The seven point negotiation recipe with a banker

Negotiating a business deal with a Bank:


The Seven-point recipe.


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

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

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

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

The recipe is simple:

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

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

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

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

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

3. Be transparent during negotiations

4. Be humble

5. Never hide the data.

6. Go with a vision and a future plan

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

Good in intent and Deep in expression

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



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

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

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

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

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

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

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

yerramr@gmail.com

Financial Sector Reforms on the Edge.

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

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

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

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

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

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

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

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

Capacity Building on low key:

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


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

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

Complexities in Risk Management

Complexities rise in Risk Management


B. Yerram Raju*

The latest Financial Stability Report from the RBI confirms that the risks to financial stability have worsened although financial institutions are largely resilient to credit, market and liquidity risks. The 82nd Annual Report of BIS expressed more concerns: ‘Five years on from the outbreak of the financial crisis, and the global economy is still unbalanced, seemingly becoming more so as interacting weaknesses continue to amplify each other. The goals of balanced growth, balanced economic policies and a safe financial system still elude us. The Report points out that the financial sector, governments, and households and firms need to repair their balance sheets: "the financial sector needs to recognise losses and recapitalise; governments must put fiscal trajectories on a sustainable path; and households and firms need to deleverage. As things stand, each sector's burdens ... are worsening the position of the other two." It is the operational risks that continue to rise. Who would ever have imagined that Barclays or Stanchart would indulge in manipulating the LIBOR? Technology, the facilitator for speed and accuracy, started turning riskier than ever.

Markets rejoiced with the huge bailout packages for the Euro Zone. The earlier US Fed package and this package clearly throw up moral hazard to the front as the cascading effects on the rest of the global financial system seem to worsen. All along, risk management practices in emerging economies have been driven by regulation and intense supervision. The other side of risk, namely, the reward is forgotten. When does the coin turn to the other side and what the Banks need to consider and remedy? In the Indian context, these are briefly examined.

The conservative regulator, distancing from capital account convertibility, and non-introduction of derivatives saved the Indian financial system and economy from the contagion effect of global recession in 2008. But we could not stay far from it for long and throughout 2011and till now in 2012, the policy makers blame the global effects of Euro fall and job losses of US in the wake of continuing recession-effect for the ills of the Indian economy. "The financial sector is putting pressure on the government," the BIS Report adds. "Governments, with their deteriorating creditworthiness and need for fiscal consolidation, are hurting the ability of the other sectors to right themselves. And as households and firms work to reduce their debt levels, they hamper the recovery of governments and banks. All of these linkages are creating a variety of vicious cycles." There has been compression of credit in the first quarter despite rate corrections by the RBI.

A couple of decades back, when the reforms hit the financial sector, the NPAs were blamed on the government-sponsored programmes or directed credit portfolio. The fears of NPA have only multiplied ever since although banks have learnt the art of greening their balance sheets and giving net NPA position in the range of 3 to 0. Chairman of the biggest Bank, SBI, recently confirmed that 20 percent of the restructured debt would land in the NPA bracket . It is shocking to realize that it is not agriculture or SME sectors that take the giant share of this but the corporate credit. The quality of credit appraisals and due diligence is resting on technology instead of careful enquiry and analysis. Institutions have migrated to arm-chair lending. Playing to the gallery has become the name of the game. Due diligence of firms and their directors, expectations of financial flows are turning out faulty with billions of rupees getting unearthed in frauds and collusive part of banks being questioned in the process. ATM frauds are on the rise. Manipulations are maneuvering the systems.

Operational Risks:

The ground level staff is more tech-savvy than domain-knowledge driven. Recruitment is on machine to man ratio. Manpower planning in Banks does not seem to provide for continuous off-the desk training. The digital and on-line training has become system driven. Opportunity cost of training having gone up, institutions fall short of training and education expenditure. Training costs are treated as operational expenses by banks. If there is change in the accounting practices and such expenditure is treated as Investment Cost in the balance sheet of banks and it is in fact so, there is prospect for this portfolio of banks taking a positive turn. People and process risks need immediate attention as attrition is posing a problem. The Risk Managers may have to evolve a model where a person with more than 5 years of experience were to join another organization, the company engaging such person should pay to the company a part of the development cost of this resource. This can be a complex model but need working out if attrition were to be prevented in the long run.

Basel III concerns:

In this backdrop, if we look at the capital requirements, one keeps wondering whether capital availability of huge size would cover all the risks that are surfacing. Banks must reduce the NPAs not only when they surface but by preventing them for occurrence. Once they surface, they should quickly act on converting them into cash by taking recourse to factoring – not so popular with banks till now- and sale of collateralized assets to asset reconstruction companies like the ARCIL. The Government is the biggest owner of the financial system and should provide capital only after it is convinced that the options at their disposal are fully exhausted. Budgetary provisions for capital replenishment would mean putting deeper holes in the tax-payers’ pockets. The other best way is, reducing the share of government in Public sector banks while retaining its say on the affairs of management and governance. In fact, Narasimham Committee suggested in its very first report that the government should gradually reduce its share in the PSBs. Instead, we saw its increasing participation and interference. May be that the present Finance Minister in PM would revisit the reform agenda. It is not the size of the Bank but the quality of service and proximity that become crucial to financial inclusion agenda and therefore, the small and big banks, the public and private sector need to co-exist. The holding company concept with all checks and balances may become relevant for getting critical mass in shape in the financial sector. The less-attended cooperative sector needs also dedicated support for a clean-up and reform process.

Feedback at yerramr@gmail.com

NPA Management

Banks require Rs.1,67000cr capital to meet the requirements of Basel III in the next two years while they have Rs.1.37000cr locked up in 67000 cases with the Debt Recovery Tribunals as at the end of March 2012. It would make lot of sense for the Finance Ministry to ensure expeditious treatment and recovery of the DRT cases by incurring the required cost instead of pumping in tax payers' hard earnings to refurbish the capital required.

The Sixty year-young Parliament

13th May 2012 was a day of resolve by the otherwise divisive Parliament to keep the Legislative Wings superior to the other two - Executive and Judiciary. It is Judiciary that saved the country from the slanderous behaviour of some of the elected legislators' and Parliamentarians' and even the Executives' misdemeanours. It is not the question of which arm of democracy is supreme so much as which arm is performing to the expectations of its people. Out of the nearly 40crore adults eligible to exercise the franchise, only twenty to thirty percent exercise the franchise. Out of them, many whose interest in future is limited - we find, the old disabled and those closer to their final destination also exercise the franchise. While this is the great virtue of Indian democracy, there is need for electoral reforms that would enable only those with untainted lives in whatever field they have been engaged in the past to contest elections without fear or fervour. It is the fond hope that those elected to sit in Parliament would be the beacon lights to the democracy by not absenting themselves even for a day of its working; by not claiming privileges for their own sake; by enacting laws that reform the nation socially and economically with provisions for speed of execution and with an annual regulatory review of such laws to ensure serving their intended purpose. Sixty years is the age of retirement in India for the present. Many individuals celebrate the Sixty as the marriage day recalling the happy years of married life. The Nation too celebrates - but there should be a resolve to work for the eradication of poverty and achieving growth across the length and breadth of the Nation evenly.  

The Parliament at Sixty.

The Parliament at Sixty has a tough agenda for future:

India is a miniature world. It has all the flora and fauna available in the rest of the globe. It has all types of soils – from the lateritic to alluvial to black cotton. It has all types of water – from saline to mineral and to plain. It has all types of weather. It has all types of minerals – some are highly inadequate while a few in abundance. It has a long coast line – extending from Bay of Bengal in the East to Arabic Sea in the west joining at the tip in Indian Ocean. Apart from this great geography, it has thousands of history. Yet it also suffered the longest history of servitude of colonialism. It has tolerance to all religions exercising free existence. It has perennial rivers and yet lots of villages without drinking water. It surpassed famines and yet farmers commit suicides under the burden of debt. It suffered from the worst of cyclones and tornados as also occasional visits of worst of droughts. It had the worst of earthquakes. It has world’s greatest Universities with many a village without a good primary school yet. It has the largest number of bank branches of various hues and sizes spread throughout the length and breadth of the country and carries still highest level of Financial Exclusion. It has a confluence of cultures of various dimensions and languages with thousands of dialects and variety of scripts. Its diversity is as much strength as weakness. The people of the land enjoy freedom of speech like nowhere else in the world. It has recently joined the league of the most powerful guild of nuclear nations.

Its Parliament is 60years young on this 13^th May and both the Houses stand in unison for once, to celebrate and recall the glorious years when its first Parliament had the highly educated and literate while the current Parliament has perhaps the World’s largest number of billionaires in a democracy in such a short time. It has the poorest of the poor and richest of the rich. Its economy started looking up from the middle of the first decade of the triennium, only to falter in the wake of series of scams and seriously suffer under its own weight of misbehavior and misdemeanor of the political and bureaucratic elite. Introspection truly is tough. There are States that take pride in the figures of poverty because of the faulty incentive system built into the federal fiscal dispensations. People have come to take shelter in being a part of the schedule of the Constitution. The land that treats woman as a deity cruelly treats her on the streets and gender discrimination and sufferance are common.

McKinsey Report in 1990s mentioned that India was losing 1.3 percent economic growth a year, if we consider the man-hours lost in land litigations. Doubts over ownership of land inhibit supply of capital, thus raising the cost of credit for agriculture. There is a consistent demand for lowest cost of credit for agriculture and this is met by huge interest subsidies and disinterested investments in the sector. There is a flight of capital from land and land is groaning under the weight of unproductive labour. India is a land of entrepreneurs. But enterprises retreat in the largest numbers.  Business climate index always suffers from serious dips. Targeting inclusive agenda is easier than reaching the goalposts. The path is rugged with self-imposed but obnoxious regulations that cry for reforms. The land of talkers should turn out ere long as land of doers and this becomes possible only with discipline and demonstrable stern action for the errand in the quickest possible time.

The 97 amendments of Indian Constitution in 60 years eloquently speak of the need for rewriting the Constitution with a brave new world of another 60 years ahead of the country to rebalance the economic and political forces. It longs for a sensible administrative code that could check corruption and bribery. There have been long hours of debate on the Lok Pal Bill but its passage adds significance at this moment of history. I am reminded of what Oliver Gold Smith said once: “Let not thy winged days be spent in vain; where gone, no gold can try them back again.”

 

AP Budget evokes mixed responses

AP State Budget 2012 evokes mixed response
The fourth largest State of the country, Andhra Pradesh has as many credits as discredits at the time of its Annual Budget 2012. It has a growth rate of 9.26% surpassing the National GDP 8.5% in the five-year period 20045-12. Over 40% of its geographical space is farm land and has 22% forest cover. 8744km river length and a coast line of 974sq.km offers scope for port development. It has tainted bureaucracy; Ministers and politicians deeply entrenched in corruption and controversies; though second in the country in mining, the growth of the sector is marred by unholy exploitation. The State saw the farmers queuing up for fertilizers; burning the crops like cotton and mirchi; throwing of onions in the streets for want of better price; crop holiday etc. Several of the recommendations of Jayati Ghosh Committee in the wake of farmer suicides and Mohan Kanda Committee Report in the wake of crop holiday have not seen light of the day. Liquor mafia in the State is under seize of the ACB and the estimated amount is Rs.5000cr and some informed sources place it ten times more.
The Rs.1.45lakhcrore budget of Andhra Pradesh Finance Minister in this backdrop is a hopeful estimate against the poor performance in 2011-12 both on tax revenue and capital receipts. Non-plan expenditure indicates a rise of around 15percent.
Sectorwise Allocation in regard to Economic Services (%) in Budget 2012-13
Sector RE.2012 BE 2012-13
Economic Sectors 36.46 37.99
Agriculture & Allied activities 3.56 4.04
Rural Development 5.93 6.48
Irrigation & Flood control 16.09 16.56
Energy 4.05 4.07
Industry & Minerals 0.70 0.70
Transport 3.05 3.04
Science, Technology & Environment 0.01 0.01
General Economic Services 3.08 3.09
Social Services 22.87 31.74
General Services 40.67 30.28

The tax buoyancy is seen in the expectation of nearly 20percent rise to Rs.66021crores in 2012. The growth euphoria of 9.26percent compared to the National GDP growth rate of 6.88% whittles down when one sees the number of farmers’ suicides and the lowest human development index ranking of the State (10th). Agriculture budget in a predominant agriculture State is a meager Rs. 3175crores (2.2% of the total budget or 3% of the revenue budget). There is no announcement of Market price stabilization fund the farmers have been seeking for the last five years. Regarding drought relief, except looking to central grant, nothing more could be seen.
The best part of the Budget is higher allocation to Education that touched 18% of the Revenue budget, the highest in the recent years. Allocation to Health dropped by a notch over the previous year from 4.16% to 4.04%. Allocation of just Rs.633crores in the backdrop of CII-organized Global conclave that promised investments of Rs.6.48lakhcrores would make the investors turn a nelson’s eye on the State.
Power sector is reeling under weekly power-off for the industry sector; farmers cry foul over the free power/seven hours a day; and severe voltage fluctuations speak of the quality of power. Investments seem trifle in this scenario for this sector too. Budget has long verbose where the allocations are least; the irrigation sector cleverly sticks to whatever was spent last time: it is actually Rs.8459crores against the allocation of Rs.15000croress. This helps in Fiscal Responsibility Budget Management of the State even in the year 2012 as releases are hinted only at the levels attained in 2011-12.
If the Social sector expenditure got a higher share it is only to be expected in the wake of by-elections in Telangana region and the impending General Elections a year after. The unsustaining sops would certainly cast a shadow on the growth prospects of the State. The Chief Minister’s keenness on sports led the Finance Minister to announce well-equipped sports stadia in each District. Legislature Constituency Fund of Rs.382crores goes for non-monitored investments/expenditure. The tiresome speech of the Finance Minister faces trying times in reaching the expected outcome.