Access to Finance: MSMEs

 

Access to Finance – the Achilles Heel for the MSMEs

Economic restructuring followed by financial deregulation has brought in its wake the need for a change in the very mindset of credit analysts. Infusion of liquidity into banks has strengthened confidence in depositors more than the borrowers.

Share of MSMEs in GDP was of the order of 29 percent with a credit flow constituting 15% of the total credit disbursal of Banks and NBFCs. This amounts to approximately Rs.17trn. Government of India in its overreach to $5trn economy by 2022, has proposed that the share of MSMEs in GDP should reach 50%.

We have seen the most enticing schemes under Atma Nirbhar Bharat Abhiyan Scheme 1 reached only 55% in terms of disbursements, which targeted incremental credit of 20% working capital to the pandemic-struck standard assets in the MSME sector. In regard to the second scheme that targeted the sub-standard and NPAs for revival and provision of equity banks are shy to move fast – in a once bitten, twice shy mood.

It is unfortunate that we should be discussing this issue for decades despite a number of initiatives taken by the RBI and GoI. Priority sector guidelines have been modified allowing banks to co-lend with all NBFCs with no restrictions in order to push lending to this sector. The measure should enhance the risk appetite among banks by co-sharing the risks with the NBFCs. During the years 2015-20, borrowers’ accounting practices moved to the regulatory conformance zone. This should actually rebuild the lost trust among lenders and borrowers.

In Telangana, as many as 8,435 MSME units have commenced their operations since formation of the state, with an investment of about Rs.11,487crore. Since January 2015, MSMEs have provided additional employment opportunities to approximately 1.59 lakh persons.

While micro industries account for approximately 58.07% of total units, their share of investment and employment generation is comparatively less—11.92% and 30.12%, respectively. Small units account for 63.44% of total MSME investment and 55.41% of total MSME employment—the highest for both categories.

Telangana is the only State to have set up a separate institution to revive and restructure the manufacturing micro and small enterprises, viz., Telangana Industrial Health Clinic Ltd with a seed capital of Rs.100mn.

A couple of case studies would be in order where the TIHCL have been successful in not just reviving the enterprise but also substantially scale up their operations, save the lock-down period.

In times of uncertainty as now, investors hesitate to start new enterprises except in greenfield areas like the IT and Pharma. We should not allow the existing viable enterprises to shut their doors for want of some critical funding or margin money or buttressing his equity.

M/s. Deccan Pulverisers Private Limited promoted by two women entrepreneurs, engaged in manufacturing mineral powder from quartz/feldspar mineral stones, availed a term loan from SFC to the extent of Rs.6.2mn without any arrangement for working capital. State Government has sanctioned Rs.2.1mn as investment subsidy and other incentives.

The machinery was ordered as soon as the Financial Institution (FI) sanctioned the loan, but the installation of machinery was delayed from vendors end. The business did not receive expected export orders and the promoter searched for buyers in the local markets. In initial stages could not find an appropriate buyer who can pay in 60 days due to this the receivables were delayed and the payments to the FI were also delayed, FI started charging penal interest for the delayed payments.

In the meantime, the constructed factory shed was damaged due to heavy rains and cyclone, the entrepreneur repaired the shed from his own funds. The project was not feasible with one machine as the margins were too low in the local markets the promoter has installed a second machine with his own funds and increased the unit’s production capacity.

Due to irregularities in the repayment, FI has issued demand notice on 6^th September 2019 asking the unit to pay overdue interest and instalments amounting to ₹ 20 lacs by 1^st October 2019, failing which they will take further steps like legal action etc., The promoter and the company were in the great stress as it shattered their goals and dreams.

After a detailed diagnostic study and discussion with the SFC, we arrived at a revival package for the unit. We noticed that the high interest rate of 17% p.a., and delay in arrival were the principal reasons for the unit to turn incipient sick.

 

TIHCL has extended critical amount funding that enabled him to regularise his term loan account with the SFC. We also arranged for the priority release of incentive blocked for a year. The sword on their necks has been removed and they started production in January this year. But the pandemic struck, and they could restart production only in July this year. At present they attained 80% of their capacity utilization and a turnover of Rs,8.2mn. One of the PSBs agreed in principle to sanction working capital as well.

 Another enterprise, Suresh Textiles, a sole proprietary unit similarly shattered was assisted by the TIHCL. This entrepreneur with 20 years of weaving experience has set up 40 semi-automatic power looms initially. Later he converted them to fully automatic looms to produce shirting cloth in the year 2017. He started commercial production in 2019, the year of slow growth of the economy. The unit stopped its operations during the period of upgradation for nearly six months. During this stress period he approached the TIHCL for a solution.

Problems Identified by TIHCL-

·       Ab Initio sickness detected due to inadequate financing

·       Introduction of GST post-sanctioning of loan caused additional burden on proprietor as equity parked for working capital was utilized for GST payments on machinery.

·       Subsequently this caused cash crunch for production and unit became sick within one year from establishment.

 Revival Package-

TIHCL has conducted diagnostic study and found that the unit has suffered shortage of working capital due to external factors.  It has proposed to the primary lender for enhancing the limits for operating the unit. 

As proposed, primary lender has sanctioned additional loan of ₹14 lakhs and TIHCL has sanctioned margin loan of ₹3.73 lakhs along with the primary lender for the revival of the unit.  TIHCL now handholding and reviewing the unit periodically for efficient business operations and to control the stress in the unit.  

Overall, post revival and rehabilitation by TIHCL, the unit is performing well and improved chances of growing the business.  From nil capacity, the unit has reached 50% capacity utilization during the last three months and is confident of reaching 100% capacity in the next four months.  His experience taught him that raw material bought from outside the State would save the input costs by 15%. He is prompt in repaying the instalments and is now poised for growing big.

 Both the units have digitised their operations and installed ERP solution that enabled the TIHCL to monitor off-site the units’ performance regularly and guide the entrepreneurs.

 In more than 80% of the units that knocked our doors for support, we noticed that their working capital eroded with the banks debiting the instalments on the retail loans sanctioned to them – either for buying a car or home or both. Where the housing loan is taken this automatically collateralized the otherwise CGTMSE guaranteed loan. Their failure to repay due to the eroded working capital, turned them NPA and proceedings against their securities followed as a natural course. MSMEs were the first option of banks to lure them to retail loans, that became their thrust area. It is advisable for the MSMEs to take retail loans from banks other than those that granted them the working capital and also have proper financial planning for their personal assets and enterprise assets for growth.

 Transunion CIBIL has also announced a MSME Health Index based on two parameters – growth and development. Growth is based on the enterprises ability to access credit while development is assessed on the basis of NPA status in banks.

 Rating institutions are yet to come out with rating specifically targeting the manufacturing MSMEs. There are several issues in rating mechanisms and also the extension of guarantee by the CGTMSE. These need resolution for easy access to credit.

 Digitization of all enterprises does not brook delay. Telangana Government entered into an arrangement to provide free accounting software to 20000 enterprises to accelerate digitization. This will certainly bring transparency, accountability, and better compliance of the lending institutions’ terms and conditions of sanction thus rebuilding the lost trust among the banks and MSMEs.

 TIHCL is a co-lending institution and the banks that are interested to speed up their processes of revival and restructuring and take assistance for monitoring and supervision of their MSME assets are welcome to seek our support. Nothing comes free. But the costs that the enterprises and banks incur in their collaborative efforts with us are far minimal and we assure that their NPA portfolio would turn performing with their association with us.

 TIHCL has tailor made loan products for various types of stress faced by the MSEs and for women start-ups and for cluster-based units. Margin loan assistance, Critical amount finance, Margin money for start-ups, working capital requirements for the other types of enterprises. Every enterprise is digitised for its operations under our direction and support. It is for the units and banks to take advantage of our presence. Rates of interest range between 9 and 10 percent.

 TIHCL is keen on ensuring sustainability of enterprises through timely counselling, mentoring and advisory services on a continuing basis and this is our USP.

(This is the text of my address at the MSME Summit held by the CII-Hyderabad on the 7th November, 2020)

 

Roots to Fruits - The Journey of Development Banker

 

ROOTS TO FRUITS

This Book is all about Yerram Raju? Not just that. Apart from his life story, this book is the quint essence of development banking and financial inclusion that the country has been pursuing as its unfinished economic agenda.

 

He is perhaps one of the few to start his writing spree at the age of 20 and continuing for 60 years in a row. Not a single year was without a few articles from him, that too in reputed financial dailies and journals. This is perhaps his last book in life, that will end up with the publication of Part 2 by December 5, 2020.

 

Large families of the ilk to which the author belonged are consigned to history, following the family planning since the 1950s. Eldest of the twelve children, the author describes vividly how his parents have instilled great values, ethics and austerity. This formed the roots of his career path to pluck of the fruits in his later part of life.

 

Author’s mother proudly said that her contribution to GDP of India was significant with two of her children – one a reputed gastroenterologist in Texas and the other a reputed Certified Professional Accountant in the US. The second son is a Professor in Yoga at Chennai. With all the sisters married to their choicest spouses, they had a fulfilled life. The parents of the Author Dr. Raju who lived beyond 94yrs and 81yrs respectively had an enriching life nurturing great ambitions in their children.

 

The Book depicts his intense affection towards parents, his own family, and great reverence to his teachers. His verse on Mother and his prose on Father are moving stories. It is a tell-tale story of the growth of a large family and its contribution to the growth of the economy.  All the children of this large family, however, preferred nuclear families.

          

Since Yerram Raju, the author, grew up in austerity and simplicity, he saw his three daughters grew up in the same environment. Though they all wanted to stay in India when married, all of them moved to different countries.

 

The Book offers lessons to several upcoming youth on the choices one can make when confronted with multiple options having equal opportunities for career growth. The interviews faced by him can guide the youth. His career in Textile Mills threw up lots of challenges that he ably faced. His parental dependence made him leave the opportunity to take up one of the more challenging competitive careers – civil services and financial services.

 

His choice of banking backed by emotion had its fruits. He could see the rarest of rare things to happen – retirement of his father serving the same branch where he was posted as Agent, at his hands. Doing PhD instead of pursuing professional course that would have seen a rise in the banking career faster than he had, speaks of his continued choice of academics. This enabled him later to teach the civil servants at Lal Bahadur Shastri Academy of Administration, Mussoorie and Administrative Staff College of India. He was also an external examiner for doctoral degree of three universities. It is difficult to find a banker adorning     s u c h     position.

 

Lending to agriculture and allied activities, particularly to the financially excluded like the marginal small farmers, potters, small enterprises was an obsession with him. Simplification of systems and procedures always attracted his attention.

 

The author in this brief of 130-odd pages, describes the journey of development banking as it took place post nationalization of Banks in India. For those looking for solutions to the problems of credit to the poor and needy, this book offers ready-made solutions. The presentation is simple and lucid.

 

          According to him, “Development Banking involves deposit mobilization through innovative schemes considering the needs of a variety of customers and servicing them, both online and offline, and financing development projects that add scheme specific infrastructure for lending and financial inclusion. Social banking is part of development banking. Both require efficient credit risk management. Extension services is part of social banking. Handholding, mentoring, counselling are essential requirements for social banking. It is treated as part of narrow banking, these days.”

         

          He won many an accolade both in the Bank and outside. One such is the recognition as International Man of the Year 1991 by the International Biographical Society, Cambridge for his contribution to rural development.

 

This book offers lessons on recovery of agricultural loans. According to the author, recovery is both an art and science. His success as banker, offers many a lesson for the current day bankers deeply mired in NPAs.

 

The Book is laced with quite a few case studies and provides lots of lessons on development banking. Part 1 of the Autobiography of the author up to the age of sixty years, ends with his transition to academics and consultancy. His relocation prompted by his stint with LBS National Academy proved a good decision at the right time of his career.

 

Readers can look to Part 2 for a greater excitement as it covers policy analysis of the country’s transition to liberalization, privatization, and globalization. The key milestones in this part 1 indicate that the areas would cover financial risk management and institutional innovation.

Available at Amazon store: www.amazon.in/amazon.com

 

Human Resources Critical in Banks

 

HR in Banks Remain Critical

Banks are the talking point in any forum today, not because of deposits or credit held by them, but of the attitude of bankers to their customers. For every need, they look to the machine. One of my retired bosses prefers to attribute it to the HR practices in Banks. He preferred to call HR: “highly ridiculous”. Another retired top executive said: when was it good? The issues are worth pondering in the context of banks failing on several fronts and becoming inevitable cog in the wheel in the economy.

More acceptably, another senior banker said that the recipient system should be as responsible as delivery system. Citing his experience, he gave training to the staff at the Airhostess Training Institution. Customers complain of poor service, but when it comes to rectifying it through appropriate action, those same customers do not stand evidence, making a fool of management. This is not to say that all is hunky-dory with banks. Banks these days have no time to investigate. Firstly, they do not accept that something was going wrong and needed correction.

People over Machines

The most important resource for the banks is certainly not the machines – computers and mobiles – but the persons. They deal with customers – again not machines but persons, of all ages from school-going children to the senior citizens. But what is the attention banks pay in harnessing such resource?

At one time, people accused the PSBs as overstaffed and overpaid. Not anymore. The compliance burden on the manager is less known, a regional manager tells. Average The average business per employee – just deposits and credit - has no comparison with what it was during the 1990s.

Regional Manager would invariably say that he is either in a virtual meeting or busy in correcting a system or reviewing the targets for third party products like insurance, mutual funds.  He at best reviews that banking business his boss would like him to review – Mudra Loans or PMEGY or other government schemes. He would hardly claim full knowledge of all the managers and staff working under his control.

The remuneration and the comforts of the employees, thanks to the IBA’s periodical revisions because of negotiations with the bank unions, are market competitive. Social security including medical and health benefits, leave fare concessions allowing even overseas travel leave no grouse for any of them. Yet, none seem to be happy. Most customers in any case are certainly not happy. Frauds are on the increase.  

Higher the cadre in the Bank, more the necessity to toe the line of the boss than the market share in business he should seek to achieve or the business risks he should address. There is disillusionment in most cadres. It is important to go to the root cause of such situation.

High Aspirations

All those recruited into a bank are equally endowed on the day of recruitment, with an aspiration to move up the ladder. Why then, within a few years, either they become indolent or irresponsible? Why would an employee not so much care if his neighbour does not deal with an issue or customer as he should?

More than in any other institution, in Banks, ethics matter most as the employee deals with other’s money and money that is fungible. The entire surveillance system of the bank – monitoring and supervision should devote enough attention to this aspect. Culturing a person into continuity of ethical practices is the prime responsibility of HR management. Therefore, such responsibility rests with every supervisor – whether at the branch or regional/zonal/Head Office/Corporate Office.

If the employee perceives that at the highest level, persons are measured not for what they do but what they appear to do, like the drop of ink on a blotting paper, it spreads. It must be appreciated that persons are always unequal. Getting these unequal persons on board along with equals is the art and science of HR.

When employees see non-performers rise to the top because their slate is clean, for, nothing was written on it, the morale of the organization declines precipitously. Once such persons occupy the leadership positions at the performing levels, hiatus in attitudes develops. This needs to be arrested and this can be done through a process.

HR Balance Sheet

Banks should draw their HR balance sheet annually right from the branch to the Corporate Office with all intermediaries included. Such balance sheet, unlike the financial balance sheet should have more on assets side than on liabilities side for a globally competitive bank.

The balance sheet I am talking of, is that a person recruited has ‘x’ knowledge, endowed with ‘y’ skills and ‘z’ attitude and all persons recruited have x+y+z=1. They should periodically get enhanced with a score given to each of these x, y, Z. This score should increase with training, experience, and interactive processes on the scanner.

Each Manager should take pride in every person working with him. Annual assessment should be not on a tick in the box on self-assessment sheet but with a discussion between the assessor and assessed. A clear record of the assessment made transparently should detail what improvements are required and what supports he would get from the Manager. This exercise should be done at all levels.  

By the time a clerk reaches a supervisory level and a supervisor reaches a top management level, x^2, x^3, x⁴ levels with aggregates of ‘y’ also getting into similar or varying multiples but ‘z’ the attitude remains at the recruited ethical and understanding level. While dealing with customers of various hues, it is but natural that the response would correspond to the customer’s own approach to the issues. Second, it is human to err. Every supervisor should lend broad shoulder to the employee in all genuine mistakes and where required introduce corrections with sensitivity to the situation.

Transparent and timely redress of grievance and timely punishment to the errand should not be allowed to cloud the views of good performers. This is organisational ethics requiring scrupulous attention. If HR is taken care of, all the ills we now see in Banks will become history, worthy to forget.

*The views are personal. Author is an economist and a retired senior banker. My thanks are due to Santanu Mukherjee, former MD, SBH for his valuable suggestions on the draft.

https://telanganatoday.com/hr-in-banks-remains-critical published on 19.08.2020

 

 

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 6^th 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 30^th 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 31^st 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.

 

 

 

Little Cheer for Bank Nationalization

INDIA NEEDS TO DO SOMETHING MORE…

CRISIS OR NO CRISIS

                                                                                   

The Day of Bank Nationalization in India passed off on Sunday. Smiles were kept years behind. None talk of village adoption scheme; no Chairman would go to a village these days to see how their rural branches are helping the farmers or the MSME is financed. No pride in ownership. No regret for bad governance.

But for a full page pull-out by the All India Bank Employees’ Association on the 20^th July, 2020, who remembers the Nationalization Day? Neither the employees, nor the disappointed customers that include even the Banks’ own pensioners, nor those seeking credit from them recall the Day. People are only alert on wearing masks and spiriting their palms before handling the currency received from outsiders. Everyone cries wolf on the ever-bulging non-performing assets. The only solid reform that we boast of is the Insolvency and Bankruptcy Code. Job creation is hurt badly in the organized sector with near-65% of MSMEs shutting their windows in pandemic. Their markets are yet to revive.

Banks in UK, Iceland, and even the US resorted to the most criticized and least preferred route of nationalization of banks, when they confronted a crisis. The then OBAMA initiative that received positive response of stock markets since the announcement of Toxic Loan basket takeover under a joint Government-Private Fund, was however inadequate to retrofit the lost confidence in the financial system. 

The revival of ‘protectionist’ actions would seem to be asserting more in finance than in trade.  While the regulators of G-20 would be meeting at the shortly, global regulatory regime has serious limitations and they should be realigned with domestic regulations that have compulsive cultural characteristics. 

Events so far have proved beyond doubt that a global regulatory regime would not be able to provide appropriate solutions to the type of recession that had set in due to pandemic. No prediction as to when it would end. Annual Balance Sheets for 2020 are waiting for finalization in several institutions. Basel III may have introduced a modicum of discipline and uniformity in risk discipline among Banks globally. Several regulators sought more flexibility. It is important for India to realize its distinction in the emerging economic scenario and how necessary it is to turn the head on the screws.

At the commencement of Covid attack, India did well and even till now, we do not find people scrambling for food because farmer and rural India stood by the nation.  The biggest blunder of the system is more announcements than actions and imperfect monitoring and undependable statistics. All the rating agencies, IMF and World Bank kept the ratings low and estimated growth of 42% in 2021. Opening the economy with lot of courage has not been taken too kindly by Corona that has been surging every day crossing the 10lakh persons. India took the 4th rank in the world in Corona affected nations.

Second, we have the key sectors like Steel, Zinc, other Metals and Coal as also the transportation system largely in the public sector. We entered the Commodity markets and derivative markets in our anxiety to mix with the globe. WTO is almost nearing collapse with most countries choosing to adopt policies that secure their own nations and people, not caring so much for the global discipline. 

Third, there was no demand recession of the magnitude that the other countries in the globe faced.  Still the rural areas where still 65 percent of our population lives, drive the demand growth.  Having said that some facts that can be hardly ignored: there is a steep decline in job growth; steep declines have also set in the private sector trumped up by the global recession; the urban and metro retail chains took a severe beating; the real estate and housing boom that irrationally stepped up land values across the country took the first heat-stroke and with them, the dependent MSME sector that is seen as the engine of growth.

Fourth, Banks that lent heavily for the retail sector and real estate sector started facing the continuous decline in their performing assets.  They lost confidence in the resurgence of the demand and the productive capacities of the manufacturing sector.  Most public sector banks even, refused to go with the RBI to pump credit. 

Atma Nirbhar Bharat Abhiyan, the stimuli announced to combat Covid-19, injecting more than Rs.20lakh liquidity, still face risk aversion from the Banks. This high liquidity released only moved to the investments in treasury instruments and to quote Subba Rao, former Governor, gave confidence to depositors in the Banking system that their monies are safe with the Banks, notwithstanding PMC Bank resolution still waiting at the doors of the RBI. It has two windows: one, investments and the other credit. The latest report on Investments not withstanding the $10mn investment announced by Google, all the investment projects are reported to be lagging behind and the cost over-run of the projects already swallowed the entire incentive package.

MSMEs are yet to come out of the two shocks of demonetization and GST. After the redefinition, and after a host of digital platforms placed within their reach, the access to credit by all counts is a poor show. Out of the National Credit Guarantee Trust linked credit incentive to the standard assets, Banks disbursed only 50% or less. This was supposed to be automatic release of 20% additional working capital. The second window to the stressed assets through Sub-ordinated debt is yet to open as the operating instructions were received only a few weeks back.

SIZE – AN IRRATIONAL CONCERN

Merger of PSBs taken up while the economy was slowing down is yet to show up the results. The market value of the SBI post-merger is way behind its peer, HDFC in the private sector. Sanctioning Rs.1200cr to a known defaulter in its books and erstwhile chronic NPA resolving through IBC, does not hold SBI in any high esteem either among global peers or its own clients. Government of India, by merging PSBs to 10 from 28 did not gain either in image or confidence of the people. Several clients say that corruption has become endemic in PSBs and not even acknowledging a complaint, or a letter of customer is so habitual that the latter are in the lurch.

While the Government’s efforts to digitize the delivery system have borne fruits reasonably going by the way the MNREG wages and other direct benefits reached the intended groups during the last two years, financial inclusion is way behind. The reach of banks to the poor has declined.

Regulator’s job is to make sure that the vertical and horizontal growth of institutions should not be allowed to go with a feeling that because of their size they are insulated from collapse and that the Government and regulator had to do something to keep them afloat even in the worst event like bankruptcy.  This is where the RBI should reformulate its views and ensure that the organizational structures irrespective of their affiliations do not overboard the governance and do not oversize.

The silos-based regulatory system currently in vogue, with the RBI regulating Banks and NBFCs, Stock Markets by the SEBI, Pensions by the Pension Fund Regulatory Development Authority, Insurance by the Insurance Regulatory Development Authority, and Commodity Futures by the Futures Market Commission should be effectively brought under Financial Services Regulatory Authority. Department of Financial Services, Union Ministry of Finance may have persons of eminence but when it comes to examining micro issues for macro management, it left lot to deliver. Collective wisdom needs to emerge to improve financial regulation and governance that affects 130bn people does not brook delay.  

India, for example does not have credit risk insurance of the order prevailing in either Italy, or Germany or South Africa.  The Credit Guarantee Trust for Micro and Small Enterprises is but a poor cousin of the trade and credit risk. Credit Risk could not be introduced in India as the IRDA was apprehensive of the consequences of credit default.  It is perhaps of the opinion that the moral turpitude would reach new dimensions if credit risk is introduced. 

Percy Mistry Committee called for a unified regulatory architecture for resolving issues dealing with segmentation of financial markets into banking, capital markets, insurance, pensions, derivatives etc. Sweden, Singapore, UAE, UK, Republic of Korea to cite a few have already moved into the unified regulatory system.

OPERATIONAL ISSSUES:

Warren Buffet, the most reputed investor, is quoted at number of places: “Derivatives were financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” Over-the-counter derivatives that are off-balance sheet instruments come to surface suddenly when their collaterals fall and when their values become riskier to hold, killing in one stroke rest of the healthy assets of the Banks. The delivery and recipient systems have not reached a level of maturity to play with them, even a decade after their active entry.  Indian financial system cannot afford the consequences of systemic risks arising from their instrumentality.

Let me go to the most familiar area – Credit Risk that is mostly understood as risk of default.  Here the risks arising from asymmetric information have not been dealt with. The Credit Information Bureau India Ltd.,(CIBIL) is the only institution that currently unfolds client’s historic information at  price.  Entry of multiple players with the enactment of Credit Information Services Act of 2005 is put on hold.  Trade and Credit information services should enter the competitive domain for the information system to get into a semblance of order.

Credit rating agencies in India that are approved by the RBI are none other than the Fitch, Standard and Poor, Moodys etc., whose ratings busted on the threshold of sub-prime crisis and beyond.  There is no proof that they are doing their job differently.  Until the rating agencies’ services are paid for by the financing institutions that make use of the ratings and hold them accountable for the ratings, there is no guarantee that the ratings per se would add to the quality of the credit portfolio the banks carry in respect of the rated assets. 

While the Government and the RBI, Insurance and Capital Market regulatory authorities have proved one-upmanship over the other regulatory authorities in reasonably insulating the Indian Financial System from the impacts of the current global crisis, a large gap remains in what is needed to be done. The time to put things in the right shape is now and right away.

It is high time to appoint a High-level Committee that should also include outside experts to clean up the banking system with an open mind.

------------------------------------------------------------------------------------------------------------*The Author is an Economist with three decades of banking experience and a Risk Management Specialist He can be reached at yerramr@gmail.com The views are author’s own.

https://www.moneylife.in/article/ramping-up-the-banks-india-needs-to-do-something-more-crisis-or-no-crisis/60966.html

Cooperative Banks move to a single regulator

Cooperative Banks move to a single regulator - RBI

PMC Bank failure triggered the action on the part of Union Government to amend Banking Regulation Act 1949 bringing the Cooperative Banks in the direct regulatory ambit of the RBI, putting a full stop for dual regulation of the Cooperative Banking sector. The ordinance does not include Primary Cooperative Societies, the principal constituents of the State Cooperative Banks (StCB) District Cooperative Central Banks DCCBs). Urban Cooperative Banks and Multi State Cooperative Banks and the rest of Rural Cooperative Credit structure falling in the ambit of NABARD supervision will all be subject to such amended regulation.

The preamble of the Ordinance on Banking Regulation Act 1949 Amendment makes us understand that the cooperative banks are not well managed; not properly regulated; and the affairs conducted are detrimental to the interests of the depositors. They also lack professionalism, good governance and sound banking practices. The objective of the amendment is to correct all of them. It is important to view this ordinance in the backdrop of the latest Report on UCBs chaired by R.Gandhi, when he was Dy.Governor.

R.Gandhi (2015) Report says: “As UCBs form an important vehicle for financial inclusion and facilitate payment and settlement, it may be appropriate to support their growth and proliferation further in the background of the differentiated bank model. However, the question remains whether unrestrained growth can be allowed, keeping in view the restricted ability of UCBs to raise capital, lack of level playing field in regulation and supervision and absence of a resolution mechanism at par with commercial banks.” UCBs now have high aspirations of competing with commercial banks and they expect RBI to provide relaxations in various regulatory restrictions.

In countries like Canada, Cooperative Banks pose a formidable challenge to commercial banks and the former follow the capital regulations of Basel, conduct elections regularly, Associations of Cooperatives conduct induction courses and retreats for Board members on governance. Without harming the principles of cooperatives the Cooperative Banks pose a stiff competition to the commercial banks.

A study was conducted on behalf of Gandhi committee to ascertain the range of loans granted by scheduled and non-scheduled UCBs. The study shows diametrically opposite trends in the range of loans granted by the two types of co-operative banks. While the scheduled banks granted 59.6% of the total loans in the largest loan size ranges of Rs.1-5 crore and above Rs. 5 crore, non-scheduled banks catered to the small loan segments up to Rs.10 lakh in a substantial way as this segment constituted 59.5% of the loans granted by this component of UCBs. The study further supports the premise that large MS-UCBs have aligned their business models and goals with those of commercial banks while availing of the concessions granted to the sector. Even this study could not bring out the frauds and maleficence of Bank like PMC because the fraud has been traced to even earlier period.

“The Report says; major considerations to be kept in mind are the aspirations of large UCBs, conflicts of interest, decline in cooperativeness, regulatory arbitrage, limitations on raising capital, limited resolution powers of RBI, the capital structure of UCBs and opportunities for growth that will accrue after such conversions.” The UCBs are subject to annual inspections by the RBI. Yet it could not hold accountable for the large scale frauds in UCBs.

In so far as StCBs and DCCBs are concerned, they are under the supervision of NABARD and the Board appointments are supposed to be done as per the ‘fit and proper’ criteria fixed by RBI. Elections to the Cooperative Societies are conducted by the Registrar of Cooperative Societies. Cooperative Societies as per cooperative statute are member-driven, member-controlled and member-protected. If members who are large in numbers choose to abdicate their responsibilities or do not take enough interest in their activities, jeopardising the interests of other stakeholders and particularly the non-member depositors, the remedy rests only with the Registrar.  In so far as banking is concerned, it is only RBI that regulates all and all UCBs are subject to inspections by the RBI annually or whenever any aberration comes to their notice even during a year. Depositors’ constituency for long has been asking for a representation on the Board and this can be done only by amendment to the Cooperative Act.

The latest report on Trend and Progress of Banking in India from RBI (December 2019) has highlighted the importance of cooperative banks in India lies in their grassroots’ integration into the life and ethos of the widest sections of society and effective instruments of financial inclusion. They account for about near 10 percent of total assets of scheduled commercial banks in 2017-18. It also clarified that the combined balance sheet of UCBs witnessed robust expansion underscoring the effectiveness of measures taken to strengthen their financials.

Although 89.5% of the UCBs’ resource base happens to be Deposits, their growth is muted and remains well-below the average of 13.9 per cent achieved during 2007-08 to 2016-17.” A CAMELS (capital  adequacy;  asset quality; management; earnings; liquidity; and systems and control) rating model is used to classify UCBs for regulatory and supervisory purposes. UCBs in the top-ranking categories— with ratings A and B—accounted for 78 per cent of the sector. Only 4to 5 percent are in D category for the last five years. And yet, the well-rated UCBs have defalcated with immunity for years. Will this ordinance rectify this malady?

UCBs are under the regulation of RBI and Registrar of Cooperatives of the State Government where they were situated. The regulatory conflicts were being resolved through TAFCUB during the last ten years to the satisfaction of both banks and the regulators at the altar of RBI.

During the last two decades, Marathe Committee, Madhava Rao Committee, Malegam Committee, Gandhi Committee and RBI’ Vision of UCBs have gone on record on the measures to be taken for strengthening them in the face of a series of frauds and maleficence and even closure of several UCBs in Gujarat, Maharashtra, Andhra Pradesh etc.

GoI even brought out a comprehensive 97^th Amendment to the Constitution of India in 2011 as a Model Cooperative Act to be enacted by the State Governments. None except the Government of Orissa showed interest. Had this Act been passed and implemented in letter and spirit there would have been no need for the Ordinance now.

No State is keen on legal reforms to cooperatives. Cooperatives are the seedbed of politics and every prominent politician of the country, barring some Rajya Sabha or Legislative Council Members, everyone started his/her political career with Cooperative Society as the base. To borrow an acronym, cooperatives without politics is lame and politics without cooperatives is blind. Viewed from this perspective, this ordinance makes a great difference. It sets at naught all political interferences beyond the primary cooperative societies.

Several Commercial Banks, fully under the regulation of the RBI since 1949 have also been victims of frauds and maleficence. Several Banks, both in the public and private sector like SBI, ICICI, PNB etc continue to hit the headlines on such count.

The difference is that in all such cases, the interests of depositors have been protected. There were mergers or amalgamations but there were very few occasions where the affected Banks were closed or deposits barred from withdrawal. It should be worthy to recall that even in case of commercial banks the deposits are secured to the same extent as UCBs/MSCBs, viz., Rs.1lakh earlier and recently enhanced to the extent of Rs.5lakhs per depositor. 

Several UCBs are already part of the National Payments System. Financial inclusion demands customer centricity and smart technology applications apart from financial learning at the institutional and client level.

Rural Credit Cooperatives have been in the throes of change: accounting practices,  (from single entry book keeping to double entry book keeping), technology change; regulatory changes and structural changes. They have come into the mainstream of financial inclusion agenda of the country.

When NABARD has a new guard, it would have allowed scope to the new management to carry out the required improvements to the Short Term Cooperative Credit Structure instead of clubbing them with the UCBs. All the DCCBs have already been brought under the regulation of RBI notwithstanding the ordinance. Further, RBI invested in computerization of both the UCBs and Rural Coop Societies and banks with the allocation of Rs.4lakhs per UCB and maintenance cost of Rs.15000 per month for a period of 3 years post implementation. Government of India in their 2017-18 Budget allocated Rs.1900cr towards computerization of PACS. This initiative should have been properly monitored to ensure transparency, better accounting practices and better customer service on par with commercial banks. To search for a solution of lost opportunity in the ordinance does not reflect a good governance practice.

Though the organization may introduce appropriate strategies, it is the culture of the organization and governance that would require to be looked at in cooperatives. They can improve the bottom lines through reduced costs; enhance the customer experience; and strengthen security and compliance through state-of-the art encryption practices, audit trails and security certifications. Customers always need their data to be safe and secure.

When the problem rests with regulator – lax inspections, lack of transparency in dealing with the Banks and improving governance, the remedy is sought through a legislative amendment!!     This may perhaps provide a better lever to the RBI to  merge weak UCBs with strong ones and disable closures as a  solution to protect the interests of depositors. Will the PMC depositors now get fully all their deposits and interest?  We should wait and see.

Development of cooperatives is no longer an option, but a compelling necessity to achieve financial inclusion. Implementation of the Ordinance should only strengthen the cooperative system and not eliminate them in the guise of regulation.

https://www.moneylife.in/article/cooperative-banks-move-to-a-single-regulator-rbi-and-not-a-day-too-soon/60767.html