of 36% for the likes of Levis. I’m not sure where True Religion’s $250 pair of jeans falls in this argument, as there is considerable demand for their jeans that are priced 3571% higher that what they should be charging. The only reason why consumer groups are making a big deal, in my opinion, is because there is a stigma attached with charging high rates of interest for lending money. Which reminds me, I can’t stand Jeansharks.
    The argument of charging high prices, applies to everything we buy on a daily basis. The only reason I singled out jean manufactures, is I need to go out a buy a pair from those greedy people.

  2. Kishore,

    Thank you for reading the blog and posting very relevant comments. Loved your jeans analogy; sums up the problems regulation influenced by misplaced consumer activist zeal can cause..


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