Showing posts with label corporate governance. Show all posts
Showing posts with label corporate governance. Show all posts

Monday, January 10, 2022

Coveted Corporate Governance Award to NATCO Pharma

 6th January is a day remembered for the unfolding of 'Satyam' Fraud. But the year 2022, thanks to Money Life Foundation, the day made a mark with the former Chief Election Commissioner, T.S. Krishna Moorthy presiding over the Corporate Governance Award function and M. Damodaran, Former SEBI Chairman delivering the Key Note Address. V. Ranganathan delivered the second best Award to Thejo Engineering at Chennai on behalf of Money Life Foundation (MLF).

I had the privilege of delivering the Award to the Hyderabad-based NATCO Pharma on behalf of MLF. R. Balakrishnan, Member of the Jury had this to say at the Award Function online:

"Every country has hundreds of laws that govern behaviour. The fact that thousands of cases are pending in various courts, while thousands more are filed every day, tells us that we, as people, find it difficult to behave in a fair manner with fellow human beings and self-interest dominates most human behaviour. "

Good Corporate Governance is essentially based on Ethics and represent the trust the investors repose in the Company. I have gone through the Annual Reports of NATCO Pharma and their various issues of Spandana representing their social activities that included support extended to the society and Anganwadis in Telangana and Andhra Pradesh.

Its VC and MD, Rajiv Nannapaneni, a very unassuming person, epitomizes the company both in attire and action. 

They are not just wealth creators but are health creators, with the Active Pharmaceutical Ingredients for Oncology and Diabetology. 

This multi-layered and multi-centered Company believes that excellence is journey and not destination and has been crossing its own benchmark in performance - financial and product performance - every year in a sustainable manner.

Its corporate governance is worthy of emulation with fifty percent of the Board wearing the hat of independent directors in diverse fields of experience, guiding its destiny. 

It withstood the impact of Covid-19 pandemic with tenacity, alacrity and social responsibility. 

Its risk management and accounting practices are best in the field of pharmaceuticals. 

Its claims in the Annual Report are factual and represent the Environmentally Sustainable Governance at its best. No wonder they bagged the coveted MLF Award for 2021 Best Corporate Governance. 

Reaching the peak is one thing and reaching it every time is another thing. The latter requires much more social cohesion and singularly ethical practices. I wish them best of luck all times.



Monday, March 16, 2020

Fight the good fight against Covid-19

The Economist in its latest edition titled ‘Dropping the Ball’ rightly mentions – “Talking down the issues is not winning strategy.” India with a population of about 130 crore has around 100 coronavirus cases and two deaths. The awareness created by the Union and State governments and the proactive prevention and curative measures, coupled with friendly hot weather in most parts of the country barring up-North, have stood in good stead.
But it is unfortunate for a slow-growth economy where inflation is down and IIP up that this new scare has caused market mayhem pulling it down to pre-1930 levels. Several weaklings and numerous of MSMEs could see the prospect of unpaid bills. It may be difficult for them to keep the labour engaged with obstructions to the moving machines, more particularly, the export-led ones. Time to seek way out is right now and not later.

Paid Sick Leave

Will it be possible for India to take the call of US democrats – notwithstanding its total unpreparedness and niggardly health system – “paid sick leave rules, expanded payments for programmes like unemployment insurance and the nutrition assistance, and guaranteed payment of all testing and out-of-pocket costs”?
In fact, McKinsey’s March 9, report, anticipates that the global GDP growth in 2020 could fall as deep as -1% to -1.5% even if socio-economic impacts get localised and effective and timely countermeasures are initiated.
A large number of NRI families in several countries — Middle East, UK, US, Canada, New Zealand just to cite a few — are all dependent on imports for their essential food requirements. China and India have been their source. Now that the flights have stopped; visas have been cancelled, and even local movements in several nations restricted, the information is that all big malls like Lulu, Walmart, etc, have even emptied their stocks!

Rising Unemployment

The 73rd NSS 2015-16 mentions that 110 million were employed in the MSME sector. This is despite the sector’s inhibition to disclose the actual number employed for saving regulatory costs and the countless contract labour engaged to keep themselves afloat in the market competitively. According to the RBI Governor, around 50% cent of the total MSMEs operate in rural areas and provide 45 per cent of total employment. Therefore, industrial hygiene needs to improve significantly.
Micro enterprises, which account for 97% of the total employment in the MSME sector, in the context of Covid -19, faces most of the heat. Even if banks have restructured or revived them in the recent past, they should be given further restructuring by way of reduced instalments elongated dues in their working capital accounts.
India is uniquely fortunate thanks to the hot climate catching up down the Vindhyas and in a month even the North would see about 30 degrees. Moreover, with adequate stocks of foodgrains, starvation will be afraid of staring at us unless we mismanage public distribution. Opportunity awaits the MSMEs but their preparedness needs unstinted support from the lenders – be it banks or NBFCs.

Active Banks

Banks cannot be sitting ducks talking of collateral security and failing to convert risk into reward at the right time. Industry associations should aggressively put their strategies in position and rebuild trust between their member entrepreneurs and lenders. The time is for more leg work; more buyer-seller meets; more enterprises must adopt affordable ERP and move to digital platforms because these platforms alone enable speed of transaction and delivery.
Second, they should also be handheld for capturing the local domestic market to the maximum extent by coordinating with the State government concerned under the public procurement policy. The unmoved stocks thus should be quickly turned into cash.
MSMEs should be made not merely preferred creditors under IBC and NCLT but should also get at least 75% of the pendency cleared within 30-60 days of accepting the case on merits. Third, the moratorium period for the new MSMEs and restructuring in manufacturing should be extended by six months to ward off project and cost overruns.
The MSMEs financed by the NBFCs and digital payment platforms should quickly reassess the status of the loans from a practical point of view by speaking to the entrepreneurs concerned to resolve any payments likely to get stuck due to Covid-19.

Worst Hit

The services sector, where the banks and NBFCs lent heavily under retail market and MSME (services) portfolios, would be worst hit. Training-led conferences and seminar-dedicated institutions, which run mostly on promised payments from their hosts, would renege on payments as they are either not held or least attended.
Here, along with the earlier manufacturing MSME credit, it is important that the RBI quickly takes corrective policy decisions and guide banks, financial institutions and NBFCs to postpone NPA thresholds to 120 days and review the position at the end of April, 2020.
Banks beleaguered as it is due to unsustainable NPA levels would be worst hit if Covid-19 impacts their assets right away. Globally, central banks are already ahead of the curve in providing relief to the financial sector both through the zero/least interest rates for bond and credit markets and even Basel may be moving in some unusual remedial stand.
“One scary thing facing us is demand contraction. People will buy only essential goods. New purchase orders will drop further. Payment cycles will get disrupted. Job losses are ahead. All this could be a possible fallout of coronavirus. Also, the loss of GDP may be equivalent to one month of GDP,” says Sameer Kochhar of Skoch Group. But production cannot stop if employment is to be preserved and future demand is to be adequately met.
‘When winter comes, can spring be far behind’? Next monetary policy, notwithstanding comfort on inflation headwinds, could see a rate cut. At least the Chief Economic Adviser asked for it!

Saturday, November 30, 2019

Rating the Ratings is imperative


CREDIT RATING – YET AGAIN ON THE BENDING MAT



It is three decades since CIBIL rating has commenced its operations and a decade since Brickworks has started. We also see the frequent sovereign ratings of Standard and Poor, Ind-Ra (Fisch) and Moody’s. Very recently, Nirmala Sitaraman, in the wake of serial failure of well rated corporates – eg., DHFL, IL&FS, and several other PSUs as well as Private Companies, mentioned her serious concern. Sovereign ratings are also not infallible. This article would like to see the present status and suggest the modifications.


“A credit rating is technically an opinion on the relative degree of risk associated with timely payment of interest and principal on a debt instrument. It is an informed indication of the likelihood of default of an issuer on a debt instrument, relative to the respective likelihoods of default of other issuers in the market. It is therefore an independent, easy-to-use measure of relative credit risk.”[i]

If a bank chooses to keep some of its loans unrated, it may have to provide, as per extant RBI instructions, a risk weight of 100 per cent for credit risk on such loans. Basel regulations provide for supervisors increasing the standard risk weight for unrated claims where a higher risk weight is warranted by the overall default experience in their jurisdiction. Further, as part of the supervisory review process, the supervisor may also consider whether the credit quality of corporate claims held by individual banks should warrant a standard risk weight higher than 100%.

The working of the entire rating system was questioned after the sub-prime crisis resulted in collapse of not just Fennie May and Freddie Mac but even UBS Credit Suisse, Citi group, Deutsche Bank etc. This led the US Fed and the Wall Street to revamp the entire rating mechanism after a careful study of the processes they followed and the measurement they gave to different parameters. But such changes are not followed uniformly across nations.

Theoretically, internal credit scoring models are effective instruments for the banks in loan origination, loan pricing and loan monitoring.  But the banks’ rating architecture is different from the rating agencies and this is one of the reasons for the regulator to insist on a rating review mechanism to be part of the Banks’ Credit Risk Management Committee. 

The rating process involves assessment of Business Risk arising from interplay of five factors: industry risk; market position, operating efficiency, financial risk and management risk. While industry risk and market position can be assessed from the macro level data, operating efficiency and management risk can be captured by observation, frequent interaction and experience. Unless cross functional, sectoral, trade data from all sources is available on digital platform and that too verifiable easily, the rating agencies are bound to err.

As per Basel II (2000): “An Internal Rating refers to a summary indicator of risk inherent in an individual credit. Ratings typically embody an assessment of the risk of loss due to failure by given borrower to pay as promised, based on consideration of relevant counter party and facility characteristics.  A rating system includes the conceptual methodology, management processes and systems that play a role in the assignment of a rating.”  Understandably, there was a collapse of the rating instrumentality looking at the collapse of the corporate credit and investments almost without notice. 

One of the common failings noticed by informed circles, for example, has been, a firm that owes to MSMEs beyond Rs.2lakhs should have been rated lower than those that would have paid promptly. Most corporates both PSUs and Private Companies were chronic defaulters and this came to surface more prominently in all the NCLT-dealt with cases. Second, poor governance should have got bad rating. Including Banks, PSUs and Private Companies fare badly and yet got good ratings!!

Ever since the Rating is mandated by the RBI while extending credit, we have seen phenomenal failures in the well-rated corporates both in the private and public sectors, e.g., DHFL, IL&FS. SMEs have no option but to get the rating of one or the other agency and yet, the Bank concerned would have its own rating that would decide the quantum of credit.

Measuring policy risks, sovereign risks and governance risks is the major challenge and this challenge has become visible in the recent corporate rating failures. Banks severely compromised by pitching high on CIBIL ratings and particularly, the individuals and Directors of the Companies. The thirty-year old CIBIL needs to amend its ways if the ratings book should be cleaned.

Technology disruption, easy regulations governing payment platforms, data on merchant performance, changes in consumption patterns, differential product regulations across the nations for similarly placed products and increasing protectionism are all the new risk areas for capture by the CRAs.

In so far as Indian financial sector is concerned, consolidation following the merger of PSBs, failure of NBFCs, Urban Cooperative Banks, and the lackluster performance of the MFIs, metrocentric banking are all new challenges to the CRAs. Telecom regulations and their interface with the payment and settlement systems, Internet of Things, Blockchain technologies are the new disruptors and even moderate margin of error can impact heavily and the rating can collapse. Further, product regulations have also become dynamic. In a way, all these aspects seem to have their shadow cast on the rating instrumentality as a risk mitigant.

There is therefore an imminent need for a High Level Committee of the SEBI, RBI, PFRDA, IRDA, and Telecom Regulatory Authority to examine the methodologies of CRAs for a more reliable rating process and pricing of rating agencies.


*Dr. B. Yerram Raju is an economist and risk management specialist and can be reached at yerramr@gmail.com Also see my blog on the subject June 11, 2011
Published in the Money Life on 28.11.19



























[i] Report of the Committee on Comprehensive Regulation for Credit Rating Agencies, Ministry of Finance, Corporate Affairs Division, December 2009

Wednesday, September 4, 2019

Big Bang Bank Mergers


Bank Mergers Again at Most Inopportune Time

Strong economy and weak banking can hardly coexist. We have been stuck with weak banking for the last eight years in a row despite most wanted reforms like the introduction of IBC, drive for financial inclusion like Jan Dhan and introduction of MUDRA. There were 40 mergers and takeovers during the post nationalisation period including the SBI merger.  One wonders whether we have drawn lessons from these experiences.

Looking at the immediate past, SBI merger with Associates is yet to deliver the intended results. 5000 branches were wound up effectively guillotining the reach to the rural clientele. Decision-making is at its lowest speed. Highly informed sources say that the merged associate bank staff at all levels are looked down upon by the pre-merger SBI. Achievement motivation is at its low levels.

Even as such settling was in the process, second bout of merger took place with Bank of Baroda, Vijaya Bank and Dena Bank. While the SBI balance sheet took two years to come back to profit, BoB jumped to profit at the end of first year itself. Obviously emboldened by the apparent frictionless mergers in the immediate past, MoF announced merging ten banks into four.

Can this be at any worse time than now, when headwinds of recession are blowing hard and global uncertainties are on the rise with trade wars between US and China and our own economy’s GDP growth tanking to 5% this quarter, the lowest in the last eight years?

25 years passed since Narasimham Committee recommended for six large banks but warned that it should not be with a combination of weak banks. Watch out: just eight months back, all the targeted banks were under Prompt Corrective Action Plan (PCA). Nine out of the ten have net NPAs above the danger level of 5%. Further all these banks are to be recapitalised meaning that they are weak upfront on capital. Further, lately, their balance sheets are saddled with Derivatives and Guarantees that may move up and add to the losses. Therefore, those targeted for merger are weak banks and not strong ones.

Y.V. Reddy, D. Subba Rao and Raghuram Rajan on one occasion or the other have cautioned the government over consolidation of Indian Banks as a panacea for the ills of the banking system.

While past accomplishments are no guarantee to future success, past failures can serve as good foundation for enduring success. Financial analysts like Anil Gupta of ICRA feel that the merging banks require harmonisation of asset quality and higher provisioning levels among the merging banks. 

Every merger or acquisition is expected to create value from synergy of some kind, and yet all the statistics show that successes are in the minority and failure can be quite expensive. Excepting that all the targeted banks have technologies in sync, no other synergies are seen on the horizon. Each suffers from heavy baggage of NPAs with several of them in the uncertain NCLT window.

Banking is all about financial intermediation. People are at the epicentre of banking both before and behind the counters. Culture of institutions is intertwined with the diverse cultures spread across the country. Success of mergers across periods and nations is elusive regarding the human resource and cultural issues.

Canara and Syndicate Banks are of the same soil and they have better prospect than the rest to derive advantage of merger. All the other merging banks would struggle to synergise on cadre management, incentive system, risk practices etc. Let us not forget that there is a 74% spurt in Bank frauds in PSBs more than others and several of them emanated from system weaknesses.

It is therefore important that the big banks start becoming humble and learn lessons instead of becoming conglomerates of unwieldy nature. Banking basics and customer service can hardly be bargained.

Government after hindsight decided to start the Development Banks to fund infrastructure projects and relieve the PSBs from this window as experience amply demonstrated that they are not cut for that job well due to their funding long-term projects with short term resources.
McKinsey has recently warned in an article: “Today’s environment is characterized by rising levels of risk emanating from the shift to digital channels and tools, greater reliance on third parties and the cloud, proliferating cyberattacks, and multiplying reputational risks posed by social media. Faulty moves to make risk management more efficient can cost an institution significantly more than they save.” Will the new CROs, when appointed, be capable of taking care of this concern?

In another study on M&A, Becky Kaetzler et al. argue for a healthy Organisational Health Index post-merger where they say that unhealthy acquirers destroy value, while healthy acquirers create value and tilt the odds toward success. Leaders considering mergers should first assess their organization’s own health to better gauge whether or not to take the merger plunge. In the instant case, all the organisations in the target are not at the expected health in the financial sector.

Leadership for transformation and good governance are critical for financial mergers to be successful. These emerging big Four out of ten should prove on these two counts that they hold these necessary virtues.

The announcement on governance improvements simultaneously released by the FM need a lot more assurance on the selection processes for the Independent Directors, non-executive Chairmen and their role. It would in fact be prudent to introduce a Declaration in 250 words annually as to his contribution to the Organisation so that the Board and the Directors can measure up the achievements against such statement. The bigger reform required from the owner is a pledge not to interfere in loan sanctions and move a resolution in the Parliament that no party would indulge in loan write off either for the farm or other sectors unless the areas are affected by severe natural calamities.

Further, higher capital allocation with or without Basel III cannot prevent bank failures triggered by systems, people and processes. Capital infusion should be done after specific commitments from the capital-deficit banks on the credit flow to the prioritised sectors, revival and restructuring of viable enterprises in accordance with the RBI mandates and recovery of NPAs.

There can be no energy without friction. The envisaged mergers are bound to have friction and it is the future that decides whether this will bring positive or negative energy. It’s to be hoped that even renewable energy through the cross-culture merger would bring the intended results. Let us not forget the dictum – too big to fail’ would eventually require the government to bail them out of any failure that ordinary citizens would not like to see or wish.





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.

Monday, August 3, 2015

NPAs - the perpetrators go scot free

If the RBI and MoF representatives on the Boards of Banks had prevented approvals of some corporate loans and brought collective wisdom to do due diligence, NPAs would not have reached the current unsustaining levels. Otherwise, how could one explain the debacle like that of King Fisher sanctioned on the basis of Brand as collateral thousands of crores on the instance of the then Chairman of the SBI. And this Chairman goes scot free royal. The successors have to cool their heels. 

It is important that the regulators get out of Boards of PSBs. Government of India, as owner, would do well to provide equity and discipline by sending more qualified representatives on the PSB boards and not the persons who are trying to learn the alphabets of banking. By being in the MoF for donkey years does not make one an expert in banking and finance!!

This is my response to Mrs Usha Thorat's article on the subject in Live Mint dated 15th july 2015.