Fight the good fight against Covid-19

The Economist in its latest edition titled ‘Dropping the Ball’ rightly mentions – “Talking down the issues is not winning strategy.” India with a population of about 130 crore has around 100 coronavirus cases and two deaths. The awareness created by the Union and State governments and the proactive prevention and curative measures, coupled with friendly hot weather in most parts of the country barring up-North, have stood in good stead.

But it is unfortunate for a slow-growth economy where inflation is down and IIP up that this new scare has caused market mayhem pulling it down to pre-1930 levels. Several weaklings and numerous of MSMEs could see the prospect of unpaid bills. It may be difficult for them to keep the labour engaged with obstructions to the moving machines, more particularly, the export-led ones. Time to seek way out is right now and not later.

Paid Sick Leave

Will it be possible for India to take the call of US democrats – notwithstanding its total unpreparedness and niggardly health system – “paid sick leave rules, expanded payments for programmes like unemployment insurance and the nutrition assistance, and guaranteed payment of all testing and out-of-pocket costs”?

In fact, McKinsey’s March 9, report, anticipates that the global GDP growth in 2020 could fall as deep as -1% to -1.5% even if socio-economic impacts get localised and effective and timely countermeasures are initiated.

A large number of NRI families in several countries — Middle East, UK, US, Canada, New Zealand just to cite a few — are all dependent on imports for their essential food requirements. China and India have been their source. Now that the flights have stopped; visas have been cancelled, and even local movements in several nations restricted, the information is that all big malls like Lulu, Walmart, etc, have even emptied their stocks!

Rising Unemployment

The 73rd NSS 2015-16 mentions that 110 million were employed in the MSME sector. This is despite the sector’s inhibition to disclose the actual number employed for saving regulatory costs and the countless contract labour engaged to keep themselves afloat in the market competitively. According to the RBI Governor, around 50% cent of the total MSMEs operate in rural areas and provide 45 per cent of total employment. Therefore, industrial hygiene needs to improve significantly.

Micro enterprises, which account for 97% of the total employment in the MSME sector, in the context of Covid -19, faces most of the heat. Even if banks have restructured or revived them in the recent past, they should be given further restructuring by way of reduced instalments elongated dues in their working capital accounts.

India is uniquely fortunate thanks to the hot climate catching up down the Vindhyas and in a month even the North would see about 30 degrees. Moreover, with adequate stocks of foodgrains, starvation will be afraid of staring at us unless we mismanage public distribution. Opportunity awaits the MSMEs but their preparedness needs unstinted support from the lenders – be it banks or NBFCs.

Active Banks

Banks cannot be sitting ducks talking of collateral security and failing to convert risk into reward at the right time. Industry associations should aggressively put their strategies in position and rebuild trust between their member entrepreneurs and lenders. The time is for more leg work; more buyer-seller meets; more enterprises must adopt affordable ERP and move to digital platforms because these platforms alone enable speed of transaction and delivery.

Second, they should also be handheld for capturing the local domestic market to the maximum extent by coordinating with the State government concerned under the public procurement policy. The unmoved stocks thus should be quickly turned into cash.

MSMEs should be made not merely preferred creditors under IBC and NCLT but should also get at least 75% of the pendency cleared within 30-60 days of accepting the case on merits. Third, the moratorium period for the new MSMEs and restructuring in manufacturing should be extended by six months to ward off project and cost overruns.

The MSMEs financed by the NBFCs and digital payment platforms should quickly reassess the status of the loans from a practical point of view by speaking to the entrepreneurs concerned to resolve any payments likely to get stuck due to Covid-19.

Worst Hit

The services sector, where the banks and NBFCs lent heavily under retail market and MSME (services) portfolios, would be worst hit. Training-led conferences and seminar-dedicated institutions, which run mostly on promised payments from their hosts, would renege on payments as they are either not held or least attended.

Here, along with the earlier manufacturing MSME credit, it is important that the RBI quickly takes corrective policy decisions and guide banks, financial institutions and NBFCs to postpone NPA thresholds to 120 days and review the position at the end of April, 2020.

Banks beleaguered as it is due to unsustainable NPA levels would be worst hit if Covid-19 impacts their assets right away. Globally, central banks are already ahead of the curve in providing relief to the financial sector both through the zero/least interest rates for bond and credit markets and even Basel may be moving in some unusual remedial stand.

“One scary thing facing us is demand contraction. People will buy only essential goods. New purchase orders will drop further. Payment cycles will get disrupted. Job losses are ahead. All this could be a possible fallout of coronavirus. Also, the loss of GDP may be equivalent to one month of GDP,” says Sameer Kochhar of Skoch Group. But production cannot stop if employment is to be preserved and future demand is to be adequately met.

‘When winter comes, can spring be far behind’? Next monetary policy, notwithstanding comfort on inflation headwinds, could see a rate cut. At least the Chief Economic Adviser asked for it!

What went wrong with Mudra Loans?

Speed Thrills but Kills Too – A Story of Mudra Loans

B. Yerram Raju* & J. Sitapati Sarma**

The concerns on rising NPAs in Mudra Loans are red flagged by the Regulator starting from Shri Raghuram Rajan, followed by current Governor Shri Shaktikant Das and Dy Governor of RBI.   This only manifests the seriousness of the issue. 

The NPAs in Mudra saw a steep jump of 126% in one year – increased from Rs. 7227crore in FY 18 to Rs. 16481 crore in FY 19 with number of infected accounts totaling to 30.57 lakh. India Ratings and ICRA estimated NPAs under MUDRA between 10-15% as compared to 5.39% in March 2018.  Since the Mallya debacle, surging corporate NPAs are now in the company of their less endowed MUDRA borrowers pepped up by the Government.  Economy slowdown should have nothing to contribute to this sordid story.

What went wrong with Mudra Loans? 

Ever since the scheme has been flagged off in April 2015, the targets were not only set but closely driven breathing over the necks of the banks by the Ministry of Finance, to impress the importance attached to the scheme.  Bankers have exhibited more than required enthusiasm and competed with one another  to  achieve  targets to dwarf the peers before the Delhi bosses. 

While massive numbers are to be achieved within set deadlines, it appears that the appraisal was given a go by as hinted by the Deputy Governor urging banks to monitor repayment capacity of borrowers before disbursement.  All the targets – increased year after year - were achieved by not only PSBs but other participants too. 

The total sanctions till March 2019 since inception stood at Rs. 8.92 lakh crores.   The speed at which these loans are sanctioned can be noticed from the fact that Rs.18000 crore worth sanctions were pushed during the last 8 days of FY19 to achieve the target.  During FY19 an amount of Rs.970 crore was sanctioned per day by all Mudra Lending Institutions together. 

Coverage of these loans under Credit Guarantee Fund for Micro Units (CGFMU) up to Rs.10 lakh could be another reason for sloppy appraisal It is amply clear that these are push loans without proper appraisal and due diligence of the borrower.  Informed sources say that bankers chose this route to ‘evergreen’ their small ticket loans!  

The numbers reveal some different facts.  Of the total sanctions, the new loan sanctions hovered around 26% barring the first year of introduction where it stood at 36%.  Can we draw a conclusion that the renewals/existing loans accounted for larger share probably owing to evergreening process of existing loans with increased limits?  More than 70% of the loans are sanctioned under “shishu’ (Not exceeding Rs.50000), considered least risky in the portfolio. 

While Banks can finance up to Rs.10 lacs under the scheme, they preferred to keep the average ticket size to less than Rs. 1 lac.  To be more precise, the average ticket size of mudra loan increased from Rs.39405 in FY16 to Rs.52739 in FY18.  Statewise disbursals also indicate unequal distribution that also needs correction.

One way it is blessing in disguise; otherwise, the slippages and NPA accretion could have been higher.  But the only issue that remains in such small ticket loans is the adequacy of finance and resultant viability.   

During the current fiscal 29 million loans were disbursed amounting to Rs. 1.41 trillion, showing slight slowing down, against Rs. 3 trillion in the previous fiscal. Not even 2% has been sanctioned to the manufacturing enterprises because that involves onsite verification and follow up.  

The positive part of the story is employment creation.   As per an unpublished survey a total of 11.2 million new jobs were created in 2015-18, of which 5.1 million were new entrepreneurs.   If government were not to push for targets, Banks would not have touched these clienteles with a barge pole. It is however doubtful whether banks given a free hand would improve the quality of portfolio as everywhere else they had the free hand too, NPAs are surging ahead. Banks’ eye on quality has much to do with their knowledge, skills and attitude. All the three seem to be at low ebb.

Jandhan accompanied by savings and insurance and MUDRA led by credit with refinance and guarantee are two schemes of the most acclaimed inclusive agenda of NDA government. MFIs, Small Finance Banks also lent heavily along with PSBs in MUDRA realized that they did not have much to loose as the money to lend came from refinance window while post disbursement losses are guaranteed. Since the funds to MUDRA are from the Union Budget, the losses arising from the scheme devolve on the taxpayer.

RBI would do well to commission a detailed study of the portfolio and take corrective measures to ensure that the inclusive agenda of the government would not get undermined and the taxpayer is saved of the undue burden of the scheme.

Yerram Raju is an economist and risk management specialist and Sitapati Sarma is retired General Manager of SBI and present Chief Operating Officer of Telangana Industrial Health Clinic Ltd. The views are personal.

Published in Money Life on 2,12,2019 www.moneylife.in

Risk Management in Indian Banks and FIs need Improvement

The scale of frauds across the Banks in India, from cooperative banks to commercial banks crossing half a trillion rupees, ballooning NPAs, slow and untimely resolve of bankruptcy cases have exacerbated the credit and operational risks. Finance specialists add to them the impending climate risks.

The PMC Urban Bank is just the tip of the iceberg viewing from regulatory perspective. Lack of oversight is clearly visible. Appointment of Directors failed to honor the ‘fit and proper criteria’. IL&FS and DHL in NBFC space shook up the shadow banking as well. This situation raises more questions than answers and require a firm resolve to warding off financial risks sooner than later, much before they translate into macro-economic risks.

Post-recession (2008), when the regulators hurried to drive risk management and governance of risks relied on Basel Committee. The industry’s new-found focus on risk management was ‘driven largely by a survival mentality and regulatory requirements’, as pointed out by Clifford Rossi and not by internalizing the risk assessment processes and governance improvements.

Rating institutions gave exemplary ratings and yet there was collapse of corporate credit. Risk management committees were set up and Chief Risk Officers were appointed and yet the risk mitigation did not take place. Both the government – the owner of the largest banking space and the Banks do not speak of risk management as a factor that led to the recent surge in frauds. Every product and process in these institutions is put for risk assessment.

New schemes and new programs do not get assessed for all the risks. Institutional failure to unlearn from the past and complacence on the part of Banks and FIs would appear to be the main reason for the current imbroglio. Time is not unripe for a 360⁰ thinking on the subject to put in place a mechanism for risk management and governance.  Noticeably, it is the absence of risk culture that is to blame for the absence of risk governance, process, analytics and expertise.

Banks sit on a mountain of data and claim AI and MML are receiving their immediate attention. The questions that come to my mind are: why then the Banks and FIs are unable to put in place a risk-based pricing system for all their loan products? How is it they fund start ups in manufacturing and services at the same level of interest rates? Again, why an owner-driven or proprietary or partnership micro and small enterprise and a medium enterprise driven by a Board with competent directors are also charged the same price? Why the Banks that claim latest technologies in place failed to transmit the rate cuts of the regulator to the clients requiring a mandatory compliance to pare the rates of interest with the Repo rate?

First and foremost for correction, is the tacit acceptance of failure of governance unabashedly and move to a thorough clean up. The four regulatory institutions – RBI, SEBI, IRDA, PFRDA should sit together and review the rating processes of all the Rating institutions they approved. Rating should not lead to a regulatory arbitrage. A simple uncompiled directive like the corporate institutions should reflect the dues beyond Rs.2lakh per vendor MSMEs did not reduce the rating of many a corporate. Had this been done, many MSMEs would not have become NPAs. There would not have been any need for the FM to give specific mandates to clear the dues to MSMEs before October 15, 2019.

Institutions that are adept at rating corporates have a myopic view of MSMEs and such thinking is largely driven by false risk perception driven by the lenders! Watch out the data – micro and small enterprises constitute around 8% of the credit to them as NPAs and every NPA is not unrecoverable. Rating is also influenced by the collateral rather than the enterprise, entrepreneur and environment over which the Banks have data but with no required behavioral analytics.

I agree with Clifford Ross, the leading risk professional when he says: “Risk professionals need to use disruptive technologies and perhaps find other tools to more effectively assess non-financial risks (e.g., cyber and operational), which have grown substantially over the past five years.

For both financial and non-financial risks, the continued development of risk expertise is vital. A great risk professional possesses the following qualities: (1) a balanced and logical temperament; (2) experience, over-the-cycle; (3) critical thinking; (4) analytical leanings; and (5) an action-driven mindset. What's more, on-the-job training is essential, because we are all at least accidental risk managers.”

*The author of ‘Risk Management – The New Accelerator’, economist and risk management specialist. Can be reached through www.yerramraju1.com

Big Bang Bank Mergers

Bank Mergers Again at Most Inopportune Time

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

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

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

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

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

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

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

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

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

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

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

Government after hindsight decided to start the Development Banks to fund infrastructure projects and relieve the PSBs from this window as experience amply demonstrated that they are not cut for that job well due to their funding long-term projects with short term resources.

McKinsey has recently warned in an article: “Today’s environment is characterized by rising levels of risk emanating from the shift to digital channels and tools, greater reliance on third parties and the cloud, proliferating cyberattacks, and multiplying reputational risks posed by social media. Faulty moves to make risk management more efficient can cost an institution significantly more than they save.” Will the new CROs, when appointed, be capable of taking care of this concern?

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

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

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

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

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

https://www.moneylife.in/article/bank-mergers-again-at-the-most-inopportune-time-raises-more-questions-than-answers/58084.html

Enable MSEs breath fresh air

B. Yerram Raju

Banks want to revive. Large industry wants to revive. Firms like Jet Airways, Zee, Essar Steel and the big are given breather by the Banks and they are all NPAs for more than a year. Reserve Bank of India also encourages Banks to come out of the red. But when it comes to the micro and small enterprises (MSE) who have been vendors to the large firms and part of the supply chain, Banks almost shut the doors.

Interesting backdrop emerges from the latest Financial Stability Report. Discussing the sectoral deployment of Gross Bank Credit, exposure to industry sector expanded by 2.3% in Q2 FY19 as compared a meagre 0.7% in Q4 FY18. Large industry gained the most with almost 3% increase in exposure in the most recent quarter, as compared to 0.8% recorded in March 2018.

The manufacturing MSME segment on the other hand languished further as it experienced a negative growth of (-) 1.4% in September as compared to nearly 1% credit expansion recorded in March. Banks continued to be risk averse as much of credit increase occurred in working capital segment and not term loan segment.

Banks are no less to blame than the MSEs for their ills. Many MSE projects have been financed without consideration of the total costs of the project in most cases that came to our notice, that includes machinery installation costs, rates and taxes including GST, loading and unloading charges, transit insurance costs and other connected expenses.  Trial run for commercial production that should be part of pre-operative costs is also not included in the total project cost.  In addition, interest during the construction period is also debited to the working capital account opened simultaneously with the Term Loan account while such working capital account should be opened only from the date of commercial operations. Consequently, even by the time the unit starts commercial production, the unit becomes sick.

Moratorium should start from the date of release of last installment whereas most banks are starting from the date of first installment.  Sometimes, project implementation delays like delay in release of successive term loan instalments, receipt of imported machinery and its erection etc., would result in time overruns and cost overruns besides repayment starting well before commercial production.  This practice leads to inadequate financing of the enterprise and this is another contributory factor for sickness of the enterprise.

RBI’s Master Directions dated March 17, 2016 on Revival and Restructuring suggest that each Bank appoint Zonal Committee to consider revival. Corrective Action was to be initiated for Special Mention Accounts – SMA within certain time frame: SMA-0 to be provided corrective action. SMA-1 to go for restructuring and SMA-2 for recovery. Zonal Committees were not formed; even where formed, there is no record as to how many have been revived following the Directives.  Though RBI Empowered Committee meets every quarter no reliable data on the revival of manufacturing MSEs was available. RBI’s instructions on manufacturing micro and small enterprise revival seem glossy.

Yielding to the pressure of MSME Ministry, RBI on January 1, 2019, i.e., after a lapse of two years and over since the Master Directions, new directions for restructuring were issued. This circular clearly says that the standard assets SMA-0,1,2 need to be restructured and the exercise should be completed by March 2020 for loans up to Rs.25cr. There is an overdrive among banks now to restructure the SMA accounts. This is certainly a very efficient NPA-preventive tool if effectively implemented.

Neither the RBI nor the Banks consider ‘a known devil is better than an unknown angel’. Some unknown angels are fast turning into unknown devils as well.

The major issues in revival are: NPAs for revival require fresh margins from the beleaguered enterprise; provisioning continues at the same level even after revival; Banks do not have time to have dialogue with the entrepreneur when the unit develops symptoms of sickness; long drawn illness turns into a potential cancer turning the unit unviable. Weeding out willful defaulters is possible even in the first quarter of default during which time banks invariably tolerate.

It is intriguing that the units closed for six months due to failure to pay up electricity dues remain active in banks’ books of accounts. Good number of them has the potential to revive unless they willfully defaulted. During the first 3months of such non-payment of electricity dues proper diagnostics would help the revival.

1.         All NPA-MSMEs in manufacturing sector up to Rs.1cr due for consideration for revival even though the banker may take a different view, should be referred to an external accredited institution (EAI):

a.         Such accreditation could be given for an independent organization like the Industrial Health Clinic wherever set up or to a Committee set up by the State Government involving bank representatives that should include MSME-DI. The Committee should also hear the entrepreneur.

2.         Above Rs.1cr but up to Rs.25cr, such consideration for revival shall be referred to a Committee of the Bank at the appropriate level that should include ‘MSME Expert’, MSME-DI representative, and a State Government representative in order that interests of sovereign dues is taken due notice of and equitable attention is devoted for their recovery as part of revival package.  The committee before taking any decision should hear the view point of the entrepreneur, Revival Policy of the state government and record the same in the minutes for considering or otherwise duly giving valid reasons thereof.

4.         All such revival package shall consider the following financial facilitation:

a.         Freezing the status of the classification of asset on the date of reference to the external institution or the Committee of the Bank for one year or till the date of rejection.

b.         Reversal of penal interest and other penal charges;

c.         Charging simple interest at MCLR from the date of reference for one year;

d.         Fees/Charges levied by the EAI including IHCs should be borne by the GoI through a special fund set up for the purpose;

e.         Bank should share ‘pari pasu’ charge on the borrower’s assets for any external funding towards borrower’s margin including such funding by the IHCs;

f.          Additional funding where required, should be charged at MCLR by the involved agencies.

Such guidelines should be applicable to all the Banks, NBFCs, SIDBI and SFCs. ‘Behind every small enterprise, there is a story worth knowing.’

Bet Big on MSMEs in Telangana

Bet big on MSMEs in Telangana

Low NPAs in the sector should drive financial institutions for proactive interventions rather than waiting for things to happen

The Telangana government has created efficient policy instruments around TS-iPASS, T-PRIDE, T-IDEA, RICH (Research and Innovation Circle of Hyderabad), TASK (Telangana Academy for Skill and Knowledge) and TIHCL (Telangana Industrial Health Clinic Limited) for the MSME ecosystem. The micro, small and medium enterprises (MSMEs) in the State today do not face power outages, voltage fluctuations and scarcity of industrial water. Tolerance to pollution is going down slowly but surely.

Digital technologies, particularly artificial intelligence and man-machine learning, are changing the way businesses are moving. Large enterprises are also making a beeline to industrial parks and clusters like never before. Credit institutions, however, are yet to match these efforts.
The questions that arise now are: Where are the entrepreneurs? Why are they not crowding in? What to do to make the ecosystem deliver?

Copability and Capability

Risk profile of the MSME sector indicates the copability and capability of the financial sector. Business risks surrounding industry, markets, operational efficiency, management risks and financial risks impact credit quality and infringe on standalone credit risks. Low NPAs in the sector should drive financial institutions for proactive interventions and not wait for things to happen. Enhanced CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) threshold to Rs 2 crore is again an opportunity for the banks to move to trust-based lending from the balance sheet and ratio-based template lending platforms.

Both MSMEs and entrepreneurs are also changing the way they run their businesses. The other day I noticed as many as 60 young men and women at Cherlapally in the shoes of their parents or grandparents. The aspirations today for most of them are moving from legacy and archaic systems to newer ways of doing things; catching up with emerging technologies; setting up new systems and moving to global markets as well.

Banks should view such enterprises differently and wherever such change has been occurring; human assets should be valued and embedded into their risk profiles. This should enable better credit scoring and higher volume of credit to meet the challenges.

Cross-holding Risks

Going forward, industrial clusters should provide lenders a risk mitigation platform and for borrowers, scope for moving to value chain from supply chain management. But such clusters should have an interdependence between large enterprises and MSMEs in a seamless manner cross-holding the risks. All shall be on ERP platforms enabling easy data-based monitoring.

According to a recent report by the Planning Department, Adilabad, Gadwal, Rajanna Siricilla, Siddipet and Warangal districts require skill adaptation, promotion and skill building in textile technologies (handlooms, powerlooms, technical textiles, fabrics, apparel and readymade garments).

All other districts in Telangana, except Wanaparthy, require skills related to food processing machining, chemicals, and heat treatment. Wanaparthy district requires skillsets related to solar technology. TASK should also encompass providing for industry association interface and incubation centres in at least four key districts – Warangal, Nizamabad, Adilabad (around IIT) and scaling up the VTIs, ITI and polytechnics both in regard to technologies and faculty.

Mudra-enabled banks show more performance in the MSME sector but lending lags for manufacturing ones. Textile Mudra has extended the threshold to Rs 20 lakh at the extreme and this also provides a great opportunity for banks and NBFCs to lend for manufacturing MSMEs since the State is set to emerge as a major operator in the sector both in domestic and foreign markets. The future of MSMEs rests on embracing digital technology.

Declining growth in lending to the sector from commercial banks provided a great window of opportunity to the NBFCs. The latter are devising credit products based on GST data driven by the latest relaxations in thresholds and submission of returns and take very limited recourse to the credit rating agencies. CRAs have not been able to come up with a rating tool for new enterprises that the lenders can latch upon readily. Banks would do well to look at their lost loan book during the last five years. They should extend credit without cross-selling products like insurance and MF that led to the shortage of working capital upfront.

Competitiveness of future MSMEs comes from knowledge-based enterprises and global markets. Entrepreneur development centres in the DICs, NIMSME, and MSME-DI should work in collaboration to identify and train entrepreneurs and develop shelf of projects around the prospects within the shortest possible time. Lending institutions should tweak their products to cater to such situation providing environment for growth.

Disciplined Accounting

The MSMEs’ rate of vertical growth has not much to cheer as micro and small tended to remain in that status for decades. Product differentiation and price differentiation continue to be drawing less attention. Organisation of their sales books needs the willpower to move on disciplined accounting track. This would mean a change in the mindset of most of them. Digital training of both bank staff and MSMEs needs tools for kick-starting learning appetite within optimal costs for such initiatives.

Banks should consider failure as integral to the development. The GoI in its draft industrial policy has recognised Industrial Health Clinic modelled on TIHCL as a key intervention. Revival of a viable enterprise revives dormant fixed assets and sustains employment in the sector.

The government is also committed to seeing the MSMEs in good health. Seventy-five MSMEs through TIHCL are set to join the recently turned around Rajarajeswari Spinning Mills, Sirpur Kagaz Mills and the likes, with special support from the government.

Opportunity mapping as indicated in the infograph unfolds a large canvas for those who can take the risks and manage them well. Time and tide wait for none. Banks and NBFCs would do well to seize the emerging opportunities in the sector.

https://telanganatoday.com/bet-big-on-msmes-in-telangana

Proportionate Regulation helps MSMEs

Huge NPAs in corporate sector of the order exceeding Rs.10trillion and the increasing credit outflow for MSMEs from the NBFCs, on the verge of taking away the meat our of the portfolio have woken up the commercial banks to lend to this sector more responsibly. Banks like SBI, Canara Bank, Indian Bank, Syndicate Bank, and PNB are in the lead while the others are still in wait and watch approach. This context demands an inquest of the present status. Definition of the sector matters when we want to measure the MSME credit growth.

SIDBI defines MSMEs having credit outstanding of less than Rs.1cr as micro; 1cr-25cr as small and Rs.25cr-100cr as medium and beyond Rs.100cr as large for measuring credit growth while the MSME Development Act 2006 defines manufacturing MSMEs by way of investment in plant and machinery as of now: Less than Rs.25lakhs as micro; Rs.25lakhs-500lakhs as small; and Rs.500-1000lakhs as medium. An amendment is awaiting Parliament’s nod for changing the measure to turnover to make the sector ‘globally’ competitive and investment friendly. The new definition keeps micro enterprises at Rs.5cr annual turnover. SIDBI’s analysis follows neither the impending change nor the existing pattern for analyzing the MSME credit growth.

MSME Pulse April-June 2018, an arm of SIDBI measures growth in the sector by credit exposure mentioned above: MSME with a portfolio of Rs.12.6trn is pitched at 22.2% for micro and 12.8% for small Y-o-Y at the end of March 2018. Medium and large industry has recorded 7.2% and 5.9% correspondingly. The market share of new private banks and NBFCs has been growing at 30% and 10.9% respectively. NBFCs are now permitted the CGTMSE cover as well and this measure would see further growth in lending by these enterprises.

RBI Bulletin June 18 puts the micro and small, medium (as defined under MSMED Act) and large enterprises’ credit growth Y-0-Y at 1%, 0.3% and 3.6% respectively while in the financial year so far (up to end April), -1.8%,-2.7% and -0.9% correspondingly. Manufacturing enterprises under micro and small segments registered just 0.3% Y-o-Y reflecting the poor risk perception of the banks of these enterprises. Viewing from the risk perspective, even according to MSME Plus, NPAs of micro enterprises have been stable and range bound at 8.8% while for SME segment it is 11.2%. NPAs of MSMEs have a cascading effect of the NPAs in the corporate sector to which they act as vendors.

The Corporate entities issue cheques for the bills payable to the MSMEs before the last date of the quarter only to ask them not to present during the first week of the following month lest their order book shrinks. This measure will help conformance to the rule that above Rs.2lakhs dues to the MSMEs should be reflected in their quarterly balance sheets. No MSME can complain openly as they are in captive markets.

Most of the PSUs and Government departments do not honor the bills on time and the MSEs approaching the MSE Facilitation Council gets hardly a reprieve. The lender is a government owned bank; the defaulter is a government department or PSU; the arbitrator is a Government Executive. With such deep rooted conflict of interest, the MSEs hardly got justice. Even the disputed claims are not followed up with deposit of 75% of the amount settled by the Council. Even if deposited such amount would be in the Court but would not go for credit of the judgment debtor MSE that is reeling under NPA. Banks left with no option are proceeding under SARFAESI Act provisions even against the only dwelling house of the entrepreneur. They hardly have capacity and financial muscle to fight legally. Many capable of producing to capacity close their shutters prematurely.

Trade related electronic discounting system (TReDS) has on board only 34 PSUs. Several Government departments are yet to register on the exchange. This is a platform created for facilitating payment of 75% of the bill amount traded through this exchange for MSMEs that also register on the exchange and sell their goods to the registered members. Only a few banks registered on the exchange. Several state run firms did not register on this exchange. To swear by this instrument as a big boon to MSMEs will be  unrealistic.

Banks have not been putting their Board approved policy on their websites either for MSME lending or OTS or Revival and Restructuring. Banks are also reported to be charging huge penalties at no less than 18% p.a., on irregularities in the accounts and collecting inspection charges for inspections they rarely did. So is the case with SME Exporters. Banks have been mandated in June 2016 itself to set up zonal committees to ensure conformance to put in place corrective action plan, revival and restructuring and as a last resort recovery. But these instructions are sparingly implemented. The recent amendment to NPA recognition at 180days is hard to implement as the systems do not allow.

In the current environment of trust deficit, proportionate regulation by the RBI should help. RBI should move away from its stance of distancing from micro management since banks are failing the MSMEs. They levy inspection charges for visits to the units that were not made; debit interest and penal interest on the overdue amount fully knowing that the account became overdue not because of willful default but due to the cascading effect of the corporate NPAs. RBI should therefore prescribe boundaries of penalties for the irregular accounts; charges on forex dealings; modifying the IRAC norms and better monitoring of the revival and restructuring processes. Instances are staring at us where the proprietor or proprietrix falling terminally sick and unable to run the industry seeks exit but has no exit route. Government of India would do well to amend the SARFAESI Act 2002 provisions exempting the only dwelling house offered as collateral and not recognizing collateral going concurrent with the CGTMSE thresholds on par with the agricultural lands.

*The Author is Adviser, Government of Telangana, Telangana Industrial Health Clinic Ltd., The views are personal.

http://knnindia.co.in/blog/blogdetails/msme-credit-on-the-banks-radar-again-proportionate-regulation-helps

 Published on 12.07.2018

All about NPA imbroglio in MSME sector Co-financing provides adequate risk mitigation to existing lenders

RBI statistics show that stressed assets in Indian banking have reached the alarming level of 16% of the total assets. MSMEs, however, suffering a cascading effect of their elder brothers in corporates as vendors, are at the fringe, with around 8%. The extent of ‘wilful default’ as defined by RBI and the contribution of ‘financial illiteracy’ of MSMEs cannot be established by data. Hidden or undisclosed reasons for NPAs in banks’ books have been narrated in a few research studies that include CII, FICCI, ASSOCHAM, CAB, etc, but they had no institutional solutions.

Karimnagar district in Telangana has thrown up a few cases. An entrepreneur manufacturing unbranded detergent who received all accolades from the government found himself on the decks due to his market restricted only to the state government during 2008-14. Another from the same place, engaged in manufacturing and innovative recycling of batteries for automobiles with market restricted to the state public transport undertaking that actually saved no less than Rs 35 lakh per month to the entity, became an NPA and sold off his property to settle debt under the OTS. A third entrepreneur, engaged in manufacturing paints at Jeedimetla IE in Hyderabad, similarly suffered in strategically positioning himself in the market.

Fragility to Fast Track?

Arun Jailtley mentioned that the UPA’s fragile economy is on fast track now. CSO forecast of GDP growth on the eve of the Budget 2018-19, however, is 6.5%, the slowest of the last four years. What has moved fast?

Union Budget presentation moved from March end to February end. Insolvency and Bankruptcy Code completed its first anniversary. But the MSMEs are yet to get their deal. All the goods carriers from North East to down South Kerala move without any check post hurdles and the palm greasing saving nearly Rs.30000cr for various companies. Indirect Tax Reforms through GST with all its initial hiccups is still with glitches. Tax compliance moved an inch up on direct taxes although only 1.2% of the tax filers paid taxes.

Can Cooperative banks be better alternatives?

Cooperative Banking – Hopes on the rise

Banking environment in India structurally has become more dispersed than before with the Small Finance Banks, Payment Banks, Postal Bank emerging on the scene. Mergers and amalgamations in the private and public sector banks and ever increasing NPAs in the commercial banks are threatening the stability of the system. Seemingly strong macro-economic fundamentals notwithstanding, disruptive technologies are also adding fuel to fire. FRDI Bill poses a threat to the security of depositors and leaders’ promises cannot be insurance to what the bill itself holds for the banking clientele. Senior citizens, differently abled citizens, women and several customers of small means feel distanced from the services they were expecting at the hands of the banks.

Recapitalisation, NPAs and Basel III

http://www.moneylife.in/article/banks-recapitalisation-i-the-need-is-rs5-lakh-crore-to-meet-basel-iii-capital-norms/52166.html

http://www.moneylife.in/article/banks-recapitalisation-ii-4-measures-that-will-help-banks-survive/52178.html

Post demonetisation, banks were flush with funds and yet credit did not pick up. Blame was on the surging NPAs that decimated the risk appetite of the Banks. The whole country is now aware that NPAs of corporate borrowers is the villain of the piece. Banks for once stopped blaming the priority sector for the unsustainable level of NPAs.

PSBs have their liberal share and therefore FM announced recapitalization of the order never seen before at Rs.2.11trillion. To call these reforms is a travesty of judgement. Average tax paying person has to bite the bullet. It has the potential for moral hazard.

India's Growth Story

The Apparent and the Real Growth Story of India

B.  Yerram Raju*

There was a chorus from some economists with former FMs joining against the transitory decline in the GDP growth as though GDP is a strong determinant of growth. High growth and high inflation are good friends (see the table below) and the net result has resulted in poor becoming poorer and rich, the richer.

S.No.	Particulars	Average 2009-10 to  2013-14	2014-15	2015-16	2016-17	2017-18 First quarter
1	Real GDP@ market prices (%change)	7.4	7.5	8.0	7.1	5.7
2	Inflation (CPI-Industrial workers) (average %change) Wholesale price Index (average % change	10.3 7.1	6.3 1.3	5.6 -3.7	4.1 1.7	1.8 1.9

Source: RBI Annual Report 2016-17 and monthly Report September 2017.

Notwithstanding some of the good things that NDA government has done like the laws to regulate the Real Estate sector and the Insolvency & Bankruptcy Code, amending 87 rules for FDI in 21 sectors, abating corruption in some quarters and the GST introduction etc., resounding alarm has been the faulty(ed) demonetization, the GST glitches and the enigmatic oil prices that have lost the relationship with the crude price variations.

In the context of monetary policy announcement there is another chorus for reduction in interest rates as though such reduction in the backdrop of risk aversion of the banks due to the unrelenting NPAs would kick start fresh demand for credit. All the rate cuts thus far failed to result in any fresh credit or a pass through to the existing clients to spur demand. It is doubtful that RBI would have the luxury of another rate cut in the emerging economic uncertainties and falling rupee on the Forex front. Stock markets became nervous with the global undercurrents of rising unrest between North Korea and USA.

While demonetisation set in a trail that closed the a lakh and odd shell companies and disqualified 3lakh directors apart from around Rs.30000cr tax evasion, GST is in the process of bringing in better tax compliance. Going by global experience, GST will take a minimum of two years to stabilise. However, what the GST missed out is a big worry: skipping the petrol, diesel and trade in waste and scrap. A rough estimate says that the city of Mumbai alone has a turnover of Rs.1trn a year in waste and scrap. Huge black money hides here because all deals are in cash even now.

Rising fiscal deficit is another major concern. The States in the emerging political context and certain states by habit have been indulging in distributive justice without productive gains. Gujarat elections are a case in instance where the insurance companies against no fall in agriculture production are in line for responding to unsustainable claim settlements under PMBY.

In addition dragging farm sector despite good monsoon, education and health sectors are the other bigger causes for the present imbroglio in the economy.

Pragmatic government would have started addressing more worrisome issues like the rising unemployment and declining manufacturing, certainly not as a consequence of the reforms but as a cause.

Nation with more young population in the backdrop of consistent unemployment rate of 7-8% during the last three years is also facing the rising aged working population with bulging demand for high pension budget. NSSO 2011-12 Employment Survey – the one quoted by NITI Aayog in its Vision 2017-20 – admits to 51% of the workforce employed in manufacture and services, contributing to 83% share in the economy.

The Vision Document failed to make MSMEs the centre of manufacturing and employment growth.  MUDRA should move to targeting micro manufacturing enterprises in the ‘Tarun’ window. A crore of Rupees investment in manufacturing MSEs would give rise to average of six persons while six crore rupees in medium and six hundred crores in large enterprises would give rise to employing no more than ten and a couple of hundreds respectively. Its emphasis on the high-productivity high-wage jobs in the large industry sector is misplaced while its focus on infrastructure investment is laudable.

Before any strategic corrective interventions are made, the government must listen to dissenting voices both from within and outside. While fresh investments in infrastructure like Rail, Road and Ports are welcome, corrections to the failed infrastructure would require less investments if the Industrial Estates of the yester-era do not turn into havens of real estate instead of manufacturing hubs.

If the next budget typically focuses on elections and fails to provide the much needed investments in education, safe drinking water, health and bolstering manufacturing sector realising that the Make-in-India and Start-Up India remained as slogans both the economy and the NDA are going to witness a decent burial. If every citizen in the country can get safe drinking water health budget of the poor would come down by 70-80 percent. This should be the next mission of the Government.

http://www.moneylife.in/article/the-apparent-and-real-growth-story-of-india/51803.html?utm_source=PoweRelayEDM&utm_medium=Email&utm_content=Subscriber%2327753&utm_campaign=Daily%20Newsletter%2004%20Oct%202017