Tuesday, February 20, 2024

Character & Competence

 

I am tempted to republish this article in this blogpost as the nation needs to rethink, reinvigorate and move forward to reach its visionary goal of becoming a developed nation. 

Character and Competence  

 

 

B Yerram Raju 

 

Economist and Founder-Director, Telangana Industrial Health Clinic Ltd. Co-Author of the book ‘A Saint in the Board Room’ (2011)

 

Global Inequality Report 2022 mentioned that top 10 percent earn as much as the bottom 64 percent. India’s policy reforms during the last two decades saw high growth and high inequality levels intermittently. Quite often we also witness confrontation between the legislatures and Courts. We have also come across persons of acknowledged high competence landing in jail. Why?   

 

Sustainable and inclusive growth demands both competence and character. In order to define competence and character, and seeing the paths of their convergence, some storytelling becomes necessary.

 

The McKinsey Global Institute’s latest research on human development in Mapusa, a small town along a historic trade route in Goa, and in Porto, the second largest city in Portugal, unfolds “the story of both places that had virtually the same GDP per capita of $33,000 in 2019. At the country level, they are worlds apart: India’s GDP per capita was $6,700 (Purchasing Power Parity) or US$1941.82 in 2019, compared to $34,900 in Portugal—overall more than five times less.” 

 

Nevertheless, we are witnessing a few reputed leaders of self-aggrandisement and self-esteem directing the nation into the debris of material prosperity while a few others are wedded to the development of society. Hence, there is a strong need for recalling the basic principles of living that our inherent culture taught us emphasising competence with character.

 

S Radhakrishnan, the philosopher-statesman of India, said: “The ideal man of India is not the magnanimous man of Greece or the valiant warrior of medieval Europe but the free man of spirit who has attained insight into the universal source by rigid discipline and the practice of the disinterested virtues. He has freed himself from the prejudices of his time and place.” Indian heritage lies in humanism and universality. This sets the tone for redefining character and competence as traits of individuals and corporates. 

 

Wheels within Wheels

Meta, Amazon, Google, Wipro, Microsoft etc, are in no mood to keep their roasters intact. Jobs are removed in tens of thousands. NINJA (no income no job, no asset) had set in again. Banks and housing, and real estate companies are scared of their recoveries. Rising interest rates, lowering consumption sentiments, volatile markets, and untamed inflation are at the beginning of a new end. 

 

India, for the moment, seems to make a difference, raking in higher than expected revenues in GST and GDP growth forecast from the CRISIL placing it at 6 percent and Nomura at 5 percent in ‘23-‘24. When winter sets in, can spring be far behind?

 

Pure economics defies answers to many problems confronting society, while behavioural economics does offer solutions if character and competence move like two wheels of the forgotten bullock cart. 

 

If persons of character are afraid of their shadow and fail to take decisions keeping in mind the three ‘angel-robed demons – Central Vigilance Commission, Central Bureau of Investigation and Comptroller-cum-Auditor General’, competence in them takes a backseat. Autonomy, transparency, and timeliness in taking decisions never mean ignoring rules and regulations.

 

Lack of character is different from failure of character. Lack of character is unpardonable while failures are remediable. People who fail should be given an opportunity to correct and they should be made clear about the boundaries and consequences of the failure.

In Chapter 13 of Bhagavad Gita, (Kshetra, Kshetragjna Vibhaga Yogam), Lord Krishna defines the character: ‘Amanitvamadambhitvam, Ahimsaakshantirarjavam, Acharyopasanam, Saucham, Sthyryamatmavinigrahah’. The substance of the sloka is that a person with character should be devoid of pride and disrespect; should be humble, patient, and steady; should be able to have control over his self; be clean and clear in thinking and have restraint. We are at a point where we know what is right but are hesitant to adopt it. The Supreme Court had to pull up a plaintiff over the penalty sought on YouTube for airing what he preferred to see. 

 

High Character, Low Competence

How do we handle people on our leadership team who evidence the highest character, and the best motives, but are incapable of doing effective work? In a matrix of competence and character, fixing such people would be difficult. Organisations also skip them while mapping coaching and mentoring persons for results and sustainable growth. The loss is to the organisation and not to that person.

 

If we can draw a matrix of high character with high competence, high character with low competence, low character with high competence, low character with low competence in a Board of Governors, we will be able to establish the reasons for the failure of many a corporate who got the best ratings but ended up as disasters. 

 

The high character – high competence scenario will automatically lead to a high corporate governance (CG) scenario. But one without the other will not lead to a good CG scenario. It is said, “Economics without ethics is empty, and ethics devoid of economics is limp”.

 

We did not learn our lessons after the 2008 recession. The proverbial Vijay Mallyas proliferated and none of the cases of misgovernance and colossal bank losses got resolution. Over a decade of arguments in the highest courts of jurisprudence, involving malfeasance, misappropriation, corporate failures, and bad governance still defy resolution. On top of it, even the Insolvency and Bankruptcy Code gives the longest rope for resolution and those resolved, benefitted the errand.  

 

It is hard to disagree with EV Ramasamy Naicker, a Tamil philosopher of the 20th century, who said, “When I used to carry heavy bags during my younger days, my back would bend due to the weight, but not due to shame. Being straightforward and having less food is far better than diluting our character and taking lots of rich and quality food.”

 

The history of today’s wealthiest nation tells us about what happened between 1923 and 1948:

-        President of the largest steel company, Charles Schwab, lived on borrowed capital for five years before he died bankrupt.

-        President of the largest gas company, Howard Hudson, went insane.

-        One of the greatest commodity traders, Arthur Catton, died insolvent.

-        President of the New York Stock Exchange, Richard Whitney, was sent to jail.

-        A member of the President’s Cabinet, Albert Fall, was pardoned from jail to go home and die in peace.

-        The greatest ‘bear’ on Wall Street, Jessie Livermore committed suicide.

-        President of the world’s greatest monopoly, Ivar Krueger committed suicide.

-        President of the Bank of International Settlement, Leon Fraser committed suicide.

It was the pursuit of money to the exclusion of other goals that caused them their downfall.

 

Market behaviour largely depends on individual investor behaviour like buying-high-selling-low or buying-low-selling-high. Behaviour here largely is related to the character and not pockets. This character is typically borne of greed and not need. It is more like a honeybee that flits from one flower to another, sucking honey as it flies. But when it perches on its hive, it stops humming. 

 

Man is made by his own beliefs. ‘As he believes, so is he.’ (Bhagavat Gita). Henry David Thoreau may have told in different words, the same thing: ‘What a man thinks of himself: that is what determines, or rather indicates his fate.’

  

We need resilient boards of companies that can build teams of executives with foresight, virtuous and timely response, and adaptation capabilities.

 

India is at the cusp of change and the dream of India 2050 has to be realised by a generation that is seeing the garbage at the foot of the hill. They should be directed to reach the top of a mountain and every step counts. It is competence with character that should enable a crowning future. 

https://epaper.telanganatoday.com/Home/ArticleView?eid=1&edate=20/01/2023&pgid=48693

 

  

Tuesday, September 5, 2023

Teachers' Day - The Eternal Day

 

Prof. E.K. Warrier, T.A. Purushotham, S.Subbaramaiah at the S.V. University (1960)

THE DAY TO REMEMBER FOR LIFE &

THE PRAYERS THAT REMAIN LONG.

‘Acharya Devo Bhava’.  “Guru Brahma Guru: Vishnu, Guru: Sak Shaath Parabrahma:”. Parents are the first Gurus and I bow to them day-in and day-out and all life for, these Gurus took my hand , opened my mind, and remained in my heart.

During the childhood there were teachers who taught me alphabets and who did not spare their rod for being late to the school or for correcting a mistake! No complaints on the Child Rights for my parents told me that I had only responsibility and not right at that age, for the right to honourable life had to be earned the hard way.

K. Keshava Rao, my father’s English Teacher taught me English Grammar - Wren & Martin was the Bible in front of me in my class IX at the Mc Lauren High School, Kakinada. Earlier was the most fortunate year when I had the privilege to learn Telugu language under Indraganti Hanumatsastry in class VIII. He made me win the District Debating Competition on the subject -- Voting Right for the Youth, Right or Wrong -- at the inter-school District Competition.

At Mrs. A. V. N. College, Visakhapatnam, where I studied Intermediate (1955-57) K. Swaminathan, Lecturer in English, Prof Diwakarla Rama Murthy, brother of Diwakarla Venkatavadhani (Osmania University fame), Ramhbhatla Lakshmi Narayana were my teachers in Telugu and how can I redeem my debt for introducing me the depth and charm of the language that has no barriers in the globe?

Moved to Tirupati for my graduation and post-graduation in Economics. T.A. Purushotham's inaugural address on the opening day of the College defining the words TIME and CHARACTER shaped my life.



Acharya Rayaprolu Subba Rao, 



Pingali Lakshmikantam, G.N. Reddy, Jeereddi Chenna Reddy taught me old poetry,  modern poetry, prose, and non-detailed text respectively, Prof. M. V. Rama Sarma, E. Nageswar, Mrs. M. Suryakanta, Lecturers in English, Prof. M.S. Prakasa Rao, who earned the title ‘Laddu of Public Finance’ in Pachiappa’s College, Madras,   Prof. E. K. Warrier, Dr. S. Subbaramaiah, and B.N. Yugandhar (IAS latter),



 were all my teachers in my graduation and post-graduation at the Sri Venkateswara University College, Tirupati (1958-62) who made me what I am today.

Dr. C.S. Venkata Ratnam  and Prof V. Balamohan Das, of the Commerce Department guided me into PhD at Andhra University, Visakhapatnam, while I was at work. Prof. B. Sarveswara Rao, Prof. G. Parthasarathy (EPW fame), were my  mentors.

The will to write became part of me because of all these teachers. When I close my eyes, I see their bright eyes, hear their voices, recall their corrections in my essays of the school and college days, the direction they gave me not just on the stage when I acted in a few plays - Galsworthy’s Strife in College Days, and ‘Pedda Manushulu’ in Telugu on Vijayawada and Hyderabad theatres,


 but to my life. My teacher Prakasa Rao insisted that whenever I write, I should keep in mind, whether I have a single message to convey couched in understandable language, a story that stays in the readers’ minds for long. He always used to say; “Keep your flame burning” but not to burn you. Watch the word you say and it will save you. I am yet to become a great writer! Not just today, I pray my teachers everyday to give me the energy and thought that enriches the society I live in. The warmth, the affection and the blessings all these teachers who made my life are eternal.  

Wednesday, August 9, 2023

Pressing the interest rate button? Wait for a day.

 

Will the RBI again pause the Rates?

Subbarao, the past Governor of the tumultuous times, authored a book on ‘Who moved my Interest Rates?’ Will the present Governor Shaktikant, acclaimed as the best central bank governor while the other central banks are still in uncertain policies, author another book ‘Who paused my interest Rates? Really, a big question mark. Can inflation be hounded by the RBI or for that matter any central bank in the world? The day of reckoning is tomorrow.

I am reminded of my childhood days when my father got my chappals (footwear) resoled with less cost than a new one and it used to last for one more cycle of use. Restitch the saree to make frocks for the daughters when the head of the household gets tired of using the saree for more than four or five occasions. How can the lady go to functions with the same saree?

European Commission 2008 quoted in a World Bank blog of 19th September 2022 mentions: “national authorities must pay attention to measures that can facilitate the recovery of the so-called secondary raw materials or end-of-waste materials” arguing for a circular economy. https://blogs.worldbank.org/allaboutfinance/inflation-and-ecological-transition-european-perspective-part-ii?CID=WBW_AL_BlogNotification_EN_EXT

Is growth complacency driving this aspirational $5trillion economy? Is inflation in a growing economy an imperative? Should the RBI Monetary Policy Committee stick to the boundaries of inflation +/- 2 percent of 4 percent? Next quarter, are we going to see the soaring prices of tomato ketchup, tomato sauce, tomato soup and other processed foods using tomato base, touch the roof? Should the RBI see the warning signals more clearly?

Five states are bound for elections in the next few months and are in a mood of competitive populism. Once the schedule is out of the Election Commission  pigeon, several incentives directed to engage the voters have to halt. Make hay while the Sun shines. States within the FRBM norms hasten to implement their agenda pre-election.

GoI is comfortable with its GST earnings month after month. It cares little for whatever the economists say on federal relations and implementation of the recommendations of the Fifteenth Finance Commission. Consumption of durable goods is on the rise. With the festive season ahead, markets are preparing to stock as much as possible from the rural markets that are buzzing with economic activity. Farmers are increasingly adopting latest technologies aided by solid support from a few states like Telangana.

Crorepatis increased and even a tomato farmer of Karnataka, a press report says, bought a car worth Rs.45lakhs within a month’s sale of this crop. But the poor who are still around 240mn and the lower middle class are unable to make both ends meet. They seem to be toying with the idea of recycling the useable instead of replacing their old TV or nearly worn out durables with the new ones.

Can tomatoes and onions be recycled? My wife says: Tomatoes, if bought when cheap, can be sliced and kept in the deep fridge to last for more than six months. Pull them off, wash them with water at room temperature, they can be used as good as fresh tomato slices. But onions, by nature are more durable but storing them in a fridge stinks. There is no way to recycle. Prices of many vegetables soaring beyond the common man’s pocket at the moment can neither be stored nor recycled.

The latest buzz word in the US is super core inflation and James Powell argued for unemployment as a solution, ludicrously. Efficacy of inflation targeting remained an uneasy solution to the rising prices of all daily consumables.

An interesting discussion in OECD Economic Outlook Vol. 22 of 2022 highlights the current difficulties in targeting inflation post pandemic as both supply and demand factors pushed the inflation.

A S&P Rating Agency’s recent report says that the days for low interest rates and easy credit in Asia-Pacific markets are ending. India is largely demand-driven economy and the recent service sector PMI hovering above 65 is a strong evidence. PMI manufacturing is steady at 57.7 in July 2023.

Politics of economic growth in India cannot afford the luxury of inflation pushed either through hiking the interest rates or a dominating fiscal policy. Will these considerations bat for a pause in the interest rates or reduce by a tad, to please the tomato buyer by 10 to 20 basis points?

*The author is an economist and risk management specialist.

 

 

 

Friday, July 28, 2023

SBI The Old and The New

 I have the pride and honour of serving for 28 years, the State Bank of India, till February 1994 and as a pensioner for the last 29 years. I see vast difference in the way the Bank deals with its customers from then to now – both internal and external. It has one of the biggest balance sheets among its peers as on 31st March 2023 and with very low NPAs. There is speed of service for those who help themselves. SBI celebrates 75 years of independence, Azadi ka Amritotsav with a unique gesture of giving a pension bonus for those who are above 75years according to the cadre at which they retired. We, the old-SBI-ites thus had a pleasant surprise in that it still could remember that generation despite the generational divide and technology disruption.

On the 8th June, 2023 we heard the news that its Chief Financial Officer, Attar resigned from the Bank. In fact, his appointment raised several eyebrows couple of years back, because he came from a consulting experience with Ernst & Young and banking experience with its rival ICICI Bank. Conflict of interest is not ruled out. This is a governance issue. 

For those who visit the Personal Banking branch, one stares at long ques. Technology of which we are all proud of, looks a harrowing experience for the staff. The staff, despite all good intentions feel helpless many a time because the system just does not respond.

The SBI I worked at was ‘the largest bank for the smallest man’. There were concept branches dedicated to Agricultural and SSI sectors. It’s primacy in these two areas and domain expertise whittled away with not many field level managers and staff having no time to visit the villages and enterprises. They do not have much time to discuss with them their problems. Most problems are left for the system to resolve.

The SBI today is SBI plus seven Associate Banks merged with it assimilating seven work cultures. Both are thus entirely different. I am reminded of a Chairman who said a few years ago: “We are a technology company. Banking also we do.” Very true. There are more retail loans, personal loans, vehicle loans, more housing and real estate, and corporate loans. Property and Collateral verifications take more time than client interactions. There is little time for the small segment, who need most the banking services. ‘Its old slogan:” the biggest bank for the smallest man” is consigned to history. Anything small, except where it is a regulatory responsibility, is not to their taste.

Now SBI does little of banking as all the staff and managers look to the machines for instructions. If the machine fails to respond, the employee or manager has no answer for the banking problem that the customer faces. If one wants to post a grievance on the system, there is a drop-down menu. If you can’t click one of them, in ‘others’ you have to post in just 100 letters. The CACHE appears and you copy it. It disappears directing you to re-input. There is also a cultural transformation.

If a pensioner wants to see the Chief General Manager, he has to seek appointment through a letter either by mail or email. Earlier, pensioner could telephone and seek his time and meet him. Both the SBIs are different on several counts.

Earlier, there used to be Customer Committees meeting on the 15th of every month. They have become things of the past for the last five years.  

I gave an auto-debit instruction for my Electricity Bills. For fifteen years, it worked well. During the last three months the compliance is whimsical. It pays one bill and the other bill of the second meter is not paid. I had to pay a penalty on that count Rs.150 in the next bill!! If I want to change the auto debit instruction, branch does not have a mechanism to do it nor does it appear in the Standing Instruction menu of my internet account. Branch Manager, after spending lot of time and contacting even the system administrator could not resolve it.

SBI Pensioners’ Monthly Bulletin, Hyderabad has a banner line calling the pensioners for securing their ID cards both for the family and self, if alone, through MYHRM portal. The portal is the most unresponsive portal. It rarely works for loading all the inputs needed. When the ‘forgotten password’ is clicked either on mobile application or on desktop, it does not respond.

In fact, all the data that is required is in the form of KYC with the pension paying branch. Pensioner’s details should be available with the HR department. Further, even the spouse’s data likewise is available with the KYC where the pensioner and spouse have joint account and nominee details of the spouse, where the latter is the nominee, on the other deposit accounts held with the Bank. With so much of advanced technology and the Bank mentioning that they have AI application also for a decade, where is the need in the first place, for this harassment of the pensioner on the MYHRM portal? Can’t the Bank pull the data from the branch account of the pensioner? Photo, Aadhar, PAN, residential proof are all available with the Bank Branch.

During the first year of YONO it was ‘you’ for the bank and ‘no’ for the customer. It took two years to make it work efficiently and by this time, the UPI system overtook its strides. I am reasonably tech-savvy but fail to catch up with the SBI HRM portal.

Still, going by the call for a joint ID card with my spouse, I loaded all the details. The outcome is a disaster. My date of pension is wrong: Instead of 28.02.1994, it mentions 31.08.1997. Where from the data is produced, no one knows. Regarding my spouse data that has been faithfully loaded to MYHRM after great difficulty nearly six months back, her details are left blank, when the card is issued. 

I had to give up the card telling the branch manager, that I can do without the pensioner ID with my spouse details incorporated, as we have other IDs.

The staff who should have closed their systems at the end of the day at maximum 5pm sit till even 7pm entering KYC of new accounts or responding to printed requests of service!! They curse the system they work with day-in and day-out, but in silence. This is more because they continue to focus more on the sale of third party products like Insurance, Mutual Funds, Pension Funds etc.

I am writing this note with the hope that the Bank would make better use of technology and help many of my ilk not facing such risk.  Instead of being complacent, the Bank should introspect and it is not correction that is required but total replacement of its technology to stand in competition with its peers HDFC Bank and ICICI Bank.

Pensioners’ Association left a helpful note that those who have difficulty in accessing the MyHRM portal can seek its help in the Association office.

Is this necessary? Doorstep service to the pensioners announced by the RBI is in circulars. Can’t the tech-savvy bank think of better way of helping its customers and pensioners?

There are many unsung heroes. It’s time to have pity on them and find systemic remedies. I wish the Bank would regain its pride of place in the industry.

*The views are personal.

Wednesday, July 26, 2023

Urban Cooperative Banks - Future Concerns

 

Urban Cooperative Banks – Future Concerns

Urban Cooperative Banks (UCBs) occupy nearly 8 percent of the financial sector space. The topic for discussion at the College of Supervisors on the 24th  July 2023 was on “Business Development Plans, Risk Management and Governance.”

UCBs are neighbourhood banks coming under the regulations of both the State Cooperative Acts and the Banking Regulation Act 1949 and its amendments. Financial Stability Report June 2023 acknowledges their contribution to the financial sector. Credit growth of UCBs both scheduled and non-scheduled UCBs reaching 6.7 percent and 4.9 percent respectively.

The discussion is timely for more than one reason: After the Third Five Year Plan, there was no mention of Cooperatives as economic sector in the subsequent plans until the NDA government formed a separate Ministry of Cooperation and formulated a National Cooperative Policy. Second, Multi-State Cooperative Act 2023 was on the anvil. (It was passed in the Parliament on the 25th July 2023. Third, these UCBs were in the media and the press for several reasons: 1. failure of PMC Bank, RBI raising the threshold of guarantee limit of deposits from Rs. One lakh to Rs.5 lakhs; 2. depositors’ interests occupied the prime interest of the regulator after a series of failures and irregularities;3. consolidation of banks through merging of weak banks with strong banks, 4. introduction of 4-tier structure in UCBs based on their business levels considering their heterogeneity, 5. implementing some of the Viswanathan Committee recommendations – particularly to help raising capital beyond the membership through setting up National Urban Cooperative Finance and Development, an Umbrella Organisation, 6. Board of Management with functional experts as a support mechanism for the elected Boards has been put in place; 7.inter-cooperative agency cooperation in strengthening the sector, increasing number of penalties on good number of banks for several regulatory breaches; 8.new threshold of lending to priority sector by 2026 depending on the tier to which they belong, 9. poor governance and 10. risk management standards.

It has been noticed that majority of the Tier-3&4 UCBs have been conforming to the regulatory directives, introduced core banking solutions (CBS), opened ATMs, integrated with the larger payment systems like the UPI through appropriate technologies, and mostly compliant with the prudential norms prescribed by the RBI.

All the UCBs follow the regulation of submitting their Annual Business Plans to the RBI. This is more ritualistic. Business Development Plans are not prepared with bottom-up approach. There is no Board approved strategy for preparation of such plans annually. Even after the constitution of the Boards of Management as adjuncts to the Board (These BoMs do not have any discretion and they perform only advisory role). The credit to risk weighted assets ratio (CRAR) of scheduled UCBs (around 52 banks) remained stable at 15 percent and the non-scheduled UCBs at 17.8 percent. FSR acknowledges that ‘tier-wise CRAR of UCBs is well above the minimum regulatory requirement.’ Net worth of all the
UCBs is stated to be comfortable. Yet there are continuing concerns on their contribution. Some of the financially sound and well managed banks (FSWM) have been attempting total transformation akin to commercial banks relating to technology, like internet banking, mobile banking, one-stop solutions etc. Capacity building at various levels in this regard and cyber security are the challenges they are facing.

Three important aspects that seized my attention while reviewing their performance are: 1. The role of Board of Management, 2. Priority Sector lending imperative, and 3. Umbrella Organization.

Board of Management is supposed to guide and assist the Board of Governance with no delegation or commitment to them. They are outside the actual Board of Directors and yet in it. Instead of such ambiguity, there can be negotiation with the State Governments to adopt certain rules to facilitate the elected Boards to have nominated Directors from professional cadres satisfying the fit and proper criteria for such nominations too. This would settle the issue of enhancing the capability of the Boards. Further, training of the Board of Directors, measuring the performance of the Board of Directors on the basis of a written statement of what value addition they would like to bring to the Board and how they would like to participate in the stability and sustainable growth of the institution, annual Board retreats etc., should receive the attention of the regulators.

Agenda of the Task Force on Cooperative banks (TAFCUB) in several states is being prepared by the RBI while the concerned Registrar of Cooperatives of the State and the Associations as the other constituents are not being consulted mostly, save exceptions. Its functioning has become too routinised during the last ten years. Since the purpose of the TAFCUB is to resolve local regulatory issues without escalating them to higher levels, and improving the functional efficiency of UCBs, it is desirable and necessary that the agenda becomes more consultative.

Viswanathan Committee ‘s view is that “there is ample space for financial institutions that operate on the principles of co-operation and the inclusivity that they get. As such, the Vision for the UCB sector should be to emerge as the neighbourhood bank of choice powered by passion for inclusive finance as the core of the business model. This can happen only if their operations are founded on financial strength, strong branding, cutting edge technology driven processes, and skilled human resources coupled with an enabling regulatory environment. These internal drivers can be available to a bank either on a stand-alone basis or acquired through network arrangements. There are now several enabling factors, both for the UCBs themselves and the RBI as the regulator, to actualise this vision.”

Action still awaits the validated recommendations of the above Committee. Many of these aspects have been discussed while delivering my talk, the PPt of which is attached. 

*Text of the address at the College of Supervisors, RBI on the 24th July 2023 at Mumbai.

 

Wednesday, May 31, 2023

Degenerating Value: A Scar on Democratic Fabric

 

Degenerating ‘Values’, a Scar on Democratic Fabric

B. Yerram Raju*

When R. Durgadoss and I wrote ‘A Saint in the Board Room’ we never thought of being prophetic. When we see the recent controversies on ‘Mahatma’ getting off the mark on twitter, and the controversy over the Prime Minister Modi inaugurating the Parliament on the 28th of March 2023, setting aside the chorus in the country for the Lady President of India from the Dalit Community to substitute him, the degenerating values and the decline in governance made me recall the values emphasised in the 2011 Book referred above. Reinforced, as it looked, there was  a relentless fight of the women wrestlers of repute waging a war in the streets of Delhi calling for punishing the offender who intruded into their privacy.

“Leaders like Gandhi acquired discipline to put to operation the knowledge gained into actual learning. He came across a book titled, ‘Unto the Last’ by John Ruskin, while he was in South Africa. In this book Ruskin states that the liberation of the individual lay in the liberation of the community. This ideology transformed Gandhi. He said, “I arose with the dawn ready to reduce these principles into practice”. These principles are based on simple living and pursuit of honesty. Today, we have many who speak of principles and few, who think of practising them.

Gandhiji felt that one who cannot wage war over the internal conflicts that require no arms, it is incredible that non-violence cannot stop war among nations. This recall bears significance in the conflict between Russia and Ukraine. Except these two nations at war, every other nation in the world wants them to be at peace and this is refusing to happen.

Words of Wisdom from Gandhiji

“Cleaning oneself is the first step to realize God. When one cleanses his soul, the spreading effect will have a telling effect on others. He said it was better to conquer desire and hatred than winning wars with weapons. Further he believed that one should have humility as one of the main virtues with the outer boundary of the humility being “ahimsa” or “non-violence.”

Gandhiji said unto himself: ‘I myself do not feel like a saint in any shape or form’ (Young India Jun 20, 1924).[i] It is important to watch the biological clock in life:

Age

Designated as

Our role in this period

0 – 20

Butterfly

We have colourful dreams; we do not bother for anything

20 – 40

Migratory bird

We go in search of career to better environmental destinations

40 – 60

Donkey

We bear the burden of the family

60 – 80

Snail

We slowly withdraw into a shell, looking more inwards

80 – 100

Crane

We wait for our final journey towards the eternal world

 

Business ethics, however, is not driven by such biological clock.

Philosophical outlook these days is inversely proportional to the age. One can find examples of politicians aged 70 and above are actively pursuing the wrong road to wealth these days. The child in him has no role model to earn wealth by any other means.

We have people loving movies of hatred, street fights, wars, and unnatural weaponry to show their winning streak. As they age, they learn only to lie and earn money at any cost by dubious means. We see children getting used to opium in one form or other. Not a day passes without hearing the news of police catching hold of such persons.

Cultivating the right values should start from childhood and their practice depends on the world they witness. Young parents today do not have time to spend with their children to teach any of those values, for, they are busy in their pursuit of wealth. They suddenly realise that all this pursuit vanishes on a single day when they are handed over exit chit. Lakhs of jobs are lost in the guise of running their organization better.

The purpose of the educational system is to prepare its students for a lifetime learning experience that will go better and faster than it would have otherwise done without formal education. The test of every religious, political, or educational system is the philosophies that it produces and the spirit that it preserves. “If the system violates intelligence, it is bad. If it injures character, it is vicious and if it injures the conscience, it is criminal”.[ii]

Character and governance are shadowed. Child of the day is in wilderness seeing those street fights among politicians, and frightful support to ill-gotten wealth. It is time for all of us to think – reminisce into the glorious past that produced Gandhiji, Vijaya Lakshmi Pundit, Gopala Krishna Gokhale, Jawaharlal Nehru, Vajpayee, Rabindranath Tagore, Swami Vivekananda and not think of the colour of the cloth one wears – white or saffron.

75 year-old independent India, growing economically as the fastest among nations in the world, ranking fifth now, should not show cracks in its aspirational century in 2047. Next few years should be the years of correction in thinking, federal cooperation, respecting the views of the opposition, allowing debate over dissent, and a determined pursuit of shaping the next generation based on values and ethics. The saga of Mallyas, Nirav Modi, Chokshi, and the still brewing Adani story should be consigned to forgotten history. The nation has the right to freedom of expression and autonomy of institutions within the well-defined boundaries, and transparency. The largest democracy of the world, as it would emerge, should be the beacon light as it was during its epic history.

New structures always make the legacy, a forgotten past. But the new Triangular Parliament Structure built on cultural ethos of the nation could herald a new dialogue, symbolise cooperative federalism and usher in an era of value-driven democracy.

 

*The writer is co-author of ‘A Saint in the Board Room (2011)’, an economist and risk management specialist.   

 

 

 

 



[i] Mahatma Gandhi’s Significance for Today: John Hick, Pg 2 of 11 (http://www.johnhick.org.uk/article15.html)

[ii] Henry Frederic Amiel, Journal, 17 June 1852

Wednesday, March 29, 2023

Risk Profiling of Manufacturing Micro and Small Enterprises

 

India’s Micro, Small and Medium Enterprises (MSME) viewed as the lifeblood of the Indian economy, contribute 30 percent to GDP and of them micro enterprises alone are estimated to employ 23 percent of India’s total workforce, according to the data of the Union Ministry of MSME. Access to credit has been the most contentious issue discussed on public platforms and IMF estimated that only 23 percent of the total number of enterprises in this segment got formal access to credit.

 


Post-pandemic, government of India has been laying lot of emphasis on the growth of micro, small and medium enterprises and extending incentives and products for easing the conduct of their business. The Union Finance Minister, in her usual meetings with the bankers, draws her untiring attention to the need for increase in credit to these enterprises. Banks, on their part, do not lose the opportunity to exhibit their fancy to lend to such enterprises.

 

Trust deficit was the major contributory factor from the lenders’ perspective. It is therefore considered expedient to look at the risk profile of such enterprises and see the possible mitigating factors.

 

Latest Profile of the Sector

Interestingly, TransUnion CIBIL-SIDBI MSME Pulse Report for July-September presents a very hopeful perspective presenting a growth of 24 percent year-on-year (Y-o-Y). Credit to ‘micro’, viewed as unmoving window of Banks for five continuous years since 2017 and even on the negative window, reported a 13 percent growth in credit outstanding y-o-y as of September 2022 versus 10.6 percent y-o-y for all the MSMEs y-o-y. Growth in disbursements for micro, small, and medium enterprises had been at 54 percent, 23 percent, and 9 percent respectively during the period.

 

According to RBI’s Financial Access Survey, 72.83 percent of MSME Credit is concentrated in ten states: Maharashtra, Gujarat, Tamil Nadu & Pondicherry, Uttar Pradesh, Delhi, Karnataka, Rajasthan, West Bengal, Telangana, and Haryana. Maharashtra takes the major slice of 26.19 percent. This obviously means that government assistance to the sector also reached these states in a significant measure, at least proportionately viewed.

 

Very small (with aggregate credit exposure not exceeding ₹ 10 lakh), micro1 (with aggregate credit exposure between ₹ 10-50 lakh) and micro2 (with aggregate credit exposure between ₹ 50 lakh-1 crore) experienced growth of 20 per cent, 15 per cent and 11 per cent y-o-y respectively showing sudden spurt in micro lending, which is not just a post-pandemic bounce back, it added.

 

Delinquency rates dropped y-o-y across all the three lender categories (public sector banks/PSBs, private sector banks(PVBs) and NBFCs); the highest drop was in PVBs segment (from 2.8 per cent in FY22-Q2 to 1.5 per cent in FY23-Q2).[i] Street Vendors’ financing programme, MUDRA loans (Rs.3.4cr sanctioned during FY21-22), 59-Minute loan programme for the MSMEs contributed to the steady uptick that was presented apart from the Union Finance Minister dinning into the ears of bankers that credit to MSMEs has been sluggish. There was a pressure on the banks to perform.

 

This positive vibration whittles down suddenly when we hear the Union Minister of State for MSME submits to the Parliament, duly reported in the Financial Express dated 23.02.23: “The number of Udyam-registered MSMEs closed in the current financial year has nearly doubled from the last financial year’s count, showed official data. From 6,222 MSMEs shut during FY22, the count has jumped to 12,307 as of March 9 in FY23 while only 175 units were closed between July 1 (when the Udyam portal was launched) and March 31 in FY21, taking the total number of MSMEs closed to an all-time high of 18,704. Maharashtra had the highest number of casualties with 4,871 Udyam-registered MSMEs shut since July 2020 followed by Tamil Nadu (2,326), Uttar Pradesh (1,568), Gujarat (1,558), Rajasthan (1,297), Bihar (1,075), and more.”

 

Gross Non-performing Assets ratio  (the ratio of total gross NPAs to the total advances made during a particular period by the lender) in MSME loans in FY22 stood at 7.6 per cent, 7.3 per cent in FY21 and 8.9 per cent in FY20. 

 

Resilience and sustainability of industrial growth is inextricably linked to the healthy growth of the manufacturing micro and small enterprises (MMSEs), that happen to front-end the supply chains of the industry at large. The data and analysis of the Transunion report does not provide information on how much is the share of growth of manufacturing MSEs. September 2022 PMI data shows that industrial growth has not kept pace with the overall growth of the economy. The growth obviously occurred in the services sector, due to the digitization of the highest scale, entry of FINTECHs, formalization of the MSMEs, widely dispersed 200-odd incentive schemes from the Union Ministry of MSME, and the unique success of unified payment interface system (UPI). Despite the U.K. Sinha Committee Report calling for cash-flow based lending of working capital to the MSMEs, RBI creating public credit registry, and pushing the banks to move to data-based lending instead of security-based lending, MMSEs did not catch the eye of the banks. Hence, risk profiling of the MMSEs would be necessary to understand the reasons for the trust deficit in the manufacturing sector.

 

Definitional Risk:

Manufacturing and Services have been combined in the way the MSMEs are defined. The changes to the definition adopting the twin criteria of investment and turnover to redefine them have given an escape window for the banks to keep at bay the MMSEs with investment below Rs.1crore (Rs. Ten million). The turnover threshold for such enterprises is five times the investment level – Rs.5cr per annum. While this definition coupled with the insistence of any new enterprise shall register on Udyog-Aadhar portal of Government of India, has enabled only the organized to have access  credit and incentives, it is yet to bring many unorganized MMSEs into the organized fold. Lenders still have their own definition – micro enterprises are those that have outstanding credit of less than Rs.1cr. The law of proportionality demands that the micro enterprises be brought under a separate statute so that the benefits meant for them reach without infringement.

 

By nature, micro manufacturing enterprises are owner-led proprietary or family partnerships. They do not distinguish their firm expenditure from family expenditure. Their books of accounts are also not well organised. Their maintenance of record of stocks of raw materials and finished products is less systematic than their counterparts in the small and medium enterprises even. They are mostly sub-contractors as their scale of production does not permit them to participate in private or public tenders directly. But their working capital cycle accommodates this unorganised way of running their enterprises. They lack counselling and guidance from their lenders as the later have little time for these large numbers in their books of accounts that tend to slip to non-performance at the turn of the hat. Thus, these enterprises have origination risk. Information asymmetry and adverse selection, the two factors that adversely affect the credit risk need mitigation.

 

Covenant Risks: These MMSEs in their eagerness to borrow money sign on the dotted line before their lender. They do not understand the implications of the covenants they are agreeing for. Earlier they were not knowing even the rates of interest. At least now, thanks to the widely publicised monetary policy interventions periodically, they know the interest rates. But they are ignorant of the insurance clauses and their implications. They do not, in many a case, know that their machinery and stocks are jointly insured with the lender and the premium is directly deducted annually from their working capital account. The extent of insurability is least known to them. Such insurance is invariably made with the insurance arm of the Bank that lends the enterprise. But the covenants of the policy are little known to them as the Banks do not share any copy of the insurance policy. This is a grey area.

 

Compliance Risk: MMSEs fail to comply with the regulations relating to products, processes, and finance more out of ignorance than out of own volition. Neither the regulatory institutions nor the financial institutions spare time to explain the implications of non-compliance of the rules and regulations. Environmental regulations and financial regulations are the most breached. Labour Code that has four components are least explained to the MMSEs. It is not uncommon to find that these enterprises fail to maintain even a muster roll and even where maintained does not agree with the reality. The number of persons actually engaged and the number in the roll rarely tally. There is a cost involved in compliance and such cost is felt onerous by the micro manufacturers. When the cost of compliance is more than the cost of avoidance, they prefer the latter. Transparency in the cost of compliance is also found wanting. These are areas of immediate correction to take these enterprises to the globally competitive levels.

 

Human Resource Risks: MMSEs employ on average 8-10 workers including the owners. They invariably depend on migratory labour instead of labour because of the low wages they demand and reliability. Many studies have indicated that they spend little resources on skilling, re-skilling, and up-skilling as the cost of such human resources development is beyond their capacity to absorb. In fact, these MMSEs act as providers of skilled persons to the Small and Medium Enterprises as the labour learn their art of working on the machine duly trained by the proprietors. Some States have insisted on engaging locally available skills and their experience with such persons on the production front has become counter productive and costly. They cannot afford to train their labour in reputed institutions. They require peripatetic trainers who are rarely available.

 

Product Risk: According to a number of studies, 60-70 percent of the MMSEs may conform to the quality of the product requirements but fail in packing and forwarding requirements. This puts the buyers at risk and therefore, the related payments.

 

Pricing Risks: Several manufacturing MSEs adopt neighbourhood pricing of their products as they would not like to lose out in competition with the peers. They lack abilities to cost their products. They also do not much understand the leakages that occur in their supply chains. The product is not priced cost plus. Since debt is their major source of capital they always look to loan swaps and interest subsidy as a major source to beat the pricing competition.

 

Technology Risks: While several enterprises are aware that new technologies have the potential to increase their efficiency, their ability to finance those new technologies is very limited. Quite many are scared to approach their lenders as they would have been in arrears already either of the interest or principal payment. They must have already availed one or two name-sake restructuring of their loans. Their ability to calculate return on investment in technology is also extremely limited. Banks hardly find time to spend time with the entrepreneur and guide him.

 

Payment Risk

Global Alliance for Mass Entrepreneurship (GAME) estimated that the problem of delayed payments to MSMEs is in the magnitude of Rs. 10.7 lakh crore, with 80 percent of this being attributable to delays to micro and small enterprises (MSEs). The problem of delayed payments is exacerbated by the lack of credit, specifically working capital facilities, that are available to these businesses. Reports such as the IFC’s 2018 Financing India’s MSMEs estimate that the total addressable debt requirement of micro and small enterprises was Rs. 24 lakh crores in 2018, with an estimated 70 percent attributable to the elevated working capital needs of these businesses.

 

Sovereign Risk: Industrial policies, Budgetary announcements, Export-Import policies, Trade Policies and not-so-enriching interface between various government departments that deal with the MSMEs and the Union Ministry of Finance, inter-state coordination issues are the various factors that impinge on sovereign risk. Enterprises have to adjust themselves and accommodate for the changes in the way they function rather than seeking instantaneous remedies to their business dealings.

 

Policy formulation for the MSMEs is at risk because of lack of reliable data. There has been no census of the units since 2004, the year of last Census. The data on the Union Ministry of MSME portal is that of 2012. While the data on Udyam registration is captured in isolation, its integration with the existing data did not take place. There is no data of mortality in the figure of 6crore-odd enterprises mentioned on the website.

 

While several state governments and union governments announce a host of incentives, the reach is suspect due to a variety of constraints: 1. Expediency decides the allocated budget for release to the sector and the first hit is the MMSEs, the most vulnerable. 2. There is invariably lack of information relating to the cost of securing these incentives – in terms of number of visits the entrepreneur has to make to the concerned department; the cumbersome approach to the person who actually decides on the sanction and release of the incentives. 3. Weak negotiating ability of the Industrial Associations over the incentive releases, etc.

 

Digitalization of enterprises, Account Aggregators (yet to mature in its access and use), Open Credit Enablement Network (OCEN), Co-lending with NBFCs, Factoring, Trade Related Exchange System (TReDs), have lately entered the Risk Mitigation instrumentality. Yet, the ability of the MMSEs to take advantage of these mitigants is way behind both in terms of awareness and the skills.

 

Therefore, there is a need for developing a separate framework for the MMSEs and a broad-based ecosystem involving policy makers, institutions that act as policy instruments, RBI, Indian Banks Association, NBFCs, Ministry of Agriculture and Cooperation, Ministry of Electronics and Information Technology, Ministry of Environment, Ministry of Energy of the Union Government and the ten state governments that have the major share in MMSEs. This framework should be discussed with the stakeholders in the leading ten states before firming up. Separate line of budget should be provided to meet the announced incentives and institutions like the NIMSME, NIRD, Central Universities and those that are licensed to run technology hubs should monitor the working of the framework.

*The author is an economist, risk management and SME Turnaround Specialist.