Saturday, September 16, 2017
Sunday, September 3, 2017
Remembering my Teachers
Guru Brahma Gururvishnu Gururdevo Maheswarah:
Parents take the throne on the Teachers’ Galaxy. My Pranams.
Indraganti Hanumatsastri, my Telugu Teacher in 8th standard at District Board National High School, Ramachandrapuram, East Godavari District guided me to win a district level debate competition at Rajahmundry in 1952 on the subject – ‘Is Adult Franchise good for India’s Body Politic?’ in Telugu.
S. Radhakrishnan, my English teacher and Head Master at the Board National High School, Bapatla laid firm foundation and he never spared the cane when it came to correcting grammatical errors. He introduced Wren & Martin English Grammar as part of our regular curriculum.
Diwakarla Rama Murthy, brother of Divakarla Venkatavadhani of Osmania University taught us writing poetry in Telugu while at Intermediate in Mrs. A.V.N. College, Visakhapatnam (1957).
Greater fortune blessed me in the higher studies at Sri Venkateswara University College to have been taught during my graduation course by Rayaprolu Subba Rao and Pingali Lakshmikantham; M.V. Rama Sarma, old poetry (Milton’s Paradise Lost); Mrs. Suryakantam (Thomas Hardy’s Return of the Native and Galsworthy’s Strife); Shakespeare’s ‘Macbeth’ and ‘As You Like It’.
Luckier still during my Post Graduation in Economics – Prof E.K. Warrier; Prof. M.S. Prakasa Rao who laid foundation in the subject by making me read the original authors: Adam Smith’s Wealth of Nations; John Maynard Keynes – General Theory of Employment; Kenneth Boulding – Economic Analysis that earned me distinction in M.A (Economics) in 1962. It was Prof. Prakasa Rao who advised me that if I do not have an idea to contribute on my own, I should not attempt an article. He guided me into publishing my first article on ‘Governance in Cooperatives – A Case Study of Tirupati Town Cooperative Stores’, in the Madras Cooperative Journal in 1962. This foundation saw me as author of hundreds of articles and 15 books in Economics and Management.
Greatest of my youngest teachers is C. Venkata Ratnam who adorned Gitam Institute of Foreign Trade during its formative years and International Management Institute later who guided me for doctoral thesis in 1984. He sent out the Application for admission to Andhra University Ph.D. Course in 1981 when I was Lead Bank Officer of the SBI at Sangareddy. I completed my Ph.D course in commerce and management studies with the subject – Credit Planning in Medak District.
It is my teachers who made me what I am today with positive outlook, unblemished career, humility and happiness in life. All the errors and omissions are truly mine.
On this Teachers’ Day I am greatly beholden to them. I seek their eternal blessings.
స్వరూప లలితాశ్రయులు, రసవదిష్టార్థ
శ్వరులు, తదుద్బుద్ధ చరణ చరితము నెంతున్.” మాతృ గీతా; Acharya Rayaprolu Subbarao
Saturday, July 29, 2017
Consolidation, Convergence and Competition of Banks in India
Cooperative Banking suffering weak governance, poor legal framework, dual regulation, and excessive politicisation is in search of sustainable solutions and the consolidation move in the three states rightly highlighted by Bloomberg in its article a few days ago is perhaps the right move. Following the recommendations of Vyas Committee (2005) NABARD amalgamated the 196 RRBs established under the Multi-Agency approach to rural lending in the country during a fifteen year period till 1990 into 64 by 2013. This amalgamation has only partial success as the RRBs are still distant from the objectives of their creation in 1975.
1991-2001 saw bank disintermediation in the wake of financial liberalisation, prudential norms and profitability focus. Directed credit program was blamed for the rising NPAs till then. I recall Dr.Y.V.Reddy mentioning in his latest book ‘Advice and Dissent’: “the seeds for bad times are always sown in good times.” 2003 was the year of ‘crazy credit’ that took the route of CDRs in 2010 and 2011. This grew into a immature NPA adult and aged along to reach the unsustainable level of around Rs.8trillion. Courtesy this situation, lazy banking had set in.
Wednesday, July 19, 2017
NPAs of MSEs Need alert Banking
Grouped under unorganized sector, micro, small enterprises (MSEs) are suppliers to the organized medium and large enterprises. With GST they would migrate from unorganized to organized territory ere long.
Many entrepreneurs have been wondering about their future as their working capital cycles shake up. Credit to them has been on the continuous decline from the banks. In spite of GoI guidelines of June 2015 and master directions of the RBI, several deserving non-willful defaulters’ accounts have not been revived/restructured. Zonal Committees for MSME stressed asset resolution continue to make an apology of their presence. The remedy suggested by the RBI in its master directions with SMA(0,1,2) proved worse than the disease going by the analysis presented below based on the data in RBI Bulletin January 2017.
Thursday, June 29, 2017
Dynamics of NPAs Defy Sensitivities
B. Yerram Raju*
Non-performing Assets (NPA) are a dynamic statistic moving from Rs. 2.50trn in 2013 by nearly four times in four years! Unless the patient cooperates the medicine never works in the sense that it has to be taken on time and in required dose. Here the doctor has been experimenting with the medicine and the patient is unwilling to take it.
Corporate Debt Restructuring measure suggested post 2008 crisis, corrective action plans, Joint Lenders’ forum, 5:25 scheme, strategic debt restructuring (SDR), Sustainable structuring of stressed assets (S4) Scheme have all proved a damp squib and now the regulator-led solution through amendment to the Banking Regulation Act to invoke the provisions of the Insolvency and Bankruptcy Code against the wilful defaulters is made to appear a surgical strike at bad debts.
Any credit decision is bounded by certain forecasts or predictions about future. It is unlikely that every such decision would end up as expected. Hence NPAs are inevitable in lending. But credit assessed for corporate entities requires a finesse. The promoters and directors should be put to the rigor of scrutiny. Environment and economic risks should be part of enterprise risk assessment. When we look at the largesse in lending in the corporate sector, hindsight and individual appraisal of the directors and promoters as also post disbursement monitoring appear to have taken a beating. Banks’ scrutiny lapses could not be drubbed as willful default for a forceful recovery.
The Banks, Government owning most of them, and the RBI have been in the know of the devil in detail. After the Development Banks have been wound up and universal banking came into being where banks started selling credit, mutual funds, insurance etc., and bank-participated rating institutions or their semblance commenced rating the companies, credit risk assessment has become farcical. Lenders are aware that they are lending short term resources for long term investments prone to very high risk of losses. Banks say they were forced to lend to PSUs.
Bank executives eyeing for the top post or those that are in such high post wanting to hold to the chair compromised institutional interests. The other reason for such credit for infrastructure, real estate, housing, and retail facilitated arm chair lending suiting their limitations in staff recruitment. They earned profits at the cost of efficiency with impunity.
Bank Boards having the regulators’ and the GOI representatives as Directors liberally subscribed their signatures to the sanctions. Risk management committees, audit committees of Boards, regular audits and inspection reports at annual intervals should have been the instruments of Board oversight mechanism. Unfortunately all these would appear to have muted. Failures of governance are beyond action.
CDR mechanism helped greening the balance sheets of banks. The postponed debt obligations swooped on the banks after the CDR ended. Banks realized that they had to provide 30 percent of the secured portion and 100 percent of the unsecured for all the doubtful accounts. By the time the CDR ended Banks realized that the tangible securities have all vanished. To save the banks, RBI introduced SDR. Under SDR, banks can convert 51% of debt into equity to be owned by them and also change the management. New investors could hardly be found as the amount involved is over Rs.2trillion. Management changes could hardly be seen. In the consortium of bankers another peculiarity noticeable was that while one bank declared the asset as standard asset other bank(s) declared it as doubtful calling for action due to the former finding ways to push the ghost of NPA under the carpet.
S4 can be termed a non-starter. Unanimity in restructuring effort proved rarity. On top of this, banks started showing ‘vigilance’ from agencies like the CBI as villains. In most cases where such vigilance stumbled upon, many skeletons in the cupboard of such banks came out and some executive directors and chair persons were also exposed!!
The latest RBI measure to invoke the IBC and also provide for deep haircuts without fear of the ‘vigilance’ bodies has to prove itself as the IBC requires thorough understanding of the art and science of negotiation and arbitration. Until all the stakeholders, advocates and the jury fully acquaint the terms used in the IBC, resolution through this process would be a long and difficult journey given the fact that the banks have not been able to make use of the easiest Sarfaesi Act and its rules in good measure.Recovery effort in most of the cases instead of ‘squeezing oil out of sand’ may be a milking cow for the errant.
It is time for the RBI to step out of the Bank Boards notwithstanding the losses that their planted directors by way of intangibles could be subject to. Regulatory arbitrage shall not take place to preserve the sanctity of central bank. In more than one way, dynamics of NPAs thus far defied sensitivities in resolution. Hopefully, RBI will be able to doctor a solution to the five-star hospital patient.
Thursday, June 15, 2017
Innovation is the hallmark of growth and the progressive industry policy of our Government has plenty of it. Just about an year ago, when I and the then Commissioner of Industries Mr. Manickaraj, now collector of Sangareddy district presented a case for such innovation, our Hon’ble Minister quickly endorsed it and added his own input to make the investment in the clinic wide based with the MSME participation. He is the first ever State Minister to visit the RBI with the then Principal Secretary and Commissioner of Industries in October 2016 to espouse the cause of aggrieved sector over the failure of the banks and inadequate response from the regulator.
This first state-promoted NBFC incorporated on the 7th of this month headed by a very experienced CEO Mr. M. Sanjaya, former General Manager, Rural Planning and Credit Dept of the RBI, stratgised its one hundred crore rupee corpus fund with 10% seeding from the State Government through TSIDC into three principal arms: Make in Telangana; Grow in Telangana; and Turn Around Management with the support of research base, case studies, and strong advisory and consulting support. A few of the banks have already shown interest in contributing to the Corpus fund that promises 7% yield after a couple of years of lock-in period.
Micro and small manufacturing enterprises in the state have little start-up funding and no more than 2% of turn-around management.
This diagnostic and curative clinic provides responsible and responsive consultancy and hand-holding support to ward off the compliance risks of banks in start-ups and revival. The incipient sick will be provided bridge finance to prevent sickness as decided by the Board.
The TIHCL targets on average five to ten enterprises per month per district during the coming year providing employment to around 5000 persons.
Just one service sector Small enterprise from our state is listed on the SME Exchange for the last six years of its existence. In order to encourage the manufacturing Small enterprises running on profits with good product range for the last 3 years to move to the equity markets our Clinic in coordination with NSE-EDGE and BSE and after proper due diligence will participate to an extent of 10% of the issue up to a maximum of Rs.50 lakhs. During the first year ten enterprises are targeted.
Employment, growth and zero-NPA MSEs in manufacturing are our targets. An independent Board with professionals will drive these initiatives. The country has no parallel elsewhere. At a time when NPAs and distressed assets are bugging the banking industry and Government of India our Government with this initiative will be the torch bearer for the MSE sector.
Wednesday, May 3, 2017
Banking reforms should target ethics and governance
The Reserve Bank of India (RBI) has put four banks on its critical watch list and warned another ten to spruce up their capital. What prompted the RBI to do this is anybody’s guess. Both the warning and action are sorely needed.
Huge bank frauds are reported, many of them from public sector banks (PSBs). An analysis of both frauds and the increasing non-performing assets (NPAs) suggests that the attention of banks to their basic functions of deposit and credit has diminished in the wake of their search for non-banking products like mutual funds and insurance, which offer hefty commissions to all cadres of officers.
Neither the PJ Nayak Committee’s suggested governance reforms, leading to the setting up of the Bank Board Bureau (BBB) for selection of directors and chairpersons, nor Indra Dhanush seem to have improved the governance of banks. There is deep erosion in values and governance, in PSBs in particular and the Indian financial system in general.
Thursday, April 27, 2017
Generic Medicine Prescription: Treat the Cause and not the Symptom
Prime Minister Narendra Modi’s recent call for generic medicine prescription mandatorily by the physicians with a view to reducing the cost of healthcare, and the likely law surrounding it, is the culmination of three decades of effort to provide affordable healthcare to the poor. Doctors in government hospitals are mandated to prescribe only generic drugs. Moving from branded generics to generics, with most pharmacies and medical stores manned by unqualified or semi-qualified persons, would be well-nigh impossible, because 50% of drugs are combination drugs.
A number of studies conducted elsewhere in the world point out the factors influencing the generics’ prescribing behavior. While the patient’s financial status, welfare, compliance, and fear of punishment are positive factors, quality concerns, lack of regulation by Food and Drug Administration (FDA), poor recall of generic names, patient’s preference and personal experience are negative factors influencing the generics prescribing behavior.
A qualified physician checks the causes of an illness and treats the patient after a few diagnostic tests, while quacks treat on the basis of symptoms. Insights into the ecosystem of pharma health care in India will help understanding the burden of our arguments:
1. Too Many Brands, Loan licensing and Pharma-Physician Nexus
There are about 92,000 branded generic formulations today. Loan licensing allows manufacturing of fast moving drugs (largely prescribed molecules or fixed dose combinations) yielding higher margins for the investors. A pharmaceutical representative, manager or a physician or a group of physicians with sizable clinical practice can start a pharma company easily. Such pseudo manufacturers colluding with willing physicians, under mutually agreeable terms of contract, share the gains, leaving the pain to the poor patient. Competitors with deeper pockets can easily persuade them to prescribe their products by increasing the transactional sum. This leads to a continuous escalation of marketing costs at the expense of patients.
2. Regulatory Standards
India’s current drug regulatory mechanism has inherent inefficiencies and inadequate infrastructure. There is a vast difference in the quality of generics in India and elsewhere in the world. In the US and other well regulated markets, stringent quality control measures ensure effectiveness of generics administered on patients, through bioequivalence tests at the USFDA approved laboratory. Mere comparisons with innovator drug of chemical equivalence does not make it therapeutically equivalent. All this costs a lot and puts an entry barrier on fly-by-night operators. The technical infrastructure in India is grossly inadequate for quality testing and certainly not comparable with the West.
Most of the generic formulations are not tested by comparing them with the leader of the branded generic formulation or the brand-name drug for bio-equivalence, and yet they are approved. Many of the reported close to 10,000 drug companies do not have a manufacturing facility that conforms to and approved by the World Health Organization’s Good Manufacturing Practices (WHO GMP).
The loan licensing system enables start-ups having a million rupees to enter the market with their own generic, creating competing spaces at national, regional and local levels. How will the Drug Controller General of India (DCGI) ensure that the patients get the same quality of generic drug as the branded drug? A branded drug manufacturer has his reputation at stake while the generic manufacturer has little to lose.
3. Continuous Cost Escalation of Medical Education
The pharma-physician nexus is deepening by the day and along with it are the irrational prescriptions of expensive branded drugs. The ever increasing cost of medical education, both at the graduation and specialty level, are driving the new entrants into medical practice to recover their education expenditure through unholy contracts with pharma companies. Neither the government nor the Medical Council of India is able to do anything to curtail the capitation fee system in private medical colleges, the root cause for corruption among dotors.
4. Shortage of Qualified and Trained Pharmacists in Retail Pharmacies
It is pathetic that most of the 7.5 lakh retail pharma outlets do not have qualified pharmacists at the shop floor. Even the compromising solution suggested by the government, to train the sales persons of these shops, is yet to see the light of day. What is more, the curriculum at the graduate level in our pharmacy courses does not include many of the new drugs that are recently developed. Empowering the not-so-qualified pharmacist to dispense generic drugs can do more harm than good to the patient.
5. Breaking the Pharma-Physician Nexus or Creating a New Pharma-Pharmacist Nexus?
The other root cause of the problem lies in the hierarchy of pharmaceutical products – innovator-branded medicines, value added drugs – those that carry the same molecules with a perceptible premium and branded generics and generics, in that pecking order. Go to any corporate hospital: medicines prescribed there with the highest premium are available only in the attached pharmacy.
The contemplated legislation on compulsive generic drug prescription would have the distinct possibility of therapeutic prescription carrying the best price that would make the manufacturer-retailer nexus coexist with the physician-pharmacist nexus, making it a win-win situation for everyone – barring the patients. The solution lies not so much in law as in cleaning up the entire supply chain that includes the drug controllers.
6. Absence of Good Governance
That there is clearly a lack of good governance is evident from the fact that the government has been unable to ensure compliance from all the stakeholders despite the presence of well-defined rules governing the manufacturing and selling pharmaceutical products in India such as the Drugs & Cosmetics Act, Voluntary UCPMP (Universal Code of Pharmaceutical Marketing Practices), MCI (Medical Council of India) etc. Yet another law makes no big difference.
Evolution or De-evolution?
The modern pharmaceutical industry as we know it today has evolved over many years and contributed significantly to the discovery and development of important drugs. The same industry has to develop future cures too. Therefore, it has to continuously evolve around investments in research and innovation. Let the industry be encouraged to continue in the evolution process.
The Way Forward: A Prescription
- To change this negative perception of generic drugs, all we have to do is approve every generic formulation based on a bio-equivalence test, comparing it with the reference drug (either the brand name drug or leader brand of the branded-generic drug). If this is made mandatory the quality of the generic drugs would improve significantly.
- Ensure that a qualified and trained pharmacist, who has adequate knowledge about drugs and diseases and can improve health awareness among patients, mans all retail pharmacies.
- In order to bring a sustainable and lasting change in behavior, introduce recognition and reward systems among physicians who prescribe more generic drugs and make the names public to accelerate the rate of generic drug prescription.
- Strengthen the Drug Administration Department with adequate manpower to ensure compliance and establish good manufacturing practices (GMP) among all manufacturing units.
- It must be mandatory for a loan licensee currently leveraging on outside manufacturers to manufacture in its own manufacturing unit within a specified time, failing which the unit’s license will be cancelled after the notice time. This will rationalise the number of drug manufacturing units, improve their productivity and the overall quality of generic drugs. It would also help in stopping the pharma - physician nexus.
Currently, there are an estimated 92,000 pharmaceutical products in India, of which about 60 per cent are different versions of branded-generic or generic versions of single ingredient drugs. It is necessary to impose a cap on the number of generic formulations for each single-ingredient drug. This is by no means exhaustive. It is only to start the process of thinking holistically with a singular purpose of treating the cause(s) and not merely the symptom(s).
(Ch SVR Subbarao is former Director for Marketing at Sun Pharmaceuticals Ltd and Dr B Yerram Raju is an economist and risk management specialist.)