Negotiating a Loan during Slowdown

Ten-Point Recipe for Loan Negotiation with a Bank in Slowdown

Most first generation entrepreneurs, CFOs and CEOs of mid-corporates find it tough to negotiate a business deal with a bank. Banks usually are tight-fisted in times of recession to grant enhanced limits. They also claim full information of the enterprise, ecosystem in which it operates and the depth of the export markets. They also have a track record and credit record of the enterprise seeking to expand its operations. Economy in slowdown is tough time both for Banks and Enterprises. One has to run twice the speed in slowdown to remain where they are like Alice in the Wonderland.

Exacerbated NPAs despite the IBC have made Banks risk averse. Increase in frauds further accentuated risk aversion. The enterprises requiring higher working capital and those in export markets requiring packing credit facilities are facing formidable challenges. However, Banks may not like to lose good clients. Further, particularly those in PSBs, are also under pressure from the government to expand the portfolio in farm and MSME sectors.

Banks also actively work on the recoveries, write-offs of NPAs and topping up their Balance sheets. They are under pressure on the Asset side of the Balance sheet and therefore, look for clients who, despite slowdown, come up with a good proposal. And a good proposal in their parlance means that they would have little to exercise their thinking. Their time is under pressure most times in video conferences, meetings, Seminars, publicity and several internal committees.

Look at Mr. Raman who understands the predicament of the current banker and who is a CFO of a mid-sized corporate entrusted with the task of increasing domestic market by 100% and overseas market of the Company’s innovated tablets and injections duly approved by the US Food and Drug Administration. He is sure that the Banks would not like to lose a good client for another bank. Since his Company has proven track record, he was hopeful of the deal for higher limits on both working capital and export packing credit.

He took an appointment with the GM (mid-corporates) of the Bank one fine morning. He did his homework well. He gathered full data of the enterprise; environment in which the entire industry has been working; economics of his proposal; the area into which the Company would like to expand; the types of clients the company are targeting; the distribution system of the new markets; the incentives Company has on table; the drug controls of both India and the Asian economies in which the Company is going to operate; the disease patterns there; government health care and insurance mechanisms; the IPR and above all the financials. He also worked on the stress testing of his projections.

He presumed that in the first instance the Bank would know of the enterprise and ecosystem equally well. He started off with all humility. During the discussions, when he noticed that Bank officials do not have half the information, he had either on the product or competitiveness but are looking at only the financials and spreadsheets and not the rationale behind them, he pitched his fork high. He left some issues deliberately for the bank to come up with subsequently. He did not press for a solution instantaneously. He left a cooling time with the Bank.

After three days, when the call came, he went with his accounting team and with the required project proposal in the bank’s usual format. He took care to ensure that no additional collaterals would be offered. He kept under his armpit the directors’ individual guarantee to offer when necessary. Finally, when asked, he just mentioned that it was the company’s intention to go for public issue at a propitious moment and raise equity to meet future needs and therefore, it would be difficult to offer the same at the moment. The deal got through.

The recipe is simple:

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

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

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

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

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

3. Be transparent during negotiations.

4. Be humble; but do not compromise on limits sought as it might affect profitability.

5. ERP will help keeping the data required by the Bank and tax authorities transparent and timely.

6. Go with a vision, objectives and goals for the future.

7. Keep also the succession plan ready.

8. Give reasonable time to the Bank to think and come back with their offer,  but indicate your expectation for the result and also indicate that a Bank and a leading NBFC have also indicated their willingness to look at the proposal to attract competitive pricing of the loan.

9. Post sanction and post disbursal, keep compliance of terms and conditions tidy.

10. Make sure of half-yearly review of the limits by the Bank by feeding the required data online.

The above principles work equally well for the MSMEs. Since the MSMEs lack the attributes of a CFO and accounting team, they need to look for committed process consultancy firms like the Telangana Industrial Health Clinic Ltd (TIHCL) who handhold them and help scaling up with strategic interventions at the right time.

Published in Telangana Today 

Pre-Budget Blues for the Union Budget 20-21

Suggestions for the Union Budget 2020-21

Focus on Manufacturing MSMEs;

Industries should bloom like flowers 

We have the potential to overtake China if we trust our MSME sector more than now and provide long-lasting solutions.

Manufacturing Micro enterprises with specific focus on agro based industries and rural enterprises, which are unique and provide maximum employment need to be separated from Small and Medium enterprises and the existing MSME Act needs to be amended accordingly. All micro enterprises in future may be encouraged to be set up in clusters only with suitable infrastructure and marketing facilities. They should be enabled for scaling up and the required support system should come from the Entrepreneur Development Centres (EDCs), proposed to be co-located at the DICs. The DIC officials’ performance should be evaluated basing on the number of micro enterprises scaling up to small enterprises. Although this comes under the State domain, the Amended MSMED Act should provide for this appropriately.

The SMEs may be defined based on sales turnover and employment to incentivise them to join the formal sector and achieve GST compliance.

2. All the incentives from the government and other agencies to the MSMEs need to be linked to the employment they provide to people directly. 

3. All the subsidies and other payments by the governments and their bodies to MSMEs must be paid within 45 days from the due date. Any delay beyond this and up to 90 days should attract penal interest rate at twice the RBI repo rate. Delay beyond 90 days should be treated as criminal violation. Since the purchase and sale is a contract between the buyer and seller, Indian Contract Act should be amended appropriately, simultaneously.

4. An Independent Evaluation Office on the lines of IMF may  be set up as independent agency under Ministry of MSME/Finance/NITI Aayog to evaluate the policies, programmes, implementation and payments to MSMEs and submit a report to the Government for action and placing before the Parliament at the beginning of the Year.

5. SIDBI has had limited impact. The role and responsibilities of SIDBI may be re-examined by a High Level Committee.

Fiscal Incentives:

¡  2% to 5% of Income Tax / GST for up to every 10 in Micro & to every 25 persons employed in small evidenced by self-certified muster roll and corresponding increase in the expenditure on wages and salaries in the annual P&L statement.

¡  Micro: 1. No Cess on GST; 2. First 5 Years waive income tax for manufacturing enterprises

¡  Small: First 3 years for firms graduating from Micro exempt income tax; No corporate tax

¡  Small to Medium Enterprises: First 3 years 2% less than the usual Corporate tax for large enterprises;  

¡  Medium to Large Enterprises: First 2 years < 2% of the usual corporate tax applicable to the Corporates

¡  Technology: Micro to Small: transition with new or imported technologies – Duty to be exempted.

¡  Small to Medium: Duty to be 2% less than for large.

There should be no levy of Cess on export duties to enable the SMEs to be major contributors to export markets.

Banks and NBFCs helping revival of MSMEs:

Income Tax reduction of 1% if the institution revives 100 enterprises in a year – demonstrated by the increase in capacity utilization by 40% in six months from the date of revival for 80 percent of units revived.

Manufacturing Micro and Small Enterprises post revival earnings of up to Rs.5cr should be exempt from income tax.

With inputs from Dr. Subbaiah Singala, General Manager, CAB, Pune whose views are also personal.

Institutions loosing their relevance

Agri, MSME DFIs are failing to meet their objectives

The focus needs to shift from public sector banks to NABARD and SIDBI, whose functions greatly differ from their intended role

When one sees high inflation, the RBI comes to mind. When capital markets misbehave, SEBI is on the radar. When an insurance problem surfaces, the IRDA comes into the picture. These are institutions with proven credibility.

But when credit does not flow to agriculture or when farmers commit suicide, why does NABARD (National Bank for Agriculture and Rural Development) not come to mind? Why do farmers go to the government for a resolution? Similarly, when MSMEs do not get credit on time or do not get the services promised, why is SIDBI not under scanner? Why should the RBI still have a department to resolve issues relating to agriculture and MSMEs and prescribe priority sector boundaries, despite these other institutions?

Agricultural credit

NABARD, a statutory corporation, was set up in 1982, to take up the work of the Agricultural Refinance and Development Corporation (or, Agriculture Refinance Corporation, till 1970), as well as some functions of the Agriculture Credit Department.

The NABARD Act was passed in 1981. Its preamble states that it is: “An Act to establish a development bank...for providing and regulating credit and other facilities for the promotion and development of agriculture (micro-enterprises, small enterprises and medium enterprises, cottage and village industries, handlooms), handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promoting integrated rural development and securing prosperity of rural areas, and for matters connected therewith or incidental thereto.”

NABARD is a development finance institution (DFI) established under the statute to serve the purpose of providing and regulating credit and other facilities for the promotion and development of agriculture. It started regulating cooperative credit, but that space was ceded to commercial banks. It also started with regulating RRBs, but most of them merged into larger entities and RRB branches are now mostly seen in urban and metro centres.

When the statute provided for regulation of credit to agriculture, why did the RBI continue to hold the reins? Is it because of lack of confidence in NABARD, or a reluctance to cede control?

The Rural Infrastructure Development Fund is administered by NABARD. Why should NABARD fund States for infrastructure projects, and in the bargain became a banker for the State — not for agriculture and allied activities, rural and cottage industries? It undertakes more treasury business (pure financial operations) than refinancing of cooperative banks and RRBs at very soft rates, and through them, lends to the farmers of all hues. There has been a compromise of objectives, with full concurrence of both the RBI and the government. NABARD’s income comes more from investments than refinancing or development projects.

Commercial lending

Let us see the other DFI — set up under a separate statute in 1989 — the Small Industries Development Bank of India, or SIDBI. There are several Centrally-supported ‘funds’ for the development of small enterprises. But there is no review in the public domain as to how these funds are performing.

The Centre established SIDBI Venture Capital and the ventures funded were of the real estate sector and MFIs. It has no credible record of financing and promoting micro and small manufacturing enterprises or clusters. SIDBI started direct lending sparsely, with a minimum of ₹50 lakh. It did not consider, during the first decade financing, SME marketing activity as a term lending portfolio. Manufacturing enterprises did not get venture capital at a lower cost than the normal venture capital funds.

Commercial objectives continue to govern its functioning. Its regional offices are so autonomous that they do not even consider responding to RBI guidelines. Most of SIDBI’s lending is through collateral securities. It basks under sovereign protection to diversified activities.

Schemes such as MUDRA, CGTMSE, 59Minute Loan are all under its umbrella, albeit indirectly. No one has questioned SIDBI’s way of functioning in relation to the objectives spelt out in the statute: “An Act to establish the Small Industries Development Bank of India as the principal financial institution for the promotion, financing and development of industry in the small-scale sector and to co-ordinate the functions of the institutions engaged in the promotion, financing or developing industry in the small-scale sector and for matters connected therewith or incidental thereto.”

Thus, both the DFIs targeting specific sectors are non-performers in their supposedly dedicated domains. At a time when the Finance Minister is keen on bringing about institutional reforms, she should shift her antenna from mergers to these two DFIs.

The writer is an economist and risk management specialist. Views are personal

https://www.thehindubusinessline.com/opinion/agri-msme-dfis-are-failing-to-meet-their-objectives/article29625262.ece