Wednesday, October 31, 2012

The seven point negotiation recipe with a banker

Negotiating a business deal with a Bank:

The Seven-point recipe.

Most CFOs and CEOs of mid-corporates find it tough to negotiate a business deal with a bank. Some CFOs have an uncanny knack of having their way through. Look at Mr Ajay, an young CFO who joined Merkel and Co a pharma franchisee with a Rs.100cr turnover during the last three years. The Chairman told Ajay on the day of joining, that the company is looking to expand its brand-image and improve its overseas’ sales by at least 150% in the next year and doubling it the next year. Banks are shying away at the moment. The enterprise requires higher working capital and packing credit facilities. The challenge, he could see, is formidable. He thought he had a recipe and it worked. How did it work?

Banks usually are tight-fisted in times of recession to grant enhanced limits. They also have full information of the enterprise, ecosystem in which it operates and the depth of the export markets. They also have a track record and credit record of the enterprise seeking to expand its operations.

But Ajay was sure that the Banks would not like to lose a good client for another bank. Since Merkel is a company of proven track record he was hopeful of the deal for higher limits on both working capital and export packing credit.

He took an appointment with the GM (mid-corporates) of the Bank one fine morning. He did his home work well. He gathered full data of the enterprise; environment in which the entire industry has been working; economics of his proposal; the area into which Merkel would like to expand; the types of clients the company is targeting; the distribution system of the new markets; the incentives company has on table; the drug controls of both India and the Asian economies in which the company is going to operate; the disease patterns there; government health care and insurance mechanisms; the IPR and above all the financials. He also worked on the stress testing of his projections. He presumed that in the first instance the Bank would know of the enterprise and ecosystem equally well. He started off with all humility. During the discussions, when he noticed that the depth of the officials on the areas requiring attention was not so high, he pitched his fork high. He left some issues deliberately for the bank to come up with subsequently. He did not press for a solution instantaneously. He left a cooling time with the Bank. He awaited a call from the bank three days after the first call. He went with his accounting team and with the required project proposal in the bank’s usual format. He took care to ensure that no additional collaterals would be offered. He kept under his armpit the directors’ individual guarantee to offer when absolutely necessary. Finally, when asked, he just mentioned that it was the company’s intention to go for public issue at a propitious moment and raise equity to meet future needs and therefore, it would be difficult to offer the same at the moment. The deal got through.

The recipe is simple:

1. Do your homework well: know your own enterprise, its SWOT.

a. Brainstorm possible implications of the proposal with the Board and internal management

b. Cushion the proposal with adequate collaterals and guarantees but keep it undisclosed

c. Go as a team for presentation with your confident technical and financial team for discussion.

2. Do not thrust yourself at inconvenient times for the banker

3. Be transparent during negotiations

4. Be humble

5. Never hide the data.

6. Go with a vision and a future plan

7. Give reasonable time to the Bank to think and come back with their offer.

Good in intent and Deep in expression

Monetary Policy October 30, 2012: Good in intent and deep in expression.

RBI in tossing between hope and despair over the macroeconomic reform implementation decided to symbolically respond to the recent key policy initiatives by marginally bringing the CRR down by 25basis points. Its key anxiety areas are: likely rise in headline inflation triggered by cost-push and supply-retarding factors in the backdrop of not-so-very-encouraging agricultural growth; sluggish manufacturing growth; and moderation in services sector growth in the backdrop of unstable global financial stability not withstanding commodity markets easing. The slowdown in economic growth would continue to stare at us. It remains to be seen as to how much of Rs.17500cr released with CRR cut would result in corresponding increase in the credit flow to the deserving sectors. Governor could not have done better in the given circumstances, notwithstanding the pressures from the India incorporated and the Finance Minister to reduce the key rates.

If one looks at the key factors behind the slowing down of growth – the falling domestic savings – a fall from 36.8% in 2007-08 to 32.7% in 2010-11 and the estimated slowdown of further 3 -4 percent in 2011-12 is a cause for worry. More particularly, the household savings and financial assets have come down from 11.6% in 2007-08 to 10% in 10-11; a slip in savings rate of public sector by another 1.7% and the sluggish deposit growth of commercial banks during the first and second half of 2012-13 – are a fall out of the persisting inflation. The fuel rates are up; domestic gas rate is up; slowdown in agricultural production any way pushed all the farm product prices northwards; transport bottlenecks not eased; exports showed only a marginal increase; the FDI and FII investment rise is symbolic supporting the recent policy initiatives; there are clear signals of railway passenger rates going up; the prospect of rabi crop rising is marginal and therefore, the supply side constraints have no hope of easing.

Coming to the releasing Rs.17500cr, it is a matter of big doubt whether most of it would go to areas starved of credit, notwithstanding the easing of priority sector credit norms. There has been no evidence in the past that either the earlier reduction in SLR and CRR has been put through the credit window. The amounts have gone to fund the safe havens – treasury bonds. The NPAs showed a decline lately; but the decline when looked at carefully, can be traced to corporate debt restructuring. The restructured debt can be recovered only when the order books of companies increase substantially. Such recovery is remote in the backdrop of unabated inflation. The micro and small enterprise sector is crying for credit but their sob stories cannot find real answers in the backdrop of corporate fall outs. The large manufacturing sector has to keep the MSME order book rising when the banks see comfort in lending to the MSMEs and this is hard to come by. The credit to the farm sector is more government driven than the sector driven. In the light of the farmers looking for another big write-off bonanza with 2014 General Elections just one and half years away, it is hard to expect banks to go in a big way to fill the farm credit gaps. It is time that the Banks decide whether to give Rs.4500cr to a corporate that could go for restructuring and also face sovereign risk, e.g., King Fisher and the like or to spread it to 45000 clients with Rs.10lakhs where the credit risk is likely to be around 5%.

Infrastructure, real estate and retail sectors are not exuding confidence in lenders with the huge corporate debt restructuring already on their books. It is only manufacturing sector that is leaving some hope for enhanced credit flow in the next six months. Unless the Government seriously addresses the issues confronting the mining, electricity, gas and water supply, the pick-up of the manufacturing sector would continue to live in hope and so do the MSMEs. There can be a virtuous credit cycle in motion and this depends upon the reform-action rather than reform-intent.

The hope of services sector fueling growth depends on the rising disposable incomes, low interest rates and credit-fuelled consumer spending. Last year services sector expanded by 8.5%, less by 0.7% than in 2010-11. Financing, insurance, real estate and business services and construction sectors in this segment have driven the growth. The first quarter of the current year also indicated the same trend.

Easing monetary policy is a shade less important than strengthening the fiscal policy. Fiscal policy is thus far a pack of intents. The cash subsidy scheme to materialize in a country of our diversity will depend upon the aadhar linkage and this linkage is slow to materialize. The disinvestment of Rs.30000cr announced by the FM a day before this monetary policy release has many doubts on the horizon in the light of past performance and the swinging stock indices, slow investment inflows as also the unstable rupee. The current account deficit ruling high now has also left more aspiration than action.

Monetary policy announcement is an important event more to introspect and prospect than to experience a comfort and strength.

Saturday, October 13, 2012

Financial Sector Reforms on the Edge.

Entry of FDI in Insurance is fine; but in pensions, it is fraught with high risk. Europe and US provide ample evidence for the anxiety. But there are other reforms in the Financial Sector waiting.

IMF in its latest study felt that the financial sector globally has not gone far enough on the financial sector reforms and the system is no safer now than it was when it crashed in 2007- 08. The message was in favour of more high quality regulation and called for a ‘reboot’ of the system onto a safer path".

The latest Financial Stability Report from the RBI also confirms that the risks to financial stability have worsened although financial institutions are largely resilient to credit, market and liquidity risks. Technology, the facilitator for speed and accuracy, started turning riskier than ever. While partial nationalisation of banks post crisis did the bailouts both in US and UK, it has its caution. When Basel III demands infusion of funds on an ongoing basis, FRBM would render the Government’s efforts riskier than ever pinching the taxpayer aggressively. Holding the same argument as for Insurance while permitting 49% FDI, why not lessen the Government share in public sector banks and pave the way for market efficiencies to allow public investments in Banks?

It would also appear that the small banks would have to find a way for a comfortable exit when the going is good and the market sentiment is favourable if they have to conform to the capital adequacy standards and other provisions of Basel III or opt for Mergers and Acquisitions. But the small banks adopted technologies faster and proved better reach to their clients. Their exit would harm the interests of several customers loyal to them.

At a recent Conference at PRMIA, Hyderabad a view has emerged that the asset liability mismatches are likely to move to a different trajectory when the depositors would like to move more to shorter terms and alternate investment paths compared to savings of long term nature. When the longer term deposits gradually exit, in the absence of development financing institutions, it would be difficult to fund long term loans needed both for the infrastructure and real estate sectors. Will the Government be able to keep on refurbishing capital at each knot of the shortfall in nationalized banks that constitute a little over 80 percent of the total banks in India? How should Banks respond to risk capital concerns in the emerging markets?

All along, risk management practices in emerging economies have been driven by regulation and intense supervision. The other side of risk, namely, the reward is forgotten. When does the coin turn to the other side and what the Banks need to consider and remedy? There is a crying need for revisiting the financial sector reform agenda at this crucial moment.

The conservative regulator, distancing from capital account convertibility, and non-introduction of derivatives saved the Indian financial system and economy from the contagion effect of global recession in 2008. But we could not stay far from it for long and throughout 2011and till now in 2012, the policy makers blame the global effects of Euro fall and job losses of US in the wake of continuing recession-effect for the ills of the Indian economy. "The financial sector is putting pressure on the government," the BIS Report 2012 adds. "Governments, with their deteriorating creditworthiness and need for fiscal consolidation, are hurting the ability of the other sectors to right themselves. And as households and firms work to reduce their debt levels, they hamper the recovery of governments and banks. All of these linkages are creating a variety of vicious cycles." The rate cuts did not lead to enhancement of credit indicating declining risk appetite on the part of the banks. Even the CRR cut in the previous monetary policy announcement led only to investment surge and safe havens from the banks.

The rising NPAs arising from three factors – global impacts, slower growth on domestic front and some irresponsible lending, unlike the pre-reform shadow of directed lending programmes, are serious concern. Due diligence of firms and their directors, expectations of financial flows are turning out faulty with billions of rupees getting unearthed in frauds and collusive part of banks being questioned in the process. ATM frauds are on the rise. Manipulations are maneuvering the systems.

Capacity Building on low key:

Man to machine recruitment policies and rising attrition levels have contributed to rising costs of training and capacity building efforts. Cost-effective training into domain and non-domain areas like basic banking, technology, risk management, insurance and sector specific skills is still not reflected as investment in human resources in the balance sheets of banks.

In fact, Narasimham Committee suggested in its very first report that the government should gradually reduce its share in the PSBs. Instead, we saw its increasing participation and interference. May be that the present Finance Minister, an ardent reform advocate making bold now, would revisit the reform agenda.

It is not the size of the Bank but the quality of service and proximity that become crucial to financial inclusion agenda and therefore, the small and big banks, the public and private sector need to co-exist. The holding company concept with all checks and balances may become relevant for getting critical mass in shape in the financial sector. The less-attended cooperative sector needs also dedicated support for a clean-up and reform process. This calls for specific budgetary commitments from the Finance Minister with a specific restructuring agenda. The economist in politician is seeing the twilight on the sky. This is the best time for ushering in another bout of financial sector reforms.