Concept Banking

Concept Banking

The year was 1972. State Bank of India, under the Chairmanship of R.K. Talwar pioneered the concept banking with the opening of five Agricultural Development Branches (ADB)in the entire country on a single day. He chose the first set of ‘Agents’ (later changed to Branch Manager). Significantly, three of them were in Andhra Pradesh. I was asked to arrange for the inauguration by the District Collector as the first incumbent of Visakhaptnam ADB. The date was set by the Central Office. District Collector S.N. Achanta inaugurated in the presence of Regional Manager, Development Manager, Area Superintendent (Bank has divided each region into compact areas to give guidance to the managers and oversee the development lending that had social objective and also effectively liaise with the district administration).

Government of India by then established Small Farmers Development Agency (SFDA) and Marginal Farmers and Agricultural Labourers’ Development Agency (MFALDA). (Both were subsumed in Integrated Rural Development Program subsequently).Each of them had a Project Director – either a junior IAS officer or an experienced Block Development Officer as Project Director.

Though Bank was lending for Agriculture from the day of Nationalization of Banks, concept banking involved special attention to the target clientele under village adoption (VA) approach and Group Guarantee scheme (GGS) to cover the unsecured marginal farmers and agricultural labourers. Both village adoption and group guarantee were innovations at that point, of the SBI. Bank recruited agricultural graduates as Rural Development Officers to serve the extension requirements of credit and this proved a boon to farmers. Of course, Syndicate Bank pioneered in lending for rural development with extension and others followed with their own incremental innovations.

Bank strongly believed that credit risk can be managed adequately and appropriately only when its field staff and managers knew the area, the activity and the person behind the activity well. It is with this perspective that an elaborate 8page schedule was prepared for VA. Data requirements demanded both secondary data and primary data. Types of soils, area under cultivation under different crops and different streams of irrigation, bovine population, flora and fauna, demographics, number of holdings in the fold of small and marginal, details of opinion leaders etc., constituted the major components of the schedule. Bank held one-day workshops on the manner of filling up the schedules at its Staff Training Centers.

Branch Management that too of a concept branch, whose functioning was under review by the top management, was the most enticing challenge faced by me. It involved careful planning, effective public relations, responsible business operations, handing limited human resources, and above all proximity to the farmers, the live wire of our economy. Head Office posted one accountant and one field officer, with a promise to post two more field officers in a month.

Visakhaptnam was MFALDA district. Project Director Alla Pitchaiah disclosed that the Agency identified 500 agricultural labourers engaged in pineapple and cashew cultivation on the hill slopes and 5000 marginal farmers for crop cultivation in Bhimunipatnam and Pendurthi blocks. He expected that the ADB should take the leadership in lending.

Day used to start at 5a.m., when I used to pick up the field officer on the way to village after village for their adoption by the branch to deliver credit that was scarce and out of tune with farmer’s requirements. Collecting data about the village helped due diligence of the farmers later. Farmers knew what they do with their land, animals and tools. They were a beehive of knowledge in so far as agriculture is concerned. They taught me agriculture.

Bank gave a soil test kit with a manual of its usage. This helped me build close relationship with farmers as I used to test the soil and tell the farmer how much and what fertiliser should be applied. It was here I learnt the meaning and shape of udder of a milch animal; how important it is to take care of the calf to ensure yield to the optimum. It was the poultry farmer who taught me the way to weed out a sick bird from the flock to protect the asset. Knowledge of activity, knowledge of area and knowledge of person are three essential competencies of a good credit analyst. Apart from the ICAR-published Handbook on Agriculture and Animal Husbandry that provided academic inputs, farmer interaction helped me become a practical banker.

Since this was concept banking, press and media were after me to flash stories of how the bank was helping the farmers. One day, the UNI correspondent, Hanumantha Rao asked me whether he could accompany us (I and my 2 field officers) to a village, Pandrangipuram, 6km from Tagarapuvalasa (Bhimunipatnam Block) where I programmed on-site documentation for disbursing crop loans. Application for crop loan and loan document were each of four and nine pages. Each page required a signature of the borrower and guarantor and if it is thumb impression for an illiterate farmer, a signature of the witness at the end of each page. The process started at 7am and by lunch time about 30 of the 50 targeted farmers could be completed. At about 3pm he took leave of us. We did it for the 30 adopted villages in the two blocks.

Next morning, as I was having my morning meal, the Development Manager (Ag) and Regional Manager gave two separate calls almost asking my explanation for the news item that appeared in all the English and Vernacular dailies (those days, newspapers in Visakhapatnam used to be delivered post-noon and therefore I had no knowledge of what appeared). I told them that I did not issue any press statement, but the Correspondent picked up the story as he witnessed the onsite loan documentation. The news item mentioned: “Even for Rs.100 loan, 410 signatures are required. The Agent, State Bank of India ADB confirmed.” This was a box item that appeared underneath a photograph of the inauguration of State Bank Staff College by Y.B. Chavan, FM, with R.K. Talwar, Chairman. No wonder, it sparked lot of controversy. But the issue had to be handled. Regional Manager asked me to take the morning flight and reach directly State Bank Staff College, Begumpet for a meeting with the Chairman pre-lunch.

Girding up my loins, I left for Hyderabad. In the meantime, Chairman asked the Development Manager (Ag) whether it was true that the document required so many signatures. He counted physically and confirmed that the number mentioned in the news item marginally fell short. I went to the Staff College Visitors’ lounge and saw the RM and DM waiting. They took me to the Chairman. He asked me to join lunch.

After a few fondly enquiries about the branch, the number of villages adopted and the way of identification of borrower-farmers and the number of farmers covered by the branch flor lending etc., as also of my father and family, he asked me for a solution to the problem. My response was: when the law of the land was equal to all banks, why our bank should have a 9-page loan document compared to a 4-page document of Canara Bank. I have also told him that per day I was able to cover only 50 farmers with such elaborate application and documentation and I would not have the luxury of covering 2000 farmers before the onset of monsoon, he directed the RM to immediately post three more field officers and desired that the lending must be over before commencement of the crop season. Those days, cash and kind component were to be delivered separately.

Then, he asked the Chief Manager Agriculture, SBI Central Office to constitute a working group with me, DM (Agri) as members and phoned up to Chitale & Co, legal advisers of SBI to join the team. The task was to simplify the application form and prepare a simpler loan document for release of all loans to farmers, ahead of the season.

The initial tremors caused by the box item almost damaging the reputation of SBI, resulted in simplification of procedures for loan disbursements. Every Loan sanctioned had to be reported to the Controlling Authority. I devised a Control form containing the required details in a single sheet, the size of which was 15”x20” incorporating twenty sanctions in a sheet.

The branch during the first year established a record of lending 2000 farmers for crop loans and 50 farmers for term lending to various activities like construction of dug wells with motor and pump set, diary, and 100 agricultural labourers for pineapple cultivation on the hill slopes of Simhachalam. This Pineapple variety was a juicy variety and I realised that they needed marketing support as the local sale was only for table variety. Liaising with MFALDA Kolkata market was connected for bulk sale.

The recovery season started, and every jealous eye was watching us. Believe me, it was repayment and not recovery as I assured during the awareness camps for recovery that they would get next crop loan if they repaid on time both interest and principal. At least 10 percent pledged their jewellery and repaid the crop loans while the rest sold their crops and repaid. Agricultural Cash Credit at the beginning of next season had no non-performing loan with ‘nil’ balance., Cash credit

We had night halts in the villages and used to attend the marriages of the children of farmer-borrowers as also opinion leaders with a gift from the branch to the couple. There used to be quite a bit of socialization with the farmers and the reason: credit flowed with extension and advice in time.

Concept banking moved much latter to small industries. At the behest of GoI, banks set up SME branches. Bank after liberalization gradually diluted this type of concept banking and flow of credit with extension.

*This is part of my autobiography.

National education Policy 2019-comments (1)

National Education Policy 2019 – Draft

“Universal access to quality early childhood education is perhaps the best investment that India can make for our children’s and our nation’s future.” Well articulated in the Policy document. Good things should begin well.

ECCE truly needs lot of effort at the systemic level. First and foremost, is the tacit acceptance of the Government that the existing school education can be improved with improving the stock of teachers. Second, future recruitment of teachers shall not be bound by the ‘Reservations’ of any kind. That should be totally on merit. Third, meritorious can join the stream only when they have job security and satisfaction. Fourth, parent’s responsibility has an important role to play in effective ECCE. Structured incentives and disincentives play a crucial part. Parents cannot do away with their responsibility by just paying up as much fees as required/demanded but by spending good time with their ward at home. The entire stock of existing teachers should be put to rigorous training in the otherwise vacation period and their learning outcomes should be measured.

Drawing ‘Gurukul’ concept would mean that the parent leaves the child to the care of teacher and only occasions him once in a way to see the progress of the child. That situation as the epics tell us would not question the methods of teaching of Gurus or the Gurus do not go on a prescriptive ordain of the king. Drawing the analogy closer, the social, ethnic and cultural diversity of the nation should distance community-oriented schools/ashrams.

Sanskrit and Urdu should be the two foundation languages pre-school and primary school education. Hindi, vernacular and English should be taught simultaneously from class-1. The child has innate capabilities of catching any diction and remembering well. How much we impart is what that matters. The teacher’s job is to create interest in each of these languages at the pre-schooling and primary levels. After Class VI the curriculum follows with Hindi, English and vernacular language at the required level.

Spirit of nationalism should be inculcated right from childhood and this can be done effectively through Chanakya’s Neeti Chandrika, Pancha Tantram, select short stories from Ramayana, Mahabharata and Gautam Buddha teachings apart from Persian tales and fables. Story telling is again an art. Some languages like Telugu have Neeti satakams  (100 poems) – Vemana, Sumati, Bhartruhari etc. Each child shall learn by-heart at least one such satakam with meaning of each of the 100 poems. The best way is to let each student recite and tell a story relating to that poem. There can be recitation competitions right from pre-schooling to primary education level at every class.

Curriculum should have compulsory play time both in the morning – indoor, and evening, outdoor. Both art and craft shall be part of the curriculum. At the end of each half year, students’ art and craft creations can be placed in exhibitions for sale. This will eventually serve as incentive for the student to excel in the art or craft. These should also merit attention in assessing the child at the end of the year. School should be seen as much a playground as a temple of learning.

Dissociate the child from carrying bag full of books. Let there be a few notebooks or electronic slate to graduate the child to digital learning at the cost of the Government. There shall be a well equipped pre-school and primary school within a radius of 5km from every household. Every such school shall have a good library – each student should be trained to use the library right from primary school to the same degree as he picks up a toy or play-tool at the pre-school stage.

Learning should be an enjoyable journey for the child. Creating the environment for such learning environment for such journey shall be the responsibility of the Government. This calls for doing with the primary and pre-schooling in the private fold. Every parent should feel happy to invest in incremental education.

If the Government schools were to improve, maintenance budget annually is imperative that it totally absent today. All government employees, officials of all cadres and all politicians irrespective of party affiliation shall send their children pre-school and primary school to only government schools.

Secondary education, class VI to XI should be moderately priced. Investment should be more on computer learning, library learning and should be graduated to self-learning techniques as he moves out to Higher Education.

The NEP recommendations on the rest of the tiers of learning are well thought of. From the graduate level, digital learning and self-learning make lot of sense. All the measures in this direction are most welcome.

Essay writing shall be part of the curriculum right from under-graduate level. Short stories, playlets, drama etc will be developed as hobbies.

Higher education is investment oriented. Laboratories and equipment access cannot come with measly investments. Parents must spare enough money for high quality education. From under-graduate to graduate and professional courses, the students get into intense competition. They get into choiced and exploratory learning to move to vocations of their choice. In order that the parents build resources to meet this advanced learning both by debt and investment, appropriate insurance policies can be introduced by the Insurance Companies with 10-15 year endowment policies.

The inverse proportion of costs of education – spending lavishly in primary and secondary through so-called public schools and private education and subsidized higher education do not contribute to a good Education Policy. At the same time, affordability of higher education should be enabled through credit and insurance mechanisms.

Constitution responsibilities that are rightly highlighted by the Committee shall serve as the basic plank on which the National Education Policy shall rest.

Digital India Budget - Less focus on manufacturing

This is truly the Budget for Digital India. Dramatic direction of the Budget could see the last year of the current political regime declare electronic voting doing away with huge ques and heavy deployment of security staff.

Economic Survey that marked a significant departure from the past to move to a $5trillion economy did not find its reflection in the Budget speech in any of the sectors, while targeting $3trn during the current year.

One welcome feature of the Budget is the recognition that rich can’t get away with the bounties. 2% tax on cash transactions of over Rs.1cr B2B and the untouched slabs at the upper end of Income bracket.

Women and Self-Help Groups have been recognized as economic citizens for the growing economy. Their share in the GDP contribution is set to move up with the trust imposed in them by the FM, through the interest subvention scheme, loan up to Rs.1lakh for one person in the SHG and Rs.5000 loan for every verified woman jan dhan account holder.

Jal Jivan Mission with a promise of drinking water all rural households – a replica of Mission Bhagiratha of Telangana, a World Bank acclaimed project – has been announced.

Social Stock Exchange is a novel initiative that will be a game changer if the logistics are well built.  

FM modified the Share Transaction Tax to only to the difference between settlement and strike price in case of exercise of options. Had she raised the STT rate to at least 1% she would have got direct revenue without tax administration expenditure into the treasury simultaneously reducing the Corporate Tax to 20% for corporates with turnover of Rs.400cr. This is a lost opportunity.

This is all that the Union Budget has for MSMEs:

Ø  Pradhan Mantri Karam Yogi Maandhan Scheme

Ø  Pension benefits to about three crore retail traders & small shopkeepers with annual turnover less than Rs. 1.5 crore.

Ø  Enrolment to be kept simple, requiring only Aadhaar, bank account and a self-declaration. 

Ø  Rs. 350crore allocated for FY 2019-20 for 2% interest subvention (on fresh or incremental loans) to all GST-registered MSMEs, under the Interest Subvention Scheme for MSMEs. 

Ø  Payment platform for MSMEs to be created to enable filing of bills and payment thereof, to eliminate delays in government payments.

Ø  Agri entrepreneurs and rural enterprises covering bamboo, khadi and honey clusters, 100 new clusters covering 50000 artisans and 100 business incubators covering 75000 entrepreneurs under ASPIRE would be a good start to boost rural entrepreneurship.

Finance Minister left many more for the Sinha Committee Report to take effect. There have been no provisions either for Fund of Funds (Rs.15000cr) or for the Stressed Asset Fund of Rs.5000cr mentioned in the MSME Report. It has also ignored the call for restructuring the CGTMSE away from SIDBI. Recognized inefficient functioning of SIDBI and the new role of mentoring, counselling, Advisory and non-financial services to the MSMEs assigned by the Committee has also not been even cursorily referred. SIDBI begs organizational restructuring sooner than later in the interest of the growth of MSME sector.

NBFCs heave a sigh of relief. But the Housing Finance Companies will hence forward be under the regulation of RBI. Rs.70000cr promised capital infusion in PSBs even after acknowledging the efficacy of IBC code in resolving NPAs should have been done with some accountability by the Banks that showed up over Rs.71000cr in frauds in 2018-19. This Budget has not touched reforms in the financial sector, the crying need of the nation.

Start Ups have all that they wished. This should promote innovation and entrepreneurship. Manufacturing Start Ups must prove that themselves as such, to avail the tax benefits.

FM targeted self sufficiency and exportability of the food grains, fruits and fish but the resources earmarked are far too inadequate. E-Nam and E-Markets have made limited inroads thus far and at the farm gate not much is programmed for change. Unless produce-wise aggregators reach the farm gate not much benefit will reach the farmer.

*The Views are personal. 

https://knnindia.co.in/news/newsdetails/msme//budget-2019-this-is-truly-the-budget-for-digital-india-says-economist

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The Probability of Gains and Risk Aversion

The Probability of Gains and Risk Aversion:

The frontiers of failed negotiation of Jet Airways

Toss a coin to help a friend taking decisions with 80 percent success unlike in Sholay picture where Amitabh Bachan showed 100 percent success with a coin of both sides’ heads only and no tails to lose. In the case where the coin has both head and tail, the risk of loss looked far lower than the prospect of gain.

I had a friend who bargained the landed properties stuck in litigation knowing well that the disputes take at least 20-25 years to settle in court. In the interregnum he used to invest on land – for a dug-well or borewell, commercial farming, horticulture and food crops in an admirable mix. In 80 percent cases his gamble paid. In the 20 percent cases where he lost also, he recovered the entire investment. He left a huge property for the progeny to gain. His estimation of risking the loss proved negative and probability of gains proved positive.

A colleague of mine, since the days of joining the bank, used to buy just Rs.100 worth gold and at the end of 30 years when he reached the position of Deputy Managing Director, he was rich with gold and cash. On a fateful day for him, after attending a marriage function noticed huge burglary and his life’s gold fortune is lost excepting those worn by his wife. The Risk of loss was least expected by him so much as the probability of gain.

In all these cases, to quote ‘Thinking Fast and slow’ by Economics Nobel Lauriat (2002) Daniel Kahneman, both probability of gain and risk of loss are a combination of skill and luck. Indian banks’ ability to measure the probability of gains versus the risk of losses missed out both on ‘skills and luck’!!

Take the latest case of Jet Airways that involved Rs.8500cr of assets in banks’ books and Rs.25000cr of non-banking assets for recovery. Banks involved that included the lead lender SBI taking the pilot seat must have spent Rs.100-150cr in terms of time spent, travel and negotiation costs and yet failed and now it is taken to the NCLT. 50% of debt is already provided for losses.

In this case like in all corporate bad debts, the borrower-firm is provided ample opportunity to put forward its point of view. Naresh Goyal placed his cards dexterously and the final jolt came when Etihad wanted 85 percent haircut. And there is no case in Middle East where Banks ever conceded 85 percent haircut!! Indian banks proved that they lacked both skill and luck to ensure a probability of gain even amidst huge loss staring at them.

Theoretical underpinnings in behavioural economics suggest that the tendency to overcome the desire to achieve gains is blurred by the desire to avoid losses. Foreseeing gains with a historical hindsight of losses require certainly either a broad vision or fresh thinking. For the involved parties it is difficult to have either. RBI seemed convinced of the need for an independent evaluator in their June 7 instructions relating to the Resolution Plans of corporate and mid-corporate enterprises.

Take the case of around one lakh estimated sick MSMEs involving about Rs.102000cr of which at least 50 percent could easily revive if  (1) such independent evaluation for revival package is done; (2) the package is discussed with the beleaguered enterprise;  (3) the cost of evaluation is borne by the Bank and (4) revival package is delivered within specific timelines. The probability of gain against the provided loss of 50 percent is around Rs.51000cr with employment gains to the extent of 4-5lakhs and tax gains to the exchequer to an extent of at least Rs.15000-20000cr.

T

he cost of revival even if third party assessor is engaged for both the revival package and follow up would be far less than that for corporates of the likes of jet airways and Kingfisher. Since the regulator has already announced a policy for resolution and if the regulator is non-discriminatory similar guidelines should be announced for the MSME sector.

The problem, however, is in the identification of assessors/evaluators since the presence of MSMEs on the brink of failure is spread throughout the country, al bait, in a few states like Andhra Pradesh, Gujarat, Haryana, Karnataka, Maharashtra, Punjab, Telangana and West Bengal.

It is only Telangana that thought of Industrial Health Clinic to tackle sickness on a firm footing. During the last one year, this state promoted fintech firm has revived 41 enterprises, stabilizing employment of around 500 persons and protected investment of around Rs.10.62cr.

Right diagnostics, timely release of resources and continuous handholding and monitoring supported this process of revival. Had the Banks shown initiative, the effort would have reached at least 200 enterprises.

MSME Committee that presented its report to the RBI suggested Diagnostic Clinics as part of the Entrepreneur Development Centres little realising that the persons and skills required for diagnostics and resolution are far different from those for enterprise development  Even the fund suggested for distress resolution, viz., Rs.5000cr has not been structured properly, particularly when the stress of MSEs is prevalent in 10-12 States. Hope the RBI would draw lessons from the failure in revival efforts thus far from the Banks and review its directives. If the Banks can contribute to the Fund to the extent of 1% of NPAs in such portfolio and help the States setting up Industrial Health Clinics like Telangana Government, results can flow and investments can revive speedily.

Daniel Kahneman says: “Overweighing the small chance of a large loss favours risk aversion and settling for a modest amount is equivalent to purchasing insurance against unlikely event of a bad verdict.”

https://knnindia.co.in/news/newsdetails/features/the-probability-of-gains-and-risk-aversion-the-frontiers-of-failed-negotiation-of-jet-airways

The Economy in Dilemma amidst Political Stability.

Union Budget by the first lady FM in 50 years is amidst great expectations in this era of political stability. For her, all is not hunky dory. GDP growth is projected by the RBI at 7.1% for the current fiscal. We can set aside for a moment the arguments of Arvind Subramanian and the controversies surrounding the calculus of GDP.

CEIC data reveals that consumer confidence grew at 14.8% in March 2019 compared to the earlier quarter although Business Confidence declined to -1.1% in June 2019 compared to the earlier quarter of a growth of 0.4%.

The dilemma: household debt was 10.9% of GDP while external debt was 20.1%. Private consumption declined to 59.3% of its nominal GDP in March 2019 declining by 2 percentage points from the previous quarter. Gross savings rate was at 30.9% of GDP. With the number of census towns increasing by 186% in 2011, urbanization of India moved to 31% space.

World poverty statistics show that poverty declined to some 70mn in June 2018 from 306mn in 2011. This should mean that spending money to keep people above poverty line, euphemistic subsidies should sharply decline. But the Union and several States are releasing unemployment allowances and loan write-offs along with caste-based dole-outs in the name of poverty!!

NCAER statistics place the middle-income population at around 153mn while the lower middle-income population is at 446.3mn (Krishnan & Hatekar, EPW 2017). The salaried persons constitute still the dependable taxpayers. There is only a marginal increase in tax to GDP ratio between 2008 and 2018 from 17.45% to 17.82% while the GDP and per capita income have doubled during this period. Relentless efforts are needed against tax havens.

We have seen the way audits are conducted calling for disqualification of the so far reputed Deloitte, PWC not excluded. Hiding incomes has become honourable and paying taxes honestly unwise. This situation unfolds great opportunity for the FM to see new frontiers in taxation. Direct Tax code is expected to change and it may tilt the scales.

All the legislators and Parliamentarians with very few exceptions are billionaires. It is time to start rationalizing subsidies and incentives for this group. There is also a case for taxing the rich among farmers – defining them at a threshold of six times to eight times the salaried. The mechanics are difficult but not impossible. Of course, most of them being in politics, irrespective of party affiliation, would engineer ghost rallies against even any modicum of such thought but should be fought over by a stable government trading off with the benefits for the rest of the farm sector.

Manufacturing growth is almost stunted amidst continuously declining credit for the last five years but for the recent marginal increases. Incentives to manufacturing start-ups should be more fiscal than financial and rebuilding the eco-system for sustainable manufacturing growth brooks no delay.

The rural-urban hiatus can be addressed adequately by encouraging investments in modernizing agriculture and value addition initiatives in rural areas. Rural industrial enterprise clusters or Rural Enterprise Zones (like the SEZs) can be the best answer and therefore, fiscal concessions for such investments will two birds at one shot: achieving employment and economy growth.

Actual projections for such fiscal outgoes would be far less than the bonanza that the urban and rich as also the corporates expect from the FM. In addition, as I have been untiringly mentioning since 2005, a percentage of share transaction tax in a rising economy and growing stock market would fetch to the exchequer instantaneous revenue with no tax administration expenditure.

Government should stop incurring public debt to save irresponsible lenders with capital infusion just because it happens to be the owner. Any additional capital from government should go with stringent conditions on the Chairpersons. Governance improvement shall be the focus and the RBI should withdraw its executives on all Bank Boards so that its regulatory rigour can be on par with a food regulator at the time of introduction of new products.

Women have more courage than men when it comes to the question of saving a child from a disaster. Madam Finance Minister should be able to pull it off.

*The Author is an economist and risk management specialist. The views are personal.

https://www.moneylife.in/article/will-political-strength-lead-to-a-bold-budget/57522.html

Published on 24^th June 2019

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.’