Saturday, September 16, 2017


Industrial Policy 2017 needs re-discussion to make a stronger case for MSMEs: Expert

New Delhi, Sept 15 (KNN) With reference to the draft Industrial Policy 2017, the government has announced a set of measures for the different sectors of the industry, including the Micro, Small and Medium Enterprises. However this is a need of discussion along several lines in order to make the policy a strong case for the sector, Yerram Raju, Economist opined.

Sunday, September 3, 2017

Guru Brahma Namonnamah

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.
“గురువులు, శబ్దబ్రహ్మ
స్వరూప లలితాశ్రయులు,  రసవదిష్టార్థ
స్ఫురదమృతకంఠులు,  కవీ
శ్వరులు, తదుద్బుద్ధ చరణ చరితము నెంతున్‌. మాతృ గీతా; Acharya Rayaprolu Subbarao

Saturday, July 29, 2017

'For Whom the Bell Tolls?' Bank Mergers

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

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

Obstinate NPAs refuse to leave

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

My address at the launch of LOGO and website of TIHCL

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

Ethics and Governance in Banks in India

Banking reforms should target ethics and governance
Dr B Yerram Raju  and  Vikas Singh
02 May 2017 14  

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

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.)

SMEs' Access to Equity Markets

SMEs Access to Capital Markets in India
It took almost a decade since the SME Exchange has been formalised to see 60 floats in a month. Still the total number of listings on the SME bourses is not something that the growing Indian economy can be proud of.
In India, most SMEs operate in debt markets. Cost of raising debt for SMEs is increasingly becoming problematic both from the points of adequacy and timeliness and most often banks remove the umbrella in times of either too hot Sun or heavy downpour. But in a digital world simplifying businesses in the small sector also demands investments where the returns come gradually and not at the pace at which a financial institution extending credit demands. It is therefore necessary for the firms in the sector to look for enhancing equity.
Debt is cumbersome and equity is costly. Later is better choice if the SME has a modicum of discipline as creditors armed with amended SARFAESI Act 2016 and Insolvency and Bankruptcy Code are likely to be draconian. But such access demands of SMEs, better financial discipline, healthy balance sheets, and good governance.  Scale of operation also matters for access to equity markets. Most often, The enterprise should have the habit of monitoring its debtors and creditors on a continuing basis and make finance a slave and not master of its operations.
“Need for Equity financing”
While SMEs face challenges in accessing credit, they may also lack awareness of equity as an alternate source of financing. The nascent financing requirements for a start-up are met by informal financing from friends and family. Such seed money invested in a small business is in the nature of equity but is not formally recognised as such in SMEs without a formal legal structure.
Even for start-ups that are more aware, the creation of a formalised venture often requires the aid of incubators and angel investors that provide financing and other services. Further scale-up then requires higher amount of capital, which is typically provided by venture capital funds. Apart from equity capital, the venture also needs debt for working capital.
Access to equity financing has been examined in detail in the Report of the Committee on Angel Investment and Early Stage Venture Capital (Mitra Committee), June 2012. The key issues are related to differential taxation of investments, and the need for certain enablers to expand the availability of equity capital for early stage companies. Small and Medium Enterprises (SME) The SME platform of the Exchange is intended for small and medium sized companies with high growth potential. The SME platform of the Exchange shall be open for SMEs whose post issue paid up capital shall be less than or equal to Rs.25 crores.
Across countries, the SME sector has thrived primarily on the back of access to financing through various facilities such as government-backed guarantees, credit insurance for export oriented units and schemes for equity financing. These facilities are supplemented by institutional infrastructure for advocacy, technical research, refinancing platforms and easy access to services. Both BSE and NSE of India have launched their versions of SME exchange in 2012.
BCB Finance Ltd (BSE) and EMERGE (NSE) are the two equity platforms. SMEs being small companies are at the beginning of their growth cycle and are also at the extreme end of the risk curve – very high levels of return are accompanied by very high levels of risk.
SMEs on the growth curve invariably look for easy access to capital. FDIs are also allowed for investing in SMEs up to 25% of equity without any prior approvals. In the emerging market scenario, where mergers and acquisitions have been increasingly surfacing, firms both in India and abroad have been looking for such options for expansion. But for this to happen, SMEs should have strong equity base and the SME exchange route is a safe option to access capital markets.
Facilitation for SMEs:
The two distinct advantages of using dedicated SME platforms are: easy listing norms; and IPO listing norms are simple. For an investor, it becomes easier to search from segregated stocks as there will be limited number of firms.
However, trading pick up has been slow. This has to improve only with the Market makers using some proprietary funds only for the purpose of supporting stocks through two way quotes on daily basis and hold a minimum specified amount of capital or stock in the SME. Confidence building in the exchange for small firms is extremely important at the moment. Minimum lot size is Rs. 1lakh.
Investors need to understand SME business risks and corporate governance principles and there is need for capacity building on this count.
A minimum preparation of six months is imperative for firms to access capital through this route and handholding has to be done by the EMERGE-like firms. Till November 25th 2016, BSE data reveals that while 161 firms with a Market Cap of Rs,16,155cr, raising Rs.1257 cr., 18 (12%) have migrated to the Main Board. No SME has been suspended till date.
Prabhat Kumar Committee on MSMEs while examining this issue categorically recommended that the SMEs on growth path proposing to access equity markets should be provided incentives. A few of them appear to be akin to some international practices in USA, UK, Israel, European nations, Turkey and China.
The Committee recommends that (i) the Government should meet a part of expenditure of SMEs incurred by them in the initial listing of their equity on the SME exchanges. This part reimbursement of listing expenditure could either be limited up to 50% of the total listing expenditure or Rs.I0 Lakhs whichever is lower; (ii) the Government should provide tax exemption for the investments in IPOs of SME companies under section 80C of the Income Tax Act 1961 within the overall prevailing ceiling limit of Rs. 1,50,000/-; (iii) establishing a separate 'SME Equity Investment Fund' by the Ministry of MSME to be managed by a professionally run entity of fund managers.
The government may also introduce a provision for Special Purpose Vehicle (SPV) to allow a group of angel investors to come together as an SPV and then invest in manufacturing start-ups. Even though angel investments are generally in a group, there is no provision to create an SPV for the same, so all individuals have to invest separately, leading to a large number of shareholders, which becomes an impediment for raising further funding from institutional investors.
Telangana Industrial Health Clinic Ltd., in the offing with 10% of corpus fund of Rs.100cr coming from the state government has in prospect a window to encourage manufacturing SME start ups to go to equity markets under a tie-up with the NSE-EMERGE with initial contribution of up to Rs.50lakhs or 10% of the float whichever is lower. The firm has a risk balancing model.
*The author is an economist and risk management specialist, presently serving as Adviser, MSME sector, Government of Telangana. The views are personal.

How to redefine and rebuild the banks in India

How to redefine and rebuild Banks?

‘Banks are basically meant to allocate capital to businesses and consumers efficiently.’ Post demonetization, customers feel the pain more than gain in banks. Farmers getting inadequate and untimely credit from banks take to huge private debt only to commit suicides later.

Manufacturing micro and small enterprises, the seed beds of employment and entrepreneurship, are being shown the door by the banks notwithstanding the CGTMSE guarantee up to Rs.2crore. Banks never went beyond the mandated Rs.10lakh guarantee cover for the MSEs.

Large number of customers is slapped with irrational minimum balances in their accounts and levy of penalties at will. RBI is averse to regulate such overtures in the name of micro management of banks being not their role.

With over 38% of the population still illiterate, Jan Dhan and Mudra Yojana as instruments of financial inclusion have only become compulsive agenda for the banking sector. Banks- Public sector or private sector, have their eyes set only on profit. Such profits are dwindling with net interest margins declining following the growing NPAs.

Institutional innovations like the Small Payment Banks, India Post and the likes as also the MFIs have also proved inadequate to meet the needs of the present leave alone the future banking needs of the population.

Cashless banking leading to poor inflow of deposits during the last four months and cashless ATMs demonstrate the erosion of faith in banking in India. Bad banking and good economy cannot co-exist and therefore, it is imperative that innovative institutional solutions should be thought of.

Indian economy targeting double digit growth ere long has competing clientele bases in the current milieu of banking. Domain banking has moved to high tech banking. Men at counters have now become slaves of the machine instead of being masters. Public sector banks have long back forgotten their purpose and their owner proving no better.

Emerging context requires that banking is redefined to meet the specificities of farming, employment, entrepreneurship, infrastructure, and international finance as distinct entities. In fact, Narasimham Committee (1991) suggested consolidation and convergence of the PSBs into six to serve the needs of the service sector, holding government securities, and retail lending; Local Area Banks to cater to the farmers and small entrepreneurs; International Bank to cater to the needs of exports and imports. Development Finance institutions, left untouched, would fund the infrastructure sector. FSLRC also echoed the same in its Report. This is the time to look at the spirit of such recommendations and rebuild the banks to regain the fast eroding trust in banking by the larger customer base of this country.

Breaking the nexus between the farmer and politician can happen only when there is mutual trust between the bank and the farmer. Farm sector, consisting of crop farming (organic, precision, green technologies etc.), dairy farming, shrimp farming, poultry farming, sheep farming and agricultural marketing by itself is inherently capable of cross holding risks, save exceptions like the tsunamis, severe drought for long spells, huge typhoons. It is only in the event of such natural calamities that a Disaster Mitigation Fund should come to the rescue.

The existing commercial banks should shed this portfolio in favour of RRBs and merge all the rural branches with the RRBs. RRBs should be redesigned to take to farm lending in a big way – from farm machinery to crop farming and allied sectors on a project basis. Insurance plays a vital role in mitigating credit risk and therefore, the insurance products should be redesigned and modified on the lines of South Korean model.

All the Rural Cooperative Banks could continue their lending to the farm sector parallel to the RRBs as the lending requirements are huge and farmers require multiple but dedicated lending institutions.

RBI has not been comprehensive in regulating the sector. It is better that NABARD is restructured to play an exclusive refinance and regulatory role over the entire farm and rural lending consistent with its purpose of formation. Its other functions like the RIDF can be relegated to a new institution hived off from the NABARD.


Nurturing entrepreneurship and promoting employment in manufacturing are moving at snail space in the Start Up, Stand Up and Make-in-India initiatives. Prabhat Kumar Committee (2017) called for setting up a National MSME Authority directly under the PMO to correct the milieu.

All the MSEs should be financed by dedicated MSE Bank Branches. All the existing SME branches should be brought under a new regulatory institution. SIDBI has disappointed the sector. It has to first consolidate all its FUNDS into just five: Incubation Fund; Venture Capital; Equity Fund to meet the margin requirements of MSEs when and where required; Marketing Fund to meet the market promotional requirements; Technology Fund; and Revival and Rehabilitation fund.

SIDBI should reshape into refinance and regulatory institution for the MSME sector with focus on manufacturing and manufacturing alone. It should divest its direct lending portfolio to avoid any conflict of interest. Its present lending to real estate and non-manufacturing MSME lending should be transferred to the commercial banks. RBI which is not currently able to cope with the regulatory burden of this sector can transfer it to SIDBI,

Vaanijya Banks (Commercial Bank):
All the existing commercial banks – both in the public and private sector – would do well confining to the project finance, lending to real estate, services sector, housing, exports and imports etc. All the Banks should constitute at the Board level a sub-committee on Development Banking to work on the transition arrangements to the above functionality.

Maulika Vitta Vitharana Samstha (Infrastructure Bank)
Huge NPAs have come from the practice of lending long with short term resource base coupled with lack of experience in assessing the risks in lending for infrastructure projects. ‘All the perfumes of Arabia’ (RBI’s structural debt restructuring solutions) did not sweeten the bloody hands of banks. It is time to revisit the universal banking model and reestablish Infrastructure Bank to fund the infrastructure projects and logistic parks.

These measures would help achieving the growth like never before.
RBI and GoI could constitute a High Level Committee to work on the modalities for transiting to the new structural transformation of the financial sector.

Saturday, March 25, 2017

Politics and Economics of Crop Loan Waivers

Cost of Crop Loan Waivers

SBI Chairman Arundhati Bhattacharya’s impromptu remarks on loan waiver promises of the States to the farmers have attracted the politicians’ ire. Equity and discipline are two sides of the coin of farm lending. If the Banks maintain equity, and care for lending discipline more, borrower discipline would not take a toll.

Loan waivers announced by the State Governments should be met by the state exchequer and not the centre, Venkayya Naidu, the Union Minister said. But when the BJP announced it, decrying the earlier moves of AP and Telangana Governments, it gained political traction and the states demanded a cake in the bargain from the centre with several like Maharashtra, Tamilnadu, Karnataka joining the chorus. Have farm loans become unviable and farmers untrustworthy borrowers? Are there no alternatives to rescue the farmers’ woes?

Unfortunately, lending discipline is lax. Roll over of crop loan with interest as a new loan (this we call book adjustment) and a small incremental credit for crops that take more loan component than that is actually grown on the field has become the order of the day. In South India, it is jewel loans that get accounted for as crop loans. Otherwise one cannot find an explanation for only 20.9% of crop loans getting insurance cover against the mandatory debit of premium for all the crop loans disbursed.

Some grameen banks are debiting processing fee and inspection charges for crop loans and that too without the borrowers knowing it. On top, they charge interest on those debits if not able to recover them.

Arm chair lending even for farm sector has become the order of the day due to inadequate or lack of field staff. Earlier, controlling authorities and even top management used to visit the adopted villages as a semblance of identifying with rural credit activity. One is hard put to find such visits. These are not wild allegations, but facts that came out during the crop loan waiver evaluation done in Telangana by the Development and Research services private limited.

Farmers did not fail the nation in spite of failure of the monsoons, failure of governments not releasing the promised incentives in time, insurance failing them year after year and markets ditching them on the price front. But bankers failed the farmer and the nation with absolute impunity. Any crop loan target set for them by the government is shown to be achieved.

Earlier Loan write offs of 1990 for Rs.10000cr and Rs.70000cr of 2008 were a political stroke and were criticised for lax implementation by the CAG Audits placed before the Parliament.
Telangana Government waiver scheme covers only institutional crop loan including jewel loans outstanding as on 31st March 2014 up to Rs.1,00,000 per farmer family, spouse and dependent children. It defined eligible short term production loan as loans given for raising crops that are to be repaid within 18months and includes working capital loan for traditional and non-traditional plantation and horticulture. Claims are reimbursed by the Government on the basis of a certificate from the bank that the waived amount has been actually credited into the farmer’s account.
Every lending institution is mandatorily responsible for the correctness and integrity of the list of eligible farmers under the scheme and the particulars of loan waiver in respect of each farmer. All the bankers are expected to provide fresh loans as the existing liability up to Rs.1lakh per farmer family has been picked up by the state government under the scheme.

Evaluation exercise revealed that the farmers to the extent of 70% are happy with the reprieve given to them particularly because they were affected by severe drought for two years in a row although they were unhappy that the waiver instalments were released late leading to delay in release of fresh crop loans by the banks. Fresh crop loans were inordinately delayed in 60 to 70 percent cases during 2014.They wished that the state government would have released in one single go the announced benefit.

55.5% was the share of the crop sector in the total agriculture loans. Government of Telangana agreed for writing off crop loans to an extent of Rs. 16,160crores constituting 76.19% and gave detailed instructions to the banks after consulting the SLBC.
The State having more than 80 percent of small and marginal farmers with loans from multiple institutions and also from private lenders and traders faced problems in addressing the competing demands on the claims for waiver.

Banks’ loan books and farmers’ land record passbooks proved equally non-transparent. Borrowers as well as their parents with identical names figuring in different banks posed impregnable identification issues requiring over six months for resolution at the sub-district level before the first instalment was released.

Average loan amount subject to waiver was a little less than Rs.55000 per farmer family against the announced Rs.1lakh.
Major Public Sector Banks had gross NPAs in Short term crop loans of the order of 2.4% in 2016 as against nearly 8% in 2015.

DRS study came to the conclusion that loan waivers are not a permanent solution to the recurring problems of the farmers either due to man-made or natural calamities.

Solution lies in appropriate insurance mechanisms with individual farmers and income insurance as focus and not the crop insurance that takes threshold limits of crop yields based on area affected historically.

South Korea that supports agriculture sector ranking top among the world’s highest subsidy providers, offers excellent example in this direction.

Korean farmers also get the benefit of a comprehensive agricultural insurance scheme managed by the National Agricultural Cooperative Federation (NACF) with reinsurance support on a quota share basis from a group of domestic reinsurers. The government supports the scheme in four different ways i) provides 50 percent premium subsidies for crops and livestock; ii) acts as a reinsurer of last resort for the liability in excess of 180 percent local market loss ratio;(iii) 100 percent of the NACF’s crop insurance operational expenses and 50 percent of livestock insurance operational expenses are subsidized by federal government budget; and (iv) It participates in product research and development. The insurance coverage in Korea is voluntary.

It will be worthwhile investment on the part of government both in terms of time and resources to provide sustainable income insurance to the farmers on a pan India platform on similar lines, so that the recurring demand for the loan write offs can be warded off.
*The author is an economist and risk management  specialist and part of the DRS Study Team.

Tuesday, March 21, 2017

Pre-merger SBI on the verge of bankruptcy?

Customers of State Bank of India (SBI), especially in south India, are forced to ask whether SBI is headed for bankruptcy as they find 99% of the automatic teller machines (ATMs) shut down and all branches declining withdrawals from the depositors’ savings account beyond a limit. Bank branches are refusing to honour cheques drawn on them, either their own or on third party, in spite of sufficient balance in the account. To top it, the bank’s branches refuse to give written objection for returning the cheque across the counter.  

In February, SBI, in a regulatory filing had stated, “…the entire undertaking of State Bank of Bikaner & Jaipur (SBBJ), State Bank of Mysore (SBM), State Bank of Travancore (SBT), State Bank of Patiala (SBP) and State Bank of Hyderabad (SBH) shall stand transferred to and vested in the State Bank of India from 1 April 2017.”

What does the rule-book say? Is it because of systemic failure or management failure? Does the blame rest with the SBI, or with the Reserve Bank of India (RBI) as well, as it has been a silent spectator for the last 15 days? Just last week, when Bandaru Dattatreya, the Union Minister for Labour, approached the RBI’s office at  Hyderabad, the central bank said that it has pumped in Rs1,170 crore worth of currency into the system, with half of it in the ATMs of banks and the rest to the bank branches.

Section 5 (c) of the Banking Regulation Act, 1949 defines a banking company as any company that transacts ‘banking business’ in India. 

The Act clarifies, in clause (b) of the same section, that the expression ‘banking’ found in the definition should mean accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheques, drafts, order or otherwise. To constitute the business of banking today, the banker must also undertake to pay cheques drawn upon himself (the banker) by his customers in favour of third parties up to the amount standing to their credit in their ‘current accounts’, and to collect cheques for his customers and credit the proceeds to their current accounts. Lending by itself does not constitute banking business, clarifies ML Tannan. 

A recall to all this became necessary, for the banks, even of the ilk of the SBI, seem to have forgotten the basics of banking. Yesterday I paid a carpenter for the work done at my house, by way of a ‘bearer’ cheque drawn on my savings bank account, Rs13,750, which was presented at the counter. The official at the counter and the accountant refused to pay the amount, saying that they can pay cash only up to Rs5,000 as they do not have enough cash. This is not a solitary instance. During the last fortnight, many customers faced this situation. Many members of the Resident Welfare Association, Kalyanapuri, Hyderabad, brought up this issue and demanded its resolution.

The payee asked for written objection, which the bank officials refused to provide. The cheque was otherwise in order in all respects – with proper date, proper signature, with no difference between words and figures and on top of all adequate balance in the account.  Negotiable Instrument Act requires that if a cheque or Bill of Exchange, is returned either on the counter or in clearing, an objection memo duly signed by the authorised official of the bank shall be provided with relevant reason.

In case a bank branch declines to honour the cheque in writing for want of cash in its vaults it would amount to the bank going bankrupt. In the case of SBI it is also the Agent of Reserve Bank of India and operates currency chest at number of branches. Whenever one branch falls short of the cash, the Bank is supposed to make arrangement for filling the vault with the required quantum depending on the needs of the branch. The transaction between the branches on such count can form internal cash management of the bank and only information to the RBI is adequate.

Contrary to this entire practice if the bank chooses to tell its customers that since there are not enough deposits coming into its vault and is therefore restricting payments to its customers withdrawals up to whatever limit it decides surely amounts to sheer mismanagement and frustrates the customers.

Since the bank is shutting off the ATMs and refusing to pay cash either in full or in part, the customers seem to have stopped depositing cash into their accounts and preferred to keep cash for the rainy day and meeting their essential cash requirements. This sets the vicious circle into play.

Whenever creditors’ demands are not met and assets do not support liabilities of a bank, that bank is said to be on the verge of bankruptcy. But by statute, the SBI cannot go into liquidation at its will.

Customers are losing faith in the banks with which they have been transacting for decades!! Bad banking and good economy can never co-exist. Let not SBI declare bankruptcy ahead of its merger.

Saturday, January 28, 2017

Budget 2017 for MSMEs

MSMEs and the Union Budget 2017

This is the time of expectations amidst the gloom of demonetisation. MSMEs hit worst in post demonetisation are looking eagerly to the FM for careful crafting of fiscal policy to boost the morale of MSMEs, particularly those in the manufacturing sector.

Banks have almost shut their doors to the manufacturing micro and small enterprises by biting their teeth strong through the recently amended SAFRAESI Act provisions. Their courage melts in the case of corporate defaulters. Large corporate defaulters cast a shadow of default on their vendors in the small sector and the banks are unwilling to buy this argument though the NPAs in the small industry segment is not significant compared to their elder brothers.

MSME Credit Supply Shrinks

Commercial Banks proved sweet nothings in their offerings to the MSEs while a myriad of their loan products focused on medium enterprises or the mid-corporate sector. 

Manufacturing MSEs going by RBI November 2016 data reveals that they share 42.9% outstanding credit with a negative growth of 9.2%. Manufacturing sector was the largest employer providing employment to 30.3 million (23.1%) persons, 78.9% of whom are in proprietary enterprises – mostly MSEs (Sixth Economic Census). Notwithstanding Jan Dhan, financial inclusion viewed in this prism is yet to gain colours.

Demonetisation only added further woes upsetting the credit supply to the MSEs as acknowledged by all the Industry Associations and grudgingly by the banks. It is time to see what is in store for the micro and small enterprise sector in the coming year’s budget.  
Innovation holds the key for inclusive entrepreneurship. If ‘Make in India’ were to succeed it should happen in rural India as well. In several States rural entrepreneurship is very backward mainly because of the following reasons:

Land, the key input has become scarce and is highly overvalued for any rural enterprise to access. Affordability distances the enterprise set-up. The entrepreneur cannot access the needed infrastructure with full compliance to regulations because he is ignorant of the latter. He realizes the cost of compliance is going to exceed the cost of avoidance.

Start-up MSMEs find it almost impossible to invest in land because of its prohibitive cost. Building rural industrial townships by the States with the required infrastructure like, safe drinking water, industrial water, electricity, packaging, testing and branding or co-branding facilities, multi-storied residential complexes for the workers on lease basis with industry participation, primary and upper primary schools, crèches, play grounds and cultural spaces would be the best alternative to boost this sector. Fiscal incentives like income tax exemption for a five year period for investments in such infrastructure would be in order.