Banking Reforms

 Banking Needs New Direction

Monetary Policy breathed a fresh air and for once customers felt that some comfort existed for them too. Post-liberalization Banks went on investing in technology and realizing the costs of such investments through various types of charges. Even after realizing the cost of investment in technologies over the last two decades and over, it is time to pass on the benefits to the customers in whose name and style they infused technologies. Waiver of electronic transaction charges for a year at least to start with, has been viewed as a big relief.  ‘No Frills’ accounts norms also changed. Though interest rate changes disappointed the depositors, borrowers expect some rate reduction transmission soon.

Prudential norms underwent change giving comfort to the banks and borrowers alike. Resolution process provided leeway for the corporates running after Bankruptcy Courts to resolve their debt and start production/services to their full capacities sooner than later. The present environment of banking is transiting from dissatisfaction to hope for the better. But the real challenge still remains: public sector banks realizing their raison de ‘etre of their existence: emerging context requires that banking is redefined to meet the specificities of farming, employment, entrepreneurship, infrastructure, and international finance as distinct entities. While retail banking, home loans, real estate and the failed infrastructure loans held sway during the last two decades the change should be in lending for agriculture, allied activities, MSME finance and segmentation of retail sector loans to the needy.

PSBs heaving a sigh of relief over their bad debt portfolio coming under control, should now be looking for new ways of doing businesses. But do they? Huge disappointment, however, is in the increase in bank frauds reaching >Rs.71500cr in 2018-19. Is technology facilitating frauds coupled with inability of banks to supervise staff and control them? Cultivating the technology to customers requires investment by banks in customer education, both online and offline.

Indian economy targeting double digit growth ere long has competing clientele bases in the current milieu of banking. Domain banking has moved to high tech banking. Men at counters have now become slaves of the machine instead of being masters.

Apex institutions like three and half decades’ old NABARD and almost thirty-year old SIDBI are yet to deliver the intended benefits to the sectors they are meant for. Major earnings of these institutions come from treasury business. Multiple funds held with SIDBI are yet to reach the micro and small enterprises. Both these institutions that have wealth of knowledge in their human resources, need thorough revamp and restructuring. Delaying the process would end up further wastage of huge organizational resource.

Manufacturing MSMEs are in negative growth for almost decade and half now. Several NBFCs focused on small business finance but the IL&FS and consequent failure of mutual fund promises left disappointment. PSBs have the option of exploiting the co-finance window but they are bogged by the mindset of collateralized loans. It is here they need change. Interestingly, one of the senior bureaucrats recently rued: ‘when did the banks fall in line with the aspirations and goals of the government – whether DRI loans, IRDP loans, SEEUY etc., until they were forced? Now is the time to look at the way to culture the banks into new ways of thinking and acting. This can come of only through change in governance and regulation.

With over 38% of the population still illiterate, Jan Dhan and Mudra Yojana as instruments of financial inclusion Banks are yet to treat them voluntarily favoured agenda. Institutional innovations like the Small Finance Banks, Small Payment Banks, India Post and the likes as also the MFIs have also proved inadequate to meet the needs of the present leave alone the future banking needs of the population.

India’s future still lies in rural areas; agriculture and allied activities and providing value addition to agriculture at the doorstep of the farmer; weaning away unproductive labour from farm sector to non-farm sector; revamping agriculture marketing with infusion of technology so that price discovery takes place at the source of production and building new skills and upscaling skills in farm sector with measurable outputs of such investments. Government, owner of over 82 percent of banking, should drive the sector towards this agenda.

The reach of banking should be tested in rural areas. Several PSBs are winding up rural branches. Regional Rural Banks that are supposed to cross-hold institutional risks with their principals and do social banking are set to merge with their principals. Institutions thus created for the rural areas will soon become extinct. The big question that RBI should think is – will double digit growth target of the Indian economy possible without mainstreaming rural banking efforts? Should there not be a rethinking on maintaining balance between proximate physical banking and digital banking? A committee of either RBI or GoI could look into this aspect and arrive at the future course of action.

The whole incentive system in HR in Banks should move towards such agenda. Selection of Managing Directors and Directors on the Board should discerningly look at the perceptions of such persons with such agenda.

Kisan Bank for farmers, allied agriculture and agriculture marketing; Udyog Mitra Bank for lending to micro and small manufacturing enterprises and small business finance, Vanijya Bank for retail banking, home, education and transport loans, Moulika Vitta Vitarana Bank ( revive the Development Finance institutions for lending to infrastructure) would make banking portfolio banking with capacities to cross-hold inherent risks of lending. GoI would do well to have brainstorming sessions on these areas as the sector is trying to breath fresh air now.

https://www.moneylife.in/article/banking-needs-new-direction/57446.html

MSMEs and the Union Budget

MSMEs and the Union Budget 2019-20

The time is ripe for expectations on a few counts: The first time Woman FM would be compassionate; since she combines in her portfolio the Corporate Affairs as well, the B2B can expect some reliefs for the micro and small manufacturing enterprises; fiscal reliefs will have a slant towards production and employment to push growth and would deal harshly the wilful defaulters both on tax and loan fronts.

Banks bit by huge corporate loan defaults started looking at MSMEs afresh as windows of opportunity although their attitude towards funding manufacturing enterprises still hangs on the unforeseen risks. This is so mainly because of the need for monitoring and supervision of these fledgling enterprises who will continually need mentoring, counselling and handholding and these involve manpower and related costs.

Post liberalization Banks have cut down costs on this count but at the same time charge for them in their books of accounts to ward off accountability. Banks can be legitimized to outsource such tasks at a small price from a few accredited institutions provided the banks do not charge their clients on this count. This is a non-budgetary intervention that the FM can make.

The cascading effect of large corporate defaulters on their vendors in the small sector and the banks’ unwillingness to buy this argument before applying their sledge hammer of SARFAESI Act action needs a novel treatment to the defaults arising therefrom.The allowable leeway for corporates that June 7, 2019 circular of RBI could be extended to MSMEs in the following areas: firstly, the lenders should have a Board approved policy for Resolution Plan; second, they should conform to transparent timelines for implementing Resolution Plan; third, they shall require independent credit evaluation (ICE) of the residual debt by credit rating agencies (CRAs) specifically authorised by the Reserve Bank for this purpose. Fourth, the cost of such independent credit evaluation should be borne by the lender and not the borrower.

Because of the large numbers requiring such effort, Union Ministry of MSMEs can accredit institutions like the Industrial Health Clinics wherever promoted by the State Governments and at least one more Accounting Firm that should pass the independent test of legitimacy with passion for the MSME sector.

Several units where power itself a major input like induction furnaces is, rubber, rolling mills, etc., the reforms in the power sector jacked up the price of this input by as much as 100% making them uncompetitive. Hence in the interest of the employment intensive manufacturing micro and small enterprises, the cost of power can be subsidized linked to GST as it will enable sharing the cost of subsidy equal with that of the state government.

Start-up manufacturing MSEs find it almost impossible to invest in land because of its prohibitive cost. Building rural industrial townships by the States with the required infrastructure like, safe drinking water, industrial water, electricity, packaging, testing and branding or co-branding facilities, multi-storied residential complexes for the workers on lease basis with industry participation, primary and upper primary schools, crèches, play grounds and cultural spaces would be the best alternative to boost this sector. Fiscal incentives like income tax exemption for a five-year period for investments in such infrastructure would be in order.

Hand looms and handicrafts cost the consumer high and leave little margins for the producers. Therefore, there is need for providing safe havens at both the ends to maintain production demand-driven. Present incentive system needs revisit to rationalize them.

Existing urban industrial estates should be up-scaled and modified to provide all the logistic facilities closer to the MSEs under PPP mode. It is important for India that has competing demands on land space to develop lease markets in a big way sooner than later to keep double digit growth moving sustainably.

Industrial work space should be made available on leasehold basis for 15-20 years with permission to mortgage leasehold rights in favour of lending institutions. The caveat should be that the lending institutions should be ordained to take recourse to this security only if it is sold to a frim of similar manufacturing facility and not for real estate or housing purposes.

To provide comfort to the micro and small enterprises in mainstreaming themselves into the economy, both ease of doing business and exit should be of greater comfort than now. Enterprises should be incentivized for vertical growth and all perverse incentives that led to spawning of enterprises horizontally should end. Lately, MoCA is seen to be over-regulating, making small and medium enterprises shun equity markets. There is need for extending regulatory reprieve for SMEs to access bourses.

IBC-like code for micro and small enterprises is imperative for providing easy exit route. Invariably apart from the debt overhang, sovereign dues pose severe problem for those that would like to exit the enterprise sector. Accommodative stance in this regard would be dis-allowing Banks to attach and to sell the only dwelling house of the entrepreneur under SARFAESI Act provisions.

If the enterprise has availed state incentives either while establishing or running the enterprise (like the interest rate pegged to 3 percent per annum in some states), such enterprises shall be eligible for exit route only after ensuring that they have not been diverted to building non-manufacturing assets: wherever capital subsidy has been availed by the unit, the State shall have the first right of recourse to such asset if the enterprise seeks winding up within five years of establishment.

In order that unorganised MSEs become organised and employment is truly reflected in the musters, even zero-based GST-applied manufacturing MSEs should be ordained to submit the GST returns quarterly. Firms that offer cloud-based but customised ERP solutions to the MSEs should be incentivised so that the MSEs embrace this accounting solution at least cost.

MSEs with turnover of up to Rs.10cr that engage accounting consultancy services should be provided fiscal incentive by way of income tax reduction. Tax compliance in the process will be incentivized.

Guarantees of CGTMSE did not provide the much-needed comfort as banks did not buy the scheme for enterprises drawing credit for more than Rs.10lakhs. MSEs look to the budget in terms of the banks sharing the guarantee premium on 50:50 basis with the MSEs or reduced premium for those buying the higher guarantee cover. Wherever the banks take collateral to hedge the uncovered guarantee risk, units should secure credit at lower rate of interest than otherwise.

The FM would do well to include in the budget tax incentives for strategic partners’ investments in the organisations meant for revival of the potentially viable units. This can be by way of exempting them from income tax for the first three years up to a limit of R.500lakh per unit. This will speed up restructuring of viable enterprises faster and in larger numbers.

MSEs particularly suffer from the absence of responsible and credible consulting services. Hence dedicated consulting firms with stakeholder participated – either promoted/partnered by the state governments or NBFCs through a separate Corpus Fund dedicated to the cause of MSEs should be qualified for GST exemption for five years, provided they work on low-yielding assets.

Government departments of both union and state governments should mandatorily become members of the Registered Trade Exchanges to deliver the advantages of e-commerce to the MSMEs and facilitate online payments of bills drawn on the former. It is pertinent to mention that so far trading has not moved significantly in this direction and most delayed payments are by the government departments and PSUs. MSE Facilitation Councils have inherent conflict of interests and the best would be to do away with them and the costs saved can move to incentivise e-commerce.

https://knnindia.co.in/news/newsdetails/msme//msmes-and-the-union-budget-2019-20

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.’