Showing posts with label Equity. Show all posts
Showing posts with label Equity. Show all posts

Sunday, August 9, 2020

Monetary Policy Statement 6 August 2020

 

Some Healthy Deviation and Unfulfilled Expectations

The twin objectives of Monetary Policy – Containing Inflation and Promoting Growth – have largely been addressed in the latest Monetary Policy Statement of the Governor released on the 6th August, 2020. Economy continues to face unprecedented stress in the backdrop of unabated pandemic. Inflation of 6.1% is +2% over the inflation target of RBI.

RBI says that inflation objective is further obscured by (a) the spike in food prices because of flood ravage in the north and north-east and ongoing lock down related disruptions; and (b) cost-push pressures in the form of high taxes on petroleum products, hikes in telecom charges, rising raw material costs. These factors led the Monetary Policy Committee to hold to the existing policy rates undisturbed.

Fitch and other rating institutions say that global growth tumbles in the face of pandemic growing uncertainty. ‘All manufacturing sectors remained in the negative territory excepting pharmaceutical sector. Manufacturing PMI remained in contraction at 34.2. Rural demand increase is the only silver line in the economy. Services sector indices show modest resumption of the economy. Yet tourism and aviation, passenger traffic in trains and buses do not show any signs of recovery. There is broad realization that monetary policy should drive credit in sectors that need most and the Banking sector requires more attention.

Liquidity pumped into the banking sector is of the order of Rs.9.57trillion or 4.7% of GDP with no show of risk appetite among banks. This has only assured the Depositors that the money is safe with banks and there is no need for hurried withdrawals for consumption needs.

CREDIT POLICY

The main driver of the consumption, credit activity of banks is mooted. Lot has been expected from the RBI on the credit policy front. Let me first deal with the best things first: Priority sector lending guidelines have been revised reducing regional disparities in the flow of credit and broadening the scope of priority sector to include credit to the Start-ups in the areas of renewable energy, including solar power and biogas compression plants; and, increasing the targets for lending to ‘small and marginal farmers and weaker sections.’ Incentives for lending to these sectors is related to credit flow to the lagging districts and assigning lower weight to incremental credit to priority sectors in districts where comparatively higher flow of credit had already taken place.

MSME Sector:

RBI Bulletin July 2020 indicates that during the current financial year so far, year-on-year growth is -7.6% for manufacturing MSEs and -5.4% for medium enterprises.

MSME Pulse Report indicates covid vulnerability high among 63 percent of the MSMs. Only 31 percent are strongly positioned to come back. It is these that will be pepped up by Banks and not the vulnerable even if they are standard assets. The outbreak of the Covid-19 pandemic will impact the profitability of MSMEs due to the declining market demand and rising operating costs in the new way of working.

Number of Studies, notably, ITC, Skoch Foundation, RGICS, CII, FICCI etc reveal that 59-74 percent of the MSMEs are highly risky and would be on the brink of closure if cash inflows do not support them upfront. GoI took the stand that they will be supported by Credit while those that are weak will be supported by sub-ordinated debt or Equity. This Equity product is yet to roll out from the government although Rs,20000cr guarantee backed fund is allocated in the package.

The Policy nowhere referred to the credit-driven Covid-19 Atma Nirbhar Abhiyan packages. Package one related to the standard assets at 20% additional working capital under Automatic Emergency Credit Relief Guarantee from National Credit Guarantee Trust. Against the Rs.3trn target under this window for standard asset ( Units that are performing or continuing their manufacturing activity) to be achieved by the end of September 2020, Banks have so far sanctioned around Rs.1.6trn of which 60% is disbursed. There are field reports that Banks are seeking to extend the existing collateral and/or guarantee to the additional working capital. The disadvantage for the borrowers is on two counts: one fresh documentation involving stamp duty of Rs.1000 and 2) their existing collateral will get extended for the additional working capital and this is quite contrary to the intentions of the scheme.

The second scheme, involving stressed assets under the category of Special Mention Accounts-2. The broad guidelines released are:

¡  Account shall be -

Ø  Standard as on 31.03.2018

Ø  In regular operations during 2018-19/2019-20

Ø  SMA2 later or NPA as on 30.04.2020 , and;

¡  Commercially viable enterprises post revival

¡  7-yr moratorium for principal amount of subordinated debt/equity

¡  Interest payable every month

¡  Subordinated Debt amount up to 15% of Debt O/s or Rs.75 lakh, whichever is lower will be given as personal loan to the promoter for a 10-year tenure. This amount should not be used for recovery of NPA. Entrepreneur can use this to meet his cash deficit, for meeting the payments to labour and making the unit covid-19 compliant.

¡  Unit should revive in 5 years –RBI Guidelines of March 17, 2016.

¡  Unit should be on growth path for 10 years

¡  Scheme Valid till 30th September 2020.

Banks have not rolled out this package so far. RBI Master Circular of 2016 on Revival and Restructuring (RBI/16-17/338 dated March 17, 2016) stipulates: 1. Corrective Action Plan; 2. Revival and Restructuring of all viable manufacturing enterprises and 3. Recovery of the unviable through legal means. Banks have not implemented most of these instructions, save rare exceptions. Under the Subordinate Debt scheme, the enterprise should be first viable; it should be currently running whatever be the capacity utilization, and then, it should be restructured to see it as a standard asset in a year’s time and additional revival package and sovereign obligations if any to be recovered fully before the five year period concludes. Initial moratorium for the revival package would depend upon the viability arrived at. District Committees had to be formed and they should decide on the viability.

For all such units with outstanding liability of Rs.10lakhs and below, the Branch Manager is the deciding authority for reviving the unit while for the units over and above this limit, appropriate authority as decided by the Bank will take the call and place it before the District Committee. Though several Banks committed to the RBI that all such District Committees were set up even by December 2017, most of them are dysfunctional.

Under these circumstances, RBI announcing MSME revival and restructuring of enterprises falling under the category of GST-registered Standard Assets as on 1.3.2020 before 31st March 2021 looks ambivalent.

The virtuous thing about the current instruction is that the asset classification as standard may be retained as such, whereas the accounts that may have slipped into NPA category between March2, 2020 and date of implementation may be upgraded as ‘Standard asset’ from such date of implementation. Banks are expected to maintain additional provisioning of 5% over and above the provision already held by them for such assets.

RBI should have allowed such forbearance for all the assets revived under the Atma Nirbhar Bharat Abhiyan -2 (Equity-driven revival). While Banks are aware that such any additional loan consequent to revision will be treated as standard asset, their reluctance to revive the viable enterprises is absolute risk aversion.

The only saving grace is that sale of securities to the ARC will now attract higher provisioning. This should trigger the thought that by reviving the asset instead of sale to ARC they would gain in provisioning as the asset is likely to be standard asset at the end of one year of revival. 

Monetary Policy viewed from the MSME perspective, is like what GoI proposes, RBI disposes. Apathy towards MSMEs still continues.  It is suggested that the RBI and GoI be on the same page in so far as MSME revival is concerned and second, shorten the period of decision making to just two weeks as against 55 days’ process indicated in the Master Circular of 2016 referred above.

Government of Telangana seems to be taking the lead in the revival of MSMEs. Telangana Industrial Health Clinic Ltd., set up by it, has put on its website, the Learning Tool for Revival and a Revival Pre-pack online for the enterprises to log in and post the details for quickly deciding on the prospects of viability.

Retail Loans:

As regards personal loans, RBI recognising that these loans falling under Retail Loan portfolio will be the next NPA balloon that will blow off, has accommodated the Banks through a resolution plan. It has been the practice of several Banks both in the Public and Private sector as also a few NBFCs to grant the personal loans wherever the related corporate accounts are held by them. Because of slow growth and the pandemic, several have lost their jobs and personal loan segment has come under severe pressure. RBI left it to the wisdom of Banks concerned to invoke the resolution plan by December 31, 2020 and shall be implemented within 90 days thereafter. There will be no requirement of third party validation or Expert Committee, or by credit rating agencies. Board Approved Policy will be necessary, and the resolution plan shall not exceed two years. Banks will have big relief on this score.

This Monetary Policy recognized the economic environment as tough to recover in the immediate short term. At the same time, it failed to provide the real growth impulses in invigorating the MSMEs to the required degree and failed to generate the risk appetite among banks. It looks more worried about the capital of banks than credit to the required sectors at the required speed.

The views are personal. This is an invited article from Skoch Foundation.

 

 

 

Saturday, May 23, 2020

The Sweet and Sour Package for MSMEs



Following the PM’s thunderous announcement of Rs.20trn constituting 10% of GDP, the highest by any government post-pandemic, the Finance Minister came up with a six-point package sounding big relief for the MSMEs. When the final figures came for counting the five-day pack whittled down to bare 2% of GDP. Will the relief be long lasting or comfort, lasting for short time?

MSME sector is soar over the package as it did not provide virtually any relief for either payment of wages or immediate payment of bills pending with the government itself ( approximately Rs.5trillion – both the GoI, PSUs and State Governments) and even forbearance of the loans for at least 180 days.
The initial moratorium on the term loan instalments and working capital and the deferment of working capital were just a breather in pandemic. Since the units were under lockdown, most of those availed, have no output to support the additional working capital. They are now offered relief in the margin. This would mean that the Banks would give more working capital loan against deficient stocks, wages to the labour for the lockdown period etc.,- knowing it as an unsustainable debt because there is a National Credit Guarantee Trust and there is pressure to deliver by September 2020. Against this, Cabinet provided Rs.41,600cr over a three year period. Banks are not happy with this type of guarantee dispensation since they still have to provide for likely capital erosion.
MSMEs that received the incremental credit during the quarter Mar-June 2020 post-Covid at 7.4% p.a., are now told that they have to pay 9.25% for Emergency Credit Relief Package extending over four years with a moratorium of one year!

The other measure is a follow-up of Budget 2020-21. The FM announced sub-ordinated debt  (SOD) at the hands of the same banks that have all along been winking at the revival of micro and small enterprises and on easy and timely credit access as part of Covid relief package.  
Banks that do not have a subordinated debt in their balance sheets thus far, should now look for providing it under investment category and that too upfront labeling it as NPA!! They should develop standard operating procedures and help the clientele know of the nuances of availing it. To embrace innovation for a sector that is always viewed with suspicion, will they fall in line with the thinking of the FM?

Subordinated debt in simple terms is defined as a debt subject to subordination when there is creditor’s default. If ‘A’ Bank has offered a subordinated debt to a micro, small or medium enterprise, and this enterprise goes bankrupt after a certain period, and therefore becomes a defaulter. Bank cannot claim the money it has given as a loan from the enterprise’s earnings or assets.
After the senior debts are paid off in full, the left over will accrue to the clearance of the subordinated debt. Singular advantage however is that in case of Companies (this category is just 2 to 2.5% of the total MSME borrowers) bank will receive its SOD claim ahead of preferred and equity shareholders. Banks will be able to recover their usual unsubordinated debt in the shape of term loans and working capital ahead of sub-ordinated debt.

This simply means that SOD is riskier than the normal term loan and working capital loan offered either as cash credit or overdraft. Banks that have been lurking to grant loans against CGTMSE guarantee to the extent of Rs.2 crores cannot be expected to grant SOD again at the same guarantee window!

Sub-ordinate debt, by definition, stands higher in risk and lower than the principal loan in terms of claims by the Bank. For Rs.20000cr infusion, CGTMSE is being given Rs.4000cr. It would have been a fairer had she extended the Rs.3lakh sovereign guarantee cover to these set of borrowers too. Offering this high-risk product to already declared NPAs could trigger lot of problems in operationalising this product.

It will be now for the Banks to roll out the product. Standard operating procedures for releasing this SOD will be very tough if not tricky for the Banks. On top, the CGTMSE guarantee with which the banks are already unhappy is supposed to provide guarantee. Quite likely, several of the 2lakh MSMEs pitted out this benefit may have already been covered by the CGTMSE and the claims must be hanging at one end or the other for consideration in order that the banks concerned will close the NPA accounts!!

It is advisable instead to offer equity to micro and small manufacturing firms – proprietary or partnerships, most of them – up to 50% of their total financial requirements and the balance as debt. This equity should be left untouched by the Banks for a period of five years. The purpose for which such equity is rolled out shall be for buying a leasehold right/outright sale in the site where the manufacturing unit is set up and or purchase of machinery/technology or acquiring of intellectual property rights. Once it is given as equity, Banks will be forced to become the development partners that may provide route for scaling up the enterprises from the micro to small and small to medium.
Assessment of revenue stream and monitoring it continuously is extremely important to culture the enterprise in apportioning some percentage towards the equity contributed by the Bank. There are two ways of ensuring this: 1. Banks physically monitor the functioning of the enterprise as its partners to its committed capacity; 2. Set up a consent-based ERP architecture to monitor their debtors, creditors, sales and cash flows on the system. The purpose is to ensure that any aberrations are remedied timely.

Such equity can flow across the enterprises but shall be on sound credit risk assessment and effective follow up and supervision.

Banks with their limited manpower can hardly be expected to do the former. Handholding, mentoring and counseling continuously and ensuring that the enterprise makes seamless transition from unorganized to organized, Banks may have to outsource these services to competent and State Government accredited professional institutions. Even regarding the second step, Banks should be able to re-engineer their work- spaces and train their executives to catch up with the task.
Relief package is at best a pack of intentions. The relief is additional loan burden. MSMEs’ cost of production will go up at a time when they are totally uncertain about the demand. They also become uncompetitive compared to any other SME across the globe that has received cash relief and interest-free loan to rebuild their manufacturing business.

Neither RBI nor GoI has issued operational guidelines for the treatment of existing NPAs. Without revival of the viable micro and small manufacturing enterprise and carving out a definitive future, Banks taking part in equity of such firms through sub-ordinated debt route will be a wild goose chase.
But for the risky NPAs, sub-ordinate debt to roll out is a future, worthy to watch. Banks may innovate, who knows? In essence, the package is sweet in words and soar in delivery.

https://telanganatoday.com/sweet-on-words-sour-in-delivery


Monday, October 7, 2019

Equity route the best for scaling up in MSMEs


Trust equity to transform MSMEs
Along with its good oversight, equity brings greater financial discipline right from the start
By Author
B Yerram Raju  |   Published: 7th Oct 2019  12:05 am Updated: 6th Oct 2019  10:17 pm
It is well known that the micro, small and medium enterprises (MSMEs) live in debt markets in India unlike in many other parts of the world where they access equity and debt in reasonably good proportion. In India, 93% of MSME credit is flowing to just 13 States. This skewed distribution requires correction.

Of late, genuinely worried about the continual decline in credit to MSMEs, the government of India introduced MUDRA to comfort these enterprises with Shishu, Kishore and Tarun products. But not even 10% of the total 17 million estimated enterprises was in the manufacturing sector. Then the government introduced 59Minute loan window. Both these efforts have not improved grassroots lending to the sector.

Driven to the wall, the Finance Minister pushed the panic button asking banks to do aggressive canvassing of loans for MSMEs and retail in 400 district-level shamiana meetings. The FM must be aware of both adverse selection of beneficiaries and moral hazard consequences. She expects the banks to tackle them effectively.

Convenient Option

But are there no other means of meeting the financial requirements of MSMEs? Why is equity not being explored as a convenient option? Is it because of the unorganised nature of the sector or because of the undependable clients in the sector? Or both?

Debt has been the most convenient option driven by perverse incentives right from 1950 when the Industrial Policy was announced. Debt, apart from being less costly, takes less than 30 days to deliver while equity takes at least nine months, if not more, where the promoters are assessed through a rigid due diligence process and corporate governance and board rules are put in place before filing the IPO. This process can be shortened if the enterprise has credible historical data for the pre-launch and good governance structure.

Movement from micro to small and small to medium is more governed by greater stake of the promoters through equity infusion. Therefore, such a transition is also extremely slow.

Enabling Ecosystem

District Industrial Centres, introduced in 1980-81 when George Fernandes was the Union Minister for Industries, have been engaged by the State governments to dispense the incentives, raw material like coal, iron, and help in realisation of unrealised debtors through the MSE Facilitation Councils since 2006. The Facilitation Councils, however, did not succeed to resolve the problem of delayed payments to MSMEs.

Manufacturers are the worst hit. Hence, the FM came out with a strict mandate to the PSUs and Central government departments to pay up all their bills by October 15, 2019, and confirm. Hope this would provide a lot of liquidity to the beleaguered MSMEs.

For the transformation from debt to equity access, the ecosystem, capacities and capabilities of firms and the perceptions of entrepreneurs play an important role. Several entrepreneurs are knowledge-insulated and mostly unwilling to unlearn in their growth journey.

Successful Model

Equity firms can participate with the MSMEs over a seven-year period with a gestation period of 1-2 years. Revenue sharing is the model on which it operates and is assessed after sectoral analysis and exits at an appropriate time. The participating equity firm also keeps enhancing skills and scouts for market opportunities of the partner firm. The model is a success in the US.

This equity comes at a cost of 5% more than the market price of debt. But it brings along with it good oversight and greater financial discipline right from day one. Structuring finances and structuring enterprise during the growth is a seamless process.

Scaling them up requires a different level of investments to wean away the entrepreneurs from the protective environment to self-dependence. The biggest problem they invariably come across is the choice of directors for governance. While the Institute of Directors has got on its platform thousands of trained directors, accessing them at affordable levels and verification and validation of their credentials pose problems.

Incentivise Transition
With the economy targeted for $5 trillion by 2022, MSMEs as growth engines and seedbeds of innovation have a significant role to play. Such a role requires that they seamlessly migrate to a higher level of operations during the growth stage.

Fiscal incentives can help such a transition. Having eased the rules for FDI participation and amended the corporate tax structure, it is time to look at what best can be done to make MSMEs go for greater aggregation and contribute significantly to the growing economy.

We have the potential to overtake China if we trust our MSME sector more than now and provide more long-lasting solutions than kneejerk reactions.


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.