Impact of Covid -19; Review of Measures taken

RBI in its Monetary Policy statement on the 27^th March 2020 front-ended the effort of banks through pumping liquidity, 3-month moratorium on term loan instalments, working capital while interest will continue to accrue during the moratorium period with a further clarification that instalments will include the payments falling due from March 1, 2020 to May 31, 2020: (i) principal and/or interest components; (ii) bullet repayments; (iii) Equated Monthly instalments; (iv) credit card dues; review of working capital limits of all enterprises. 3% CRR recommended by Narasimhan Committee, Tarapore and Ashok Lahri at different points of time has been announced.

Interest will continue to be charged on the EMIs and they would to that extent enlarge the instalments that follow the moratorium. To expect the industry to recover immediately after the lockdown period is over will be an overestimation. McKinsey says:” Restarting production facilities can be more challenging than shutting them down. It requires a thoughtful approach to revive the supply chain, match volume to actual demand, and, most importantly, protect the workforce.” They require minimum six months to get back into the full supply chain. Banks’ sagacity to reassess working capital lies here. Banks should not cut down the limits because the size of the Balance sheets of all firms will be downside of the previous years including their own.

Future lending shall be cash flow based and not Balance sheet ratio based or even just turnover based (Banks are asked to extend minimum of 20% of projected turnover while most have adopted this as the maximum and this includes SIDBI).

RBI February data indicates that as of January 2020 credit growth to agriculture and allied activities decelerated to 6.5% from 7.6% in January 2019; to industry more than halved during the same period; to services sector decelerated to 8.9% from 23.9% whereas for personal loans it grew by 16.9%. This position prevails despite liquidity infusion measures during the last two monetary policy initiatives. Therefore, risk aversion and not liquidity is the problem with banks.

The already risk-averse banks can hardly lend during this period of lockdown seeing temporary shutdown of 90% enterprises. They can only provide online comfort following the policy announcement, al bait for three months! For a running industry to increase capacity is easier than a re-opened industry after lockdown. Further, investment required after re-starting is also going to be much more than now. Therefore, banks must prepare to lend more aggressively immediately after the current period. But can they move away from aversion to appetite in taking legitimate credit risk, without improving their lending infrastructure?

A few special efforts that still beg attention are:

·       Banks to stop all SARFAESI proceedings and developing forbearance for the manufacturing MSEs.

·       Extension of NPA threshold to 180 days, effective January 2020 quickly that will keep accounts standard for any further booster doses to flow to the industry.        

T    

Special Mention Accounts 1 & 2 categories will also need uniform forbearance.

·       Unfunded limits – LCs, Guarantees, ECGs falling due between January and May 2020 should not be revoked for non-compliance but their periods extended by another six months. RBI directive is imperative.

·      

A       All viability tests shall be done by State Government accredited agencies

·       GST should be reduced to 5% till the end of December 2020 for all the enterprises that would submit their quarterly returns as required under law, even if at exempted thresholds. Review of impact should be based on an evaluation study by all the Industry Chambers.

·       All MSMEs that maintain record of manpower employed verifiable with EPF and ESI registrations.

·       All MSMEs may be permitted to engage contract labour with the social security burden absorbed by the State Government on reduced commitments annually by 20% provided they all are digitized for all transactions.

·       Power Tariff should be cut by 50% for all the manufacturing enterprises provided they are all digitized and registered under Udyog Aadhar or TSiPASS.

·       All MSME Funds should be maintained and monitored by the DC-MSME through NSIC instead of SIDBI.

GoI may focus more on cleaning up the financial sector with a sense of urgency to render its services effectively in tackling this uncertainty effectively. At one end, cash relief from the exchequer should flow to all digitized Jan Dhan and Mudra loan accounts and at the other end, credit shall pump prime the economy with responsible and timely deployment post lockdown.

More digitized developed economies are redirecting their efforts to containing the spread and holding people in discipline using WhatsApp, digital alarms at the Carona Control Rooms etc.

South Korea has transferred cash to all the SMEs to pay for their labour for one month. US has announced a $2 trillion package to combat the new war. Several nations across the world – with 196 affected by this monster Carona - are seriously contemplating the relief packages. G-20 announced $5trn relief package. For once everyone stopped thinking of fiscal deficit. Extraordinary problems require extraordinary solutions.

No time for Hobson’s choice. Saving lives is more important than saving the economy, no doubt. But preparing the economy to respond to the post COVID-19 very effectively also brooks no let-up in efforts.

*This is part of the article published on the 30^th March in Telangana Today with some additions.  A Response write up to the CII.

MSMEs Need Cash Flow Based Finance

Cash Flow Based Finance to MSMEs:

The Need and the Deed

Access to finance is the Achilles Heel of the MSMEs not just in our country but entire world. U.K. Sinha Committee has recommended cash flow based finance (CFB) as the best possible way of resolving the working capital issues of the sector. The term simply means that the finance starts with cash-in to cash-out, normally referred to as the working capital cycle by the lenders.

This is a form of financing in which a loan is backed by a firm's existing and expected cash flow. This loan is very different from asset-backed loans where the collateral of the loan is based on business assets. The repayments are going to be based on business-projected cash flows. The debt covenants of these kinds of loans are focused on manageable levels of interest rates.

Charting the cash flow helps in entering the fixed costs, operating costs, accounts receivables and existing accounts payable into the future weeks/months realistically.

It is important to understand that financing cash flow is somewhat unique for each business depending on the industry, business size, stage of business, model size, owner's resources, among other factors. It is therefore important for each enterprise to assess its resources of financing cash flow: owner investment or equity; government incentives and remittances; inventory financing, trade financing, deposits on sale, receivable discounts, factoring, or purchase order finance etc.

Several MSMEs do not have uniform flow of cash for doing their business throughout the year. It is set with lows and highs in the stream. If they want to buy the raw material when it is available at low price, it needs storage space and lender’s tolerance for high stock. Unmoving stock is always viewed with suspicion. Whenever the turnover is low, the firm faces stress because it cannot afford the luxury of unloading the excess raw material.

Whenever the finished goods are not rolled out, it can be for a variety of reasons: either the buyer is not satisfied with the quality specified at the time of order; or the buyer is starved of resource to buy at the time of receipt of goods or he has himself shifted his line of activity and therefore, trying to find fault with the product somehow to escape his obligation. Payments get delayed. There are also number of cases where the payments are delayed even after acceptance of goods. If the goods are not returned within the specified period of contract, it will be deemed acceptance after that period is over.

If the contractual relationship between the buyer and seller that is invariably conditioned by the provisions of the Indian Contract Act, comes into dispute, the amount gets stuck under litigation. MSMED Act has provisions to tackle delayed payments under MSME Facilitation Council but has been ineffective. Therefore, at the tail end of production, where the sale occurs, the cash gets stuck.

E-marketing that is fast making inroads through institutions like Amazon, Flipkart, etc., and e-invoicing that is getting popularized through GEMS and TReDS are yet to significantly change the fate of manufacturing MSMEs.

Several MSMEs, pre-GST were indulging in buying raw material in cash and selling finished product in cash. This simply means that they have been bypassing the lenders’ books. This unorganized way of business is gradually transforming with GST introduction, notwithstanding several issues locked up in GST dispensation itself. It is expedient for an enterprise to have a revenue-based financing program to ensure that cash flows are not hurt for want of a loan from the bank/FI.

It is very easy to lend on cash flows for business enterprises right from the flower vendor or vegetable vendor to a trader dealing in gas cylinders or furniture. Same can’t be that easy if one would like to fund the cash flows of a manufacturing enterprise. This segment can also afford higher interest for their loans as they invariably pass on the interest to the buyer through sale price. If they want to offer competitive price, they indulge in discounts.

In other words, the cash conversion cycle (CCC) of MSMEs has many aspects for the lender to understand. This requires (1) change in mindset of the bank field staff, managers and (2) continuous follow up of the cash flows systemically with a consent-based ERP architecture. MoMSME that offers ZOHO ERP book free of cost to enterprises with turnover of Rs.1.5cr could increase the threshold to Rs.5cr. The initial cost of such shift could result in transforming 55-60 percent of the micro and small enterprises getting into organized finances when CFB lending becomes reliable data based and data monitored lending. Data itself will be the security. Its credit rating and collateral is either not required or based on movable short-term assets such as inventory, floating debentures (for limited companies), debtors etc.

Cash is the king. It is cash that repays the loan and not collateral as the latter takes enormous time, cost and effort to repay a facility. Documentation is also simple: in the form of invoices issued by the enterprise; sales records; supplier and customer references in addition to a thorough interview of the enterprise owner. It may be necessary to crosscheck with the suppliers the invoices provided. All this simply means that in CFB, banks should spend more time with the entrepreneur and they don’t have the wherewithal to do this now.

While the RBI has been working on Public Credit Registry the way it captures the data, the veracity and verifiability of the data it captures and ease with which it becomes accessible would make firm data itself as collateral for the banks and FIs.

The writer is author of ‘The Story of Indian MSMEs’. The views expressed are personal.

Published in the Hindu Business Line, 12.03.2020: www.thehindubusinessline.com

CIBIL Scores Need Improvement

CIBIL Score

I was wondering why the lenders keep offering a personal loan in 24 hours to a few persons and how they get to know my mobile number to call repeatedly.  When I looked at my CIBIL score card, I got the hang of it all. Banks subscribe to the CIBIL and access the data.

Banks have no time for customer

What you get instead are hidden costs for supposedly myriad services, most of which don’t seem to exist.

One leading new generation private bank does not disburse cash other than through ATM/debit card withdrawals. Yet it charges Rs.1,000 annually for issue of the debit card, on top of keeping the minimum average balance of Rs.10,000 for a basic savings bank account for a customer.

Why choose such a bank? Because other banks, though with lower minimum balance requirements, are worse when it comes to customer service.

I credited a couple of cheques to my pension account with the SBI drawn on another local PSB branch on November 6. While one of the instruments for Rs.10,000 got credited on the same day, the other for Rs.70,000 was credited only six days later after relentless pursuit. A complaint email gets the standard response: “This is a system generated response. Your complaint takes 48 hours to respond. Please do not reply.”

Bank Employees and Social Banking

Bank Employees and Social Banking

  

Bank employees and unions will have to recharge themselves to a new set of objectives that would enhance the business of banks on one side and help the society on the other.

May Day is usually the day to recall the assertion of their rights. For a change, the All India Bank Employees Association (AIBEA) during this 70th year thought of taking the initiative of enjoining social responsibility. Gone are the hard days of militant agitations as means to achieve fair compensation, safety, security and comfort in work places. Workmen and officer representatives are today part of the governance and management of banks. Machines dictate the employees’ ways of working. Discretion has less relevance now than in the past. Technology dictates the employees’ ways of working and management processes. But are the customers, a happier lot? The response is discouraging.

Ever since the introduction of banking reforms following the recommendations of Narasimham Committee 1 and 2 and the alignment with the global regulatory architecture through BASEL I, 2 and 3, technology and capital adequacy have become the prime drivers of growth in banking sector.

Mobile banking and micro finance institutions (MFIs) moved into the space left by the RRBs, weakened cooperatives, and rural branches of commercial banks. Banking correspondents and customer service points, White ATMs surfaced.  Who should we blame for providing this space excepting the lack of commitment and motivation of staff to align with the objectives of the nationalisation of banks?