Showing posts with label credit risk. Show all posts
Showing posts with label credit risk. Show all posts

Saturday, June 11, 2022

Is risk management cost or revenue function?

 

Is Risk management a cost function or revenue function?

B. Yerram Raju*

Ever since enterprises and firms as well as banks and financial institutions got a hang on risk management function, two things happened. One, most viewed it as a regulatory imperative and felt that compliance is firm’s major responsibility. Two, when the enterprises started practicing risk management, it became more its risk culture than a regulatory function. Broadly, all the enterprises, banks and financial institutions realized that we continue to live in a complex and uncertain world despite improvements in technology and data collection. However, not many institutions realize that costs incurred on setting up good risk management practices would enhance their revenues even in the short term. How? Certainly not through mere data collection, and modelling.

The current year and the years ahead seem to pose as many challenges as opportunities and there will be many more border level institutions like the non-government organizations (NGOs) coming to interplay with the rest of the enterprise sector. It is difficult to predict or control with a degree of certainty the future, climate change, environment and social governance would bring together private players and NGOs.

For example, during the pandemic, health of individuals in organizations, migration of individuals from the enterprises to their homesteads out of fear of the outbreak of Covid-19, resettlement of people, work from home and its tracking exposed new risks and there are no models built for tackling such risks. But the enterprises developed common sense based approaches initially to combat them. Governments stepped in with fiscal, financial, and non-fiscal support measures and the whole world evolved coping mechanisms.

Many nations came to conclusion that it is better to learn to live with those risks and cope with them than running away from them. Supposing that it is a cost function, can these risks be managed without incurring them? If they are not incurred, sustainability of firms would be in grave danger. The profit curve dented but loss is minimized. and many firms could bounce back to normalcy in a few nations like India. China, continuing its lockdown as a higher risk mitigation suffered the risks of sustenance and growth.

Pandemic, more than the recession, taught risk managers the lesson that risk management is a revenue function. Further, it also taught us that such risks in the short term will also turn out as opportunities. India became the vaccine producer for the world. Pharmaceuticals, packaging and packing industry and goods transportation have seized the opportunity for growth on a sustainable basis.

E-commerce firms of various hues, that started as small ventures, became big. Food delivery firms like Zomato and Swiggy showed that it is yet another business opportunity in the waiting for many. Several cafes closed only to give space for several households to become food producers to deliver through e-commerce firms. A sea-change occurred in the firms’ growth path.

Cristian deRitis in an optimistic discourse on GARP, says: ‘How much effort we exert to avoid a negative outcome depends on how highly we discount the future. The higher the discount rate, the lower the value to us of avoiding a loss in the future.’

A unified theory of risk management would enable cohesive and integrated risk management function. Persons good at credit and operational risk would realize that they should enhance their knowledge into all other forms of risk to enhance the value of the firm. Such unified theory of risk management provides for better risk identification and assessment capabilities across the geographical spaces and the spaces between the credit, operational, market, reputational, and sovereign risks.

Enterprise Risk Management (ERM) of firms have to develop, train, and cultivate risk management techniques easily understandable to each of the staff and other stakeholders to enable risk culture to thrive and flourish in the organisation not just confining to the cabins of risk managers and chief risk managers. A realisation has to come that risk management enables growth of profit. It is an investment and not cost. The net result would be effective risk culture and governance.

*The author is an economist and risk management specialist and the views are personal.

https://timesofindia.indiatimes.com/blogs/fincop/is-risk-management-a-cost-function-or-revenue-function/

 

 

Monday, August 5, 2019

Is rate cut desirable?


Is Rate Cut Desirable?

Monetary and Fiscal Policies are the two engines of growth. While the fiscal policy is annual and out with the Union Budget, Monetary policy is more dynamic and adaptive to the economic environment and conditioned by the inflation target. It matters little either for the FM or the RBI Governor whether tomatoes are sold at Rs.80/kg or potatoes Rs.12/kg. Inflation target of 4% still appears to leave headroom for the RBI to go in for further rate cut – a policy of continuity.

US Federal Bank opted for rate reduction signaling the need for buttressing the US economy in the wake of another impending recession, much to the chagrin and disappointment of Europe and UK. Will India have to follow suit or should it go on its own? What is desirable?

Exports are on the decline. Complacence in forex reserves at the present level at around  $450bn would appear misplaced viewed against the China’s reserves even against their declining growth rate and current trade war with the US. With the UK on Brexit mode for certain going by the promise of present Prime Minister by October 2019 would further alter the trade balances globally. The present trade balance looks only a temporary comfort.

Our careful management of exports and continuous search for new markets for Indian goods call for an aggressive manufacturing policy and prevention of asset deterioration in the corporate and MSME sectors. Export of culture related products and traditional artisan products would hold good prospect and this can happen in dynamic credit markets at affordable rates of interest and not so much the subsidies.

View this in the backdrop of major central banks’ similar exercises this season: whether US or Canada and Basel warnings. Financial columnists like Ian Mcguan warn the Federal Bank against further rate cut. Eric Lascelles, Chief Economist at RBC Global Asset Management says: “the longer that people go in an environment of lower rates, the more accustomed they get to them – and the more difficult it is to raise borrowing costs.” This should explain the reason for the Indian banks going slow on rate cut transmission to the borrowers.

Further, their net interest incomes of banks have been looking south for the last five years. On top, their off-balance sheet exposures are more than the balance sheet trending to a danger that the world economy saw in 2007 and 2008.

Stock markets largely influenced by global trends and the announcements in the Union Budget over the FPI are tottering. Bond yields are also not so attractive unless they are of longer duration than 10years. Increase in minimum public shareholding could trigger a sale of shares – but not when the market is poised for decline. Company valuations are causing a serious concern at the moment.
Major Banks including SBI transmitted Central Bank rate cut on deposits. Domestic Savings already on decline could slide down further. Depositors and investors looking for safe returns year after year are a disappointed lot, for they are at their near-zero return of the money held.

Consumer index and business confidence index for June 2019 are on the disappointing numbers. Indian economy is not on a borrowing spree during the last five years. Instances like Amrapali, Hiranandini, DHL, have enough caution on hold for lending aggressively for real estate. Real Estate and housing finance, if pushed beyond limits, would put the lending institutions in a more beleaguered position than now. Priority sector lending is any way on low yields.

IMF downgrade of global growth rate to 3.2% in 2019-20 is a pointer to bolstering growth through debt route with interest rate cuts by the central banks. It should however be kept in mind that Central Banks and Governments have actively encouraged debt-driven consumption and investment in order to prop up growth. Such policies alter the dynamics of credit markets.

Climate risks are accentuating credit risks. Indian banks are yet to poise themselves to cushion against such risks. When global banks take the climate risks seriously and Indian banks delay, the impact on Indian credit markets is going to be high risk driven.

Budget lines amply indicate the necessity of more private investments to flow to key infrastructure sectors like roads, railways, airways, ports and such investments need to come from more debt than savings and investments in the emerging low rate scenario. With the uniform corporate tax rate at 25% government expects that there will be more corporate participation. But the emerging context does not elude much confidence among several well meaning economists.

If growth is a concern and if it should look only to credit markets then, infrastructure for lending needs to improve and this calls for re-positioning and reforming banks and setting up Development Banks where long term funds will be spent for long term purposes. Structural reforms should follow any impending rate cuts.

August first week is with expectation of a further rate cut to bolster the staring decline in growth. Is growth contingent upon debt or investment? This is a question that should deserve serious consideration in the context of risk-starved banks yet to recover from the self-built shocks of the NPA-overhang.

Published in Telangana Today, 5th August 2019


Sunday, December 30, 2018

12-point Agenda for the RBI Committee on MSMEs


Pain points for the MSME sector

MSMEs Credit woes in stock
The RBI has its task cut out as it sets about addressing the sector’s credit and viability concerns.

A debate on MSMEs has come alive due to the Centre’s insistence on a regulatory reprieve for the beleaguered sector post GST and post demonetisation. The RBI at its last Board meeting that Urjit Patel chaired, promised to set up a Committee on the MSME sector by the end of this month.
There is an estimate, authenticated by the Centre, that there are around 50 million MSMEs, both registered and unregistered, employing 120 million, second only to agriculture.

Credit crunch
MSMEs contribute 6.11 per cent of manufacturing GDP and 24.6 per cent of services GDP. They also account for 16 per cent of bank lending. Around 8 per cent of credit to manufacturing micro and small enterprises and 13 per cent to medium enterprises are estimated to be gross NPAs.

MUDRA (Micro Units Development and Refinance Ageny) and the ‘59-minute loan sanction’ promises enhanced credit reach to the sector with SIDBI in the lead for both. MUDRA helped banks to push the services sector lending below Rs. 5 lakh significantly.

Field studies reveal that MUDRA loans have been used by several banks to swap a good number of failing micro service sector loans. There is also evidence of moral hazard following adverse selection as several enterprises are non-traceable at the location mentioned in the applications.

In the band of Rs. 5-10 lakh the percentage of loans is less than 20 per cent, indicating preference for a risk free portfolio and lack of interest in the manufacturing sector.
The government has put in place e-Invoice, TReDX, Samadhan, GeM to ensure prompt payment of bills from public sector undertakings and central government departments. Even so, the State PSUs and state government departments continue to delay the bills of MSMEs, leading to NPAs.

A procurement policy has been put in place to provide for preferential purchase from MSMEs, without sacrificing the conditions of quality of goods and services supplied to the buyer.

The process of loan disbursal is also cumbersome. Quite a few banks follow a multi-layered approach to lend to the sector and as a result due diligence suffers. The branch that disburses is also expected to monitor and supervise the credit but does not have the time or manpower for that.

There is hardly any communication between the entrepreneur and the credit authority until an irregularity in the account surfaces.

So given declining credit and growing NPAs, the following 12-point Agenda is a way ahead for the RBI panel:

* Thresholds in priority sector portfolio.
* Credit risk assessment of the MSMEs
* Thresholds for declaring the MSMEs as NPAs — 98 per cent of the portfolio in the fold of proprietors/family owned enterprises in the shape of partnerships, have no exit route of the sort facilitated under the IBC code or the Industrial Disputes Act.
* Revival and restructuring of sick enterprises — Innovative institutional interventions like the Industrial Health Clinics in States that carry the highest numbers of enterprises in this category.
* Cluster Development — Additional lending incentives.
* SIDBI’s Role — Review and Redefine for assuming real leadership role.
* The guarantee mechanism in the shape of the Credit Guarantee Fund Trust for Micro and Small Enterprise (CGTMSE) needs to be reviewed and redefined.
It has a role conflict with SIDBI as the latter is its promoter and at the same time secures its guarantee for the enterprises financed directly by it. CGTMSE premia rates were found to be high by their primary lending institutions and the claim settlement process unacceptably late.
* Role of credit rating agencies and effectiveness of internal credit rating tools.
* Recommendations to the Centre on policy initiatives.
* Digitisation of MSME lending and managing its transition.
* Setting up of Movable Asset Registry — Operational issues and directions.
* Setting up of Public Credit Registry — Roadmap for data integration without sacrificing data
privacy and data security.
Given the cascading effect of the large corporate manufacturing and services enterprises on the MSMEs, their healthy growth is crucial for employment and growth of the manufacturing sector as a whole.
Since MSMEs are still largely debt driven and not equity driven, it is important that access to credit should be easier, cleaner, and faster.
The writer is Adviser, Government of Telangana on Micro and Small Enterprises
Published on December 27, 2018, The Hindu Business Line


Friday, September 30, 2016

Lack of oversight on credit guarantee raises concerns

Lack of oversight on credit guarantees raises concerns

Just a year back, Pradeep Malgaonkar, the chief executive (CEO) of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme was extolling the great strides it made in the geographical space of such guarantees. The Trust has issued cumulative guarantees to 23.23 lakh MSE loans involving an aggregate credit of Rs1.08 lakh crore over the past 16 years. Its corpus grew to Rs4,328 crore as of 31 March 2016. About 133 member lending institutions are participating in the scheme. 

But the Reserve Bank of India (RBI) in its Annual Report for 2016 expressed concerns about overleveraging of corpus and the way the guarantee scheme is functioning. Information asymmetry and adverse selection on the part of member lending institutions seem to worry the regulator. More worrisome issue is the absence of regulatory oversight on this institution. 

Saturday, June 25, 2016

Are we on the right track in tackling NPAs?

Are we on the right track for NPA resolution?
B. Yerram Raju*
In the last few years, barring the 2008 Recession and its global impact, no subject other than NPAs of the Indian Banks has occupied so much print space and media attention.

If good number of banks in the public sector has faltered in loan origination succumbing to external pressures, some others have failed to supervise their loan portfolio. But their contribution to NPA portfolio may not be more than 25 percent. NPAs that turn as bad loans are the real culprits. Only 20 percent of the total quantum of loans at the doorsteps of legal system could be resolved to the satisfaction of the banks, notwithstanding the projected empowerment of banks through the SARFAESI Act. The real reason is, therefore, beyond banks – the law and justice.