Pressing the interest rate button? Wait for a day.

 

Will the RBI again pause the Rates?

Subbarao, the past Governor of the tumultuous times, authored a book on ‘Who moved my Interest Rates?’ Will the present Governor Shaktikant, acclaimed as the best central bank governor while the other central banks are still in uncertain policies, author another book ‘Who paused my interest Rates? Really, a big question mark. Can inflation be hounded by the RBI or for that matter any central bank in the world? The day of reckoning is tomorrow.

I am reminded of my childhood days when my father got my chappals (footwear) resoled with less cost than a new one and it used to last for one more cycle of use. Restitch the saree to make frocks for the daughters when the head of the household gets tired of using the saree for more than four or five occasions. How can the lady go to functions with the same saree?

European Commission 2008 quoted in a World Bank blog of 19^th September 2022 mentions: “national authorities must pay attention to measures that can facilitate the recovery of the so-called secondary raw materials or end-of-waste materials” arguing for a circular economy. https://blogs.worldbank.org/allaboutfinance/inflation-and-ecological-transition-european-perspective-part-ii?CID=WBW_AL_BlogNotification_EN_EXT

Is growth complacency driving this aspirational $5trillion economy? Is inflation in a growing economy an imperative? Should the RBI Monetary Policy Committee stick to the boundaries of inflation +/- 2 percent of 4 percent? Next quarter, are we going to see the soaring prices of tomato ketchup, tomato sauce, tomato soup and other processed foods using tomato base, touch the roof? Should the RBI see the warning signals more clearly?

Five states are bound for elections in the next few months and are in a mood of competitive populism. Once the schedule is out of the Election Commission  pigeon, several incentives directed to engage the voters have to halt. Make hay while the Sun shines. States within the FRBM norms hasten to implement their agenda pre-election.

GoI is comfortable with its GST earnings month after month. It cares little for whatever the economists say on federal relations and implementation of the recommendations of the Fifteenth Finance Commission. Consumption of durable goods is on the rise. With the festive season ahead, markets are preparing to stock as much as possible from the rural markets that are buzzing with economic activity. Farmers are increasingly adopting latest technologies aided by solid support from a few states like Telangana.

Crorepatis increased and even a tomato farmer of Karnataka, a press report says, bought a car worth Rs.45lakhs within a month’s sale of this crop. But the poor who are still around 240mn and the lower middle class are unable to make both ends meet. They seem to be toying with the idea of recycling the useable instead of replacing their old TV or nearly worn out durables with the new ones.

Can tomatoes and onions be recycled? My wife says: Tomatoes, if bought when cheap, can be sliced and kept in the deep fridge to last for more than six months. Pull them off, wash them with water at room temperature, they can be used as good as fresh tomato slices. But onions, by nature are more durable but storing them in a fridge stinks. There is no way to recycle. Prices of many vegetables soaring beyond the common man’s pocket at the moment can neither be stored nor recycled.

The latest buzz word in the US is super core inflation and James Powell argued for unemployment as a solution, ludicrously. Efficacy of inflation targeting remained an uneasy solution to the rising prices of all daily consumables.

An interesting discussion in OECD Economic Outlook Vol. 22 of 2022 highlights the current difficulties in targeting inflation post pandemic as both supply and demand factors pushed the inflation.

A S&P Rating Agency’s recent report says that the days for low interest rates and easy credit in Asia-Pacific markets are ending. India is largely demand-driven economy and the recent service sector PMI hovering above 65 is a strong evidence. PMI manufacturing is steady at 57.7 in July 2023.

Politics of economic growth in India cannot afford the luxury of inflation pushed either through hiking the interest rates or a dominating fiscal policy. Will these considerations bat for a pause in the interest rates or reduce by a tad, to please the tomato buyer by 10 to 20 basis points?

*The author is an economist and risk management specialist.

 

 

 

SBI The Old and The New

 I have the pride and honour of serving for 28 years, the State Bank of India, till February 1994 and as a pensioner for the last 29 years. I see vast difference in the way the Bank deals with its customers from then to now – both internal and external. It has one of the biggest balance sheets among its peers as on 31^st March 2023 and with very low NPAs. There is speed of service for those who help themselves. SBI celebrates 75 years of independence, Azadi ka Amritotsav with a unique gesture of giving a pension bonus for those who are above 75years according to the cadre at which they retired. We, the old-SBI-ites thus had a pleasant surprise in that it still could remember that generation despite the generational divide and technology disruption.

On the 8^th June, 2023 we heard the news that its Chief Financial Officer, Attar resigned from the Bank. In fact, his appointment raised several eyebrows couple of years back, because he came from a consulting experience with Ernst & Young and banking experience with its rival ICICI Bank. Conflict of interest is not ruled out. This is a governance issue. 

For those who visit the Personal Banking branch, one stares at long ques. Technology of which we are all proud of, looks a harrowing experience for the staff. The staff, despite all good intentions feel helpless many a time because the system just does not respond.

The SBI I worked at was ‘the largest bank for the smallest man’. There were concept branches dedicated to Agricultural and SSI sectors. It’s primacy in these two areas and domain expertise whittled away with not many field level managers and staff having no time to visit the villages and enterprises. They do not have much time to discuss with them their problems. Most problems are left for the system to resolve.

The SBI today is SBI plus seven Associate Banks merged with it assimilating seven work cultures. Both are thus entirely different. I am reminded of a Chairman who said a few years ago: “We are a technology company. Banking also we do.” Very true. There are more retail loans, personal loans, vehicle loans, more housing and real estate, and corporate loans. Property and Collateral verifications take more time than client interactions. There is little time for the small segment, who need most the banking services. ‘Its old slogan:” the biggest bank for the smallest man” is consigned to history. Anything small, except where it is a regulatory responsibility, is not to their taste.

Now SBI does little of banking as all the staff and managers look to the machines for instructions. If the machine fails to respond, the employee or manager has no answer for the banking problem that the customer faces. If one wants to post a grievance on the system, there is a drop-down menu. If you can’t click one of them, in ‘others’ you have to post in just 100 letters. The CACHE appears and you copy it. It disappears directing you to re-input. There is also a cultural transformation.

If a pensioner wants to see the Chief General Manager, he has to seek appointment through a letter either by mail or email. Earlier, pensioner could telephone and seek his time and meet him. Both the SBIs are different on several counts.

Earlier, there used to be Customer Committees meeting on the 15^th of every month. They have become things of the past for the last five years.  

I gave an auto-debit instruction for my Electricity Bills. For fifteen years, it worked well. During the last three months the compliance is whimsical. It pays one bill and the other bill of the second meter is not paid. I had to pay a penalty on that count Rs.150 in the next bill!! If I want to change the auto debit instruction, branch does not have a mechanism to do it nor does it appear in the Standing Instruction menu of my internet account. Branch Manager, after spending lot of time and contacting even the system administrator could not resolve it.

SBI Pensioners’ Monthly Bulletin, Hyderabad has a banner line calling the pensioners for securing their ID cards both for the family and self, if alone, through MYHRM portal. The portal is the most unresponsive portal. It rarely works for loading all the inputs needed. When the ‘forgotten password’ is clicked either on mobile application or on desktop, it does not respond.

In fact, all the data that is required is in the form of KYC with the pension paying branch. Pensioner’s details should be available with the HR department. Further, even the spouse’s data likewise is available with the KYC where the pensioner and spouse have joint account and nominee details of the spouse, where the latter is the nominee, on the other deposit accounts held with the Bank. With so much of advanced technology and the Bank mentioning that they have AI application also for a decade, where is the need in the first place, for this harassment of the pensioner on the MYHRM portal? Can’t the Bank pull the data from the branch account of the pensioner? Photo, Aadhar, PAN, residential proof are all available with the Bank Branch.

During the first year of YONO it was ‘you’ for the bank and ‘no’ for the customer. It took two years to make it work efficiently and by this time, the UPI system overtook its strides. I am reasonably tech-savvy but fail to catch up with the SBI HRM portal.

Still, going by the call for a joint ID card with my spouse, I loaded all the details. The outcome is a disaster. My date of pension is wrong: Instead of 28.02.1994, it mentions 31.08.1997. Where from the data is produced, no one knows. Regarding my spouse data that has been faithfully loaded to MYHRM after great difficulty nearly six months back, her details are left blank, when the card is issued. 

I had to give up the card telling the branch manager, that I can do without the pensioner ID with my spouse details incorporated, as we have other IDs.

The staff who should have closed their systems at the end of the day at maximum 5pm sit till even 7pm entering KYC of new accounts or responding to printed requests of service!! They curse the system they work with day-in and day-out, but in silence. This is more because they continue to focus more on the sale of third party products like Insurance, Mutual Funds, Pension Funds etc.

I am writing this note with the hope that the Bank would make better use of technology and help many of my ilk not facing such risk.  Instead of being complacent, the Bank should introspect and it is not correction that is required but total replacement of its technology to stand in competition with its peers HDFC Bank and ICICI Bank.

Pensioners’ Association left a helpful note that those who have difficulty in accessing the MyHRM portal can seek its help in the Association office.

Is this necessary? Doorstep service to the pensioners announced by the RBI is in circulars. Can’t the tech-savvy bank think of better way of helping its customers and pensioners?

There are many unsung heroes. It’s time to have pity on them and find systemic remedies. I wish the Bank would regain its pride of place in the industry.

*The views are personal.

Urban Cooperative Banks - Future Concerns

 

Urban Cooperative Banks – Future Concerns

Urban Cooperative Banks (UCBs) occupy nearly 8 percent of the financial sector space. The topic for discussion at the College of Supervisors on the 24^th  July 2023 was on “Business Development Plans, Risk Management and Governance.”

UCBs are neighbourhood banks coming under the regulations of both the State Cooperative Acts and the Banking Regulation Act 1949 and its amendments. Financial Stability Report June 2023 acknowledges their contribution to the financial sector. Credit growth of UCBs both scheduled and non-scheduled UCBs reaching 6.7 percent and 4.9 percent respectively.

The discussion is timely for more than one reason: After the Third Five Year Plan, there was no mention of Cooperatives as economic sector in the subsequent plans until the NDA government formed a separate Ministry of Cooperation and formulated a National Cooperative Policy. Second, Multi-State Cooperative Act 2023 was on the anvil. (It was passed in the Parliament on the 25^th July 2023. Third, these UCBs were in the media and the press for several reasons: 1. failure of PMC Bank, RBI raising the threshold of guarantee limit of deposits from Rs. One lakh to Rs.5 lakhs; 2. depositors’ interests occupied the prime interest of the regulator after a series of failures and irregularities;3. consolidation of banks through merging of weak banks with strong banks, 4. introduction of 4-tier structure in UCBs based on their business levels considering their heterogeneity, 5. implementing some of the Viswanathan Committee recommendations – particularly to help raising capital beyond the membership through setting up National Urban Cooperative Finance and Development, an Umbrella Organisation, 6. Board of Management with functional experts as a support mechanism for the elected Boards has been put in place; 7.inter-cooperative agency cooperation in strengthening the sector, increasing number of penalties on good number of banks for several regulatory breaches; 8.new threshold of lending to priority sector by 2026 depending on the tier to which they belong, 9. poor governance and 10. risk management standards.

It has been noticed that majority of the Tier-3&4 UCBs have been conforming to the regulatory directives, introduced core banking solutions (CBS), opened ATMs, integrated with the larger payment systems like the UPI through appropriate technologies, and mostly compliant with the prudential norms prescribed by the RBI.

All the UCBs follow the regulation of submitting their Annual Business Plans to the RBI. This is more ritualistic. Business Development Plans are not prepared with bottom-up approach. There is no Board approved strategy for preparation of such plans annually. Even after the constitution of the Boards of Management as adjuncts to the Board (These BoMs do not have any discretion and they perform only advisory role). The credit to risk weighted assets ratio (CRAR) of scheduled UCBs (around 52 banks) remained stable at 15 percent and the non-scheduled UCBs at 17.8 percent. FSR acknowledges that ‘tier-wise CRAR of UCBs is well above the minimum regulatory requirement.’ Net worth of all the
UCBs is stated to be comfortable. Yet there are continuing concerns on their contribution. Some of the financially sound and well managed banks (FSWM) have been attempting total transformation akin to commercial banks relating to technology, like internet banking, mobile banking, one-stop solutions etc. Capacity building at various levels in this regard and cyber security are the challenges they are facing.

Three important aspects that seized my attention while reviewing their performance are: 1. The role of Board of Management, 2. Priority Sector lending imperative, and 3. Umbrella Organization.

Board of Management is supposed to guide and assist the Board of Governance with no delegation or commitment to them. They are outside the actual Board of Directors and yet in it. Instead of such ambiguity, there can be negotiation with the State Governments to adopt certain rules to facilitate the elected Boards to have nominated Directors from professional cadres satisfying the fit and proper criteria for such nominations too. This would settle the issue of enhancing the capability of the Boards. Further, training of the Board of Directors, measuring the performance of the Board of Directors on the basis of a written statement of what value addition they would like to bring to the Board and how they would like to participate in the stability and sustainable growth of the institution, annual Board retreats etc., should receive the attention of the regulators.

Agenda of the Task Force on Cooperative banks (TAFCUB) in several states is being prepared by the RBI while the concerned Registrar of Cooperatives of the State and the Associations as the other constituents are not being consulted mostly, save exceptions. Its functioning has become too routinised during the last ten years. Since the purpose of the TAFCUB is to resolve local regulatory issues without escalating them to higher levels, and improving the functional efficiency of UCBs, it is desirable and necessary that the agenda becomes more consultative.

Viswanathan Committee ‘s view is that “there is ample space for financial institutions that operate on the principles of co-operation and the inclusivity that they get. As such, the Vision for the UCB sector should be to emerge as the neighbourhood bank of choice powered by passion for inclusive finance as the core of the business model. This can happen only if their operations are founded on financial strength, strong branding, cutting edge technology driven processes, and skilled human resources coupled with an enabling regulatory environment. These internal drivers can be available to a bank either on a stand-alone basis or acquired through network arrangements. There are now several enabling factors, both for the UCBs themselves and the RBI as the regulator, to actualise this vision.”

Action still awaits the validated recommendations of the above Committee. Many of these aspects have been discussed while delivering my talk, the PPt of which is attached. 

*Text of the address at the College of Supervisors, RBI on the 24^th July 2023 at Mumbai.

 

Degenerating Value: A Scar on Democratic Fabric

 

Degenerating ‘Values’, a Scar on Democratic Fabric

B. Yerram Raju*

When R. Durgadoss and I wrote ‘A Saint in the Board Room’ we never thought of being prophetic. When we see the recent controversies on ‘Mahatma’ getting off the mark on twitter, and the controversy over the Prime Minister Modi inaugurating the Parliament on the 28^{th of} March 2023, setting aside the chorus in the country for the Lady President of India from the Dalit Community to substitute him, the degenerating values and the decline in governance made me recall the values emphasised in the 2011 Book referred above. Reinforced, as it looked, there was  a relentless fight of the women wrestlers of repute waging a war in the streets of Delhi calling for punishing the offender who intruded into their privacy.

“Leaders like Gandhi acquired discipline to put to operation the knowledge gained into actual learning. He came across a book titled, ‘Unto the Last’ by John Ruskin, while he was in South Africa. In this book Ruskin states that the liberation of the individual lay in the liberation of the community. This ideology transformed Gandhi. He said, “I arose with the dawn ready to reduce these principles into practice”. These principles are based on simple living and pursuit of honesty. Today, we have many who speak of principles and few, who think of practising them.

Gandhiji felt that one who cannot wage war over the internal conflicts that require no arms, it is incredible that non-violence cannot stop war among nations. This recall bears significance in the conflict between Russia and Ukraine. Except these two nations at war, every other nation in the world wants them to be at peace and this is refusing to happen.

Words of Wisdom from Gandhiji

“Cleaning oneself is the first step to realize God. When one cleanses his soul, the spreading effect will have a telling effect on others. He said it was better to conquer desire and hatred than winning wars with weapons. Further he believed that one should have humility as one of the main virtues with the outer boundary of the humility being “ahimsa” or “non-violence.”

Gandhiji said unto himself: ‘I myself do not feel like a saint in any shape or form’ (Young India Jun 20, 1924).[i] It is important to watch the biological clock in life:

Age	Designated as	Our role in this period
0 – 20	Butterfly	We have colourful dreams; we do not bother for anything
20 – 40	Migratory bird	We go in search of career to better environmental destinations
40 – 60	Donkey	We bear the burden of the family
60 – 80	Snail	We slowly withdraw into a shell, looking more inwards
80 – 100	Crane	We wait for our final journey towards the eternal world

 

Business ethics, however, is not driven by such biological clock.

Philosophical outlook these days is inversely proportional to the age. One can find examples of politicians aged 70 and above are actively pursuing the wrong road to wealth these days. The child in him has no role model to earn wealth by any other means.

We have people loving movies of hatred, street fights, wars, and unnatural weaponry to show their winning streak. As they age, they learn only to lie and earn money at any cost by dubious means. We see children getting used to opium in one form or other. Not a day passes without hearing the news of police catching hold of such persons.

Cultivating the right values should start from childhood and their practice depends on the world they witness. Young parents today do not have time to spend with their children to teach any of those values, for, they are busy in their pursuit of wealth. They suddenly realise that all this pursuit vanishes on a single day when they are handed over exit chit. Lakhs of jobs are lost in the guise of running their organization better.

The purpose of the educational system is to prepare its students for a lifetime learning experience that will go better and faster than it would have otherwise done without formal education. The test of every religious, political, or educational system is the philosophies that it produces and the spirit that it preserves. “If the system violates intelligence, it is bad. If it injures character, it is vicious and if it injures the conscience, it is criminal”.[ii]

Character and governance are shadowed. Child of the day is in wilderness seeing those street fights among politicians, and frightful support to ill-gotten wealth. It is time for all of us to think – reminisce into the glorious past that produced Gandhiji, Vijaya Lakshmi Pundit, Gopala Krishna Gokhale, Jawaharlal Nehru, Vajpayee, Rabindranath Tagore, Swami Vivekananda and not think of the colour of the cloth one wears – white or saffron.

75 year-old independent India, growing economically as the fastest among nations in the world, ranking fifth now, should not show cracks in its aspirational century in 2047. Next few years should be the years of correction in thinking, federal cooperation, respecting the views of the opposition, allowing debate over dissent, and a determined pursuit of shaping the next generation based on values and ethics. The saga of Mallyas, Nirav Modi, Chokshi, and the still brewing Adani story should be consigned to forgotten history. The nation has the right to freedom of expression and autonomy of institutions within the well-defined boundaries, and transparency. The largest democracy of the world, as it would emerge, should be the beacon light as it was during its epic history.

New structures always make the legacy, a forgotten past. But the new Triangular Parliament Structure built on cultural ethos of the nation could herald a new dialogue, symbolise cooperative federalism and usher in an era of value-driven democracy.

 

*The writer is co-author of ‘A Saint in the Board Room (2011)’, an economist and risk management specialist.   

 

 

 

 

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^[i] Mahatma Gandhi’s Significance for Today: John Hick, Pg 2 of 11 (http://www.johnhick.org.uk/article15.html)

^[ii] Henry Frederic Amiel, Journal, 17 June 1852

Risk Profiling of Manufacturing Micro and Small Enterprises

 

India’s Micro, Small and Medium Enterprises (MSME) viewed as the lifeblood of the Indian economy, contribute 30 percent to GDP and of them micro enterprises alone are estimated to employ 23 percent of India’s total workforce, according to the data of the Union Ministry of MSME. Access to credit has been the most contentious issue discussed on public platforms and IMF estimated that only 23 percent of the total number of enterprises in this segment got formal access to credit.

 

Post-pandemic, government of India has been laying lot of emphasis on the growth of micro, small and medium enterprises and extending incentives and products for easing the conduct of their business. The Union Finance Minister, in her usual meetings with the bankers, draws her untiring attention to the need for increase in credit to these enterprises. Banks, on their part, do not lose the opportunity to exhibit their fancy to lend to such enterprises.

 

Trust deficit was the major contributory factor from the lenders’ perspective. It is therefore considered expedient to look at the risk profile of such enterprises and see the possible mitigating factors.

 

Latest Profile of the Sector

Interestingly, TransUnion CIBIL-SIDBI MSME Pulse Report for July-September presents a very hopeful perspective presenting a growth of 24 percent year-on-year (Y-o-Y). Credit to ‘micro’, viewed as unmoving window of Banks for five continuous years since 2017 and even on the negative window, reported a 13 percent growth in credit outstanding y-o-y as of September 2022 versus 10.6 percent y-o-y for all the MSMEs y-o-y. Growth in disbursements for micro, small, and medium enterprises had been at 54 percent, 23 percent, and 9 percent respectively during the period.

 

According to RBI’s Financial Access Survey, 72.83 percent of MSME Credit is concentrated in ten states: Maharashtra, Gujarat, Tamil Nadu & Pondicherry, Uttar Pradesh, Delhi, Karnataka, Rajasthan, West Bengal, Telangana, and Haryana. Maharashtra takes the major slice of 26.19 percent. This obviously means that government assistance to the sector also reached these states in a significant measure, at least proportionately viewed.

 

Very small (with aggregate credit exposure not exceeding ₹ 10 lakh), micro1 (with aggregate credit exposure between ₹ 10-50 lakh) and micro2 (with aggregate credit exposure between ₹ 50 lakh-1 crore) experienced growth of 20 per cent, 15 per cent and 11 per cent y-o-y respectively showing sudden spurt in micro lending, which is not just a post-pandemic bounce back, it added.

 

Delinquency rates dropped y-o-y across all the three lender categories (public sector banks/PSBs, private sector banks(PVBs) and NBFCs); the highest drop was in PVBs segment (from 2.8 per cent in FY22-Q2 to 1.5 per cent in FY23-Q2).[i] Street Vendors’ financing programme, MUDRA loans (Rs.3.4cr sanctioned during FY21-22), 59-Minute loan programme for the MSMEs contributed to the steady uptick that was presented apart from the Union Finance Minister dinning into the ears of bankers that credit to MSMEs has been sluggish. There was a pressure on the banks to perform.

 

This positive vibration whittles down suddenly when we hear the Union Minister of State for MSME submits to the Parliament, duly reported in the Financial Express dated 23.02.23: “The number of Udyam-registered MSMEs closed in the current financial year has nearly doubled from the last financial year’s count, showed official data. From 6,222 MSMEs shut during FY22, the count has jumped to 12,307 as of March 9 in FY23 while only 175 units were closed between July 1 (when the Udyam portal was launched) and March 31 in FY21, taking the total number of MSMEs closed to an all-time high of 18,704. Maharashtra had the highest number of casualties with 4,871 Udyam-registered MSMEs shut since July 2020 followed by Tamil Nadu (2,326), Uttar Pradesh (1,568), Gujarat (1,558), Rajasthan (1,297), Bihar (1,075), and more.”

 

Gross Non-performing Assets ratio  (the ratio of total gross NPAs to the total advances made during a particular period by the lender) in MSME loans in FY22 stood at 7.6 per cent, 7.3 per cent in FY21 and 8.9 per cent in FY20. 

 

Resilience and sustainability of industrial growth is inextricably linked to the healthy growth of the manufacturing micro and small enterprises (MMSEs), that happen to front-end the supply chains of the industry at large. The data and analysis of the Transunion report does not provide information on how much is the share of growth of manufacturing MSEs. September 2022 PMI data shows that industrial growth has not kept pace with the overall growth of the economy. The growth obviously occurred in the services sector, due to the digitization of the highest scale, entry of FINTECHs, formalization of the MSMEs, widely dispersed 200-odd incentive schemes from the Union Ministry of MSME, and the unique success of unified payment interface system (UPI). Despite the U.K. Sinha Committee Report calling for cash-flow based lending of working capital to the MSMEs, RBI creating public credit registry, and pushing the banks to move to data-based lending instead of security-based lending, MMSEs did not catch the eye of the banks. Hence, risk profiling of the MMSEs would be necessary to understand the reasons for the trust deficit in the manufacturing sector.

 

Definitional Risk:

Manufacturing and Services have been combined in the way the MSMEs are defined. The changes to the definition adopting the twin criteria of investment and turnover to redefine them have given an escape window for the banks to keep at bay the MMSEs with investment below Rs.1crore (Rs. Ten million). The turnover threshold for such enterprises is five times the investment level – Rs.5cr per annum. While this definition coupled with the insistence of any new enterprise shall register on Udyog-Aadhar portal of Government of India, has enabled only the organized to have access  credit and incentives, it is yet to bring many unorganized MMSEs into the organized fold. Lenders still have their own definition – micro enterprises are those that have outstanding credit of less than Rs.1cr. The law of proportionality demands that the micro enterprises be brought under a separate statute so that the benefits meant for them reach without infringement.

 

By nature, micro manufacturing enterprises are owner-led proprietary or family partnerships. They do not distinguish their firm expenditure from family expenditure. Their books of accounts are also not well organised. Their maintenance of record of stocks of raw materials and finished products is less systematic than their counterparts in the small and medium enterprises even. They are mostly sub-contractors as their scale of production does not permit them to participate in private or public tenders directly. But their working capital cycle accommodates this unorganised way of running their enterprises. They lack counselling and guidance from their lenders as the later have little time for these large numbers in their books of accounts that tend to slip to non-performance at the turn of the hat. Thus, these enterprises have origination risk. Information asymmetry and adverse selection, the two factors that adversely affect the credit risk need mitigation.

 

Covenant Risks: These MMSEs in their eagerness to borrow money sign on the dotted line before their lender. They do not understand the implications of the covenants they are agreeing for. Earlier they were not knowing even the rates of interest. At least now, thanks to the widely publicised monetary policy interventions periodically, they know the interest rates. But they are ignorant of the insurance clauses and their implications. They do not, in many a case, know that their machinery and stocks are jointly insured with the lender and the premium is directly deducted annually from their working capital account. The extent of insurability is least known to them. Such insurance is invariably made with the insurance arm of the Bank that lends the enterprise. But the covenants of the policy are little known to them as the Banks do not share any copy of the insurance policy. This is a grey area.

 

Compliance Risk: MMSEs fail to comply with the regulations relating to products, processes, and finance more out of ignorance than out of own volition. Neither the regulatory institutions nor the financial institutions spare time to explain the implications of non-compliance of the rules and regulations. Environmental regulations and financial regulations are the most breached. Labour Code that has four components are least explained to the MMSEs. It is not uncommon to find that these enterprises fail to maintain even a muster roll and even where maintained does not agree with the reality. The number of persons actually engaged and the number in the roll rarely tally. There is a cost involved in compliance and such cost is felt onerous by the micro manufacturers. When the cost of compliance is more than the cost of avoidance, they prefer the latter. Transparency in the cost of compliance is also found wanting. These are areas of immediate correction to take these enterprises to the globally competitive levels.

 

Human Resource Risks: MMSEs employ on average 8-10 workers including the owners. They invariably depend on migratory labour instead of labour because of the low wages they demand and reliability. Many studies have indicated that they spend little resources on skilling, re-skilling, and up-skilling as the cost of such human resources development is beyond their capacity to absorb. In fact, these MMSEs act as providers of skilled persons to the Small and Medium Enterprises as the labour learn their art of working on the machine duly trained by the proprietors. Some States have insisted on engaging locally available skills and their experience with such persons on the production front has become counter productive and costly. They cannot afford to train their labour in reputed institutions. They require peripatetic trainers who are rarely available.

 

Product Risk: According to a number of studies, 60-70 percent of the MMSEs may conform to the quality of the product requirements but fail in packing and forwarding requirements. This puts the buyers at risk and therefore, the related payments.

 

Pricing Risks: Several manufacturing MSEs adopt neighbourhood pricing of their products as they would not like to lose out in competition with the peers. They lack abilities to cost their products. They also do not much understand the leakages that occur in their supply chains. The product is not priced cost plus. Since debt is their major source of capital they always look to loan swaps and interest subsidy as a major source to beat the pricing competition.

 

Technology Risks: While several enterprises are aware that new technologies have the potential to increase their efficiency, their ability to finance those new technologies is very limited. Quite many are scared to approach their lenders as they would have been in arrears already either of the interest or principal payment. They must have already availed one or two name-sake restructuring of their loans. Their ability to calculate return on investment in technology is also extremely limited. Banks hardly find time to spend time with the entrepreneur and guide him.

 

Payment Risk

Global Alliance for Mass Entrepreneurship (GAME) estimated that the problem of delayed payments to MSMEs is in the magnitude of Rs. 10.7 lakh crore, with 80 percent of this being attributable to delays to micro and small enterprises (MSEs). The problem of delayed payments is exacerbated by the lack of credit, specifically working capital facilities, that are available to these businesses. Reports such as the IFC’s 2018 Financing India’s MSMEs estimate that the total addressable debt requirement of micro and small enterprises was Rs. 24 lakh crores in 2018, with an estimated 70 percent attributable to the elevated working capital needs of these businesses.

 

Sovereign Risk: Industrial policies, Budgetary announcements, Export-Import policies, Trade Policies and not-so-enriching interface between various government departments that deal with the MSMEs and the Union Ministry of Finance, inter-state coordination issues are the various factors that impinge on sovereign risk. Enterprises have to adjust themselves and accommodate for the changes in the way they function rather than seeking instantaneous remedies to their business dealings.

 

Policy formulation for the MSMEs is at risk because of lack of reliable data. There has been no census of the units since 2004, the year of last Census. The data on the Union Ministry of MSME portal is that of 2012. While the data on Udyam registration is captured in isolation, its integration with the existing data did not take place. There is no data of mortality in the figure of 6crore-odd enterprises mentioned on the website.

 

While several state governments and union governments announce a host of incentives, the reach is suspect due to a variety of constraints: 1. Expediency decides the allocated budget for release to the sector and the first hit is the MMSEs, the most vulnerable. 2. There is invariably lack of information relating to the cost of securing these incentives – in terms of number of visits the entrepreneur has to make to the concerned department; the cumbersome approach to the person who actually decides on the sanction and release of the incentives. 3. Weak negotiating ability of the Industrial Associations over the incentive releases, etc.

 

Digitalization of enterprises, Account Aggregators (yet to mature in its access and use), Open Credit Enablement Network (OCEN), Co-lending with NBFCs, Factoring, Trade Related Exchange System (TReDs), have lately entered the Risk Mitigation instrumentality. Yet, the ability of the MMSEs to take advantage of these mitigants is way behind both in terms of awareness and the skills.

 

Therefore, there is a need for developing a separate framework for the MMSEs and a broad-based ecosystem involving policy makers, institutions that act as policy instruments, RBI, Indian Banks Association, NBFCs, Ministry of Agriculture and Cooperation, Ministry of Electronics and Information Technology, Ministry of Environment, Ministry of Energy of the Union Government and the ten state governments that have the major share in MMSEs. This framework should be discussed with the stakeholders in the leading ten states before firming up. Separate line of budget should be provided to meet the announced incentives and institutions like the NIMSME, NIRD, Central Universities and those that are licensed to run technology hubs should monitor the working of the framework.

*The author is an economist, risk management and SME Turnaround Specialist.

 

https://www.moneylife.in/article/risk-profiling-of-manufacturing-micro-and-small-enterprises/70258.html

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[i] https://www.thehindubusinessline.com/money-and-banking/loan-disbursements-to-msme-sector-grew-24-in-q2fy23-transunion-cibil-sidbi-report/article66652635.ece

 

Uncertainties cloud the Future in 2023

 

The Future is not so much hindsight as foresight: Uncertainties still Cloud Us

Rugged roads need all-weather four-wheel driven vehicles and not the luxury Sedans. We are in uncertain times still. End of the year has not been that good although economy-wise, India is far better than many developed countries. We have to re-discover India as it is the second largest nation in the world next to China, in terms of population. We have 17% of world’s population and 4% of world’s water resources. We see more out-migration than in-migration. Loyalty to the nation and even to the village one is borne, is suspect. This article explores the future not like a soothsayer but like a typical economist and philosopher.

we see more habitable villages than at the time of independence. We see less land producing more grain – distancing absolute poverty and hunger. The nimble hands of women farmers, in particular, were responsible to fight the pandemic with confidence. There were very few starvation deaths even in the midst of our intense fight with the pandemic. The nation proved that when a crisis arises, the nation would rise to the occasion and would not allow it to devour us. Thanks to the social development schemes of some of the states like Telangana, Tamil Nadu, Kerala, Jammu & Kashmir, Assam, and Nagaland, we also witness higher literacy and health levels during the last decade. Numbers are available in any news daily that I would not like to strain the reader with.

We have built good roads, good communication systems, and on the threshold of reaching the status of a developed nation. In the comity of nations, last eight years have won us a seat in the UN Security Council, chair of G-20 and a respect that history of India should be proud of. We see less land producing more grain – distancing absolute poverty and hunger.

A time has come when we should rethink and re-envision the freedom as we see not just economic and financial risks but risks to the very existence of humanity. We have laws on Rights – child rights to the right to information and right to education. Yet, digital education distanced the teacher from the taught and so is the respect for the teacher. It is ghastly to see the atrocities of teachers on their wards whom they should love as their children. Not many movies on celluloid or the small screen can be watched with the entire family. They are full of violence and sex and all passed by the Censors.

There is no state, nay  a district, that does not report one type of crime or other. There are areas where people are living in perpetual fear. Billions of rupees are wiped out with  a wink of an eye. Cybercrime is at its heights. A citizen has to fight for enforcing his rights. We see the strengthening of the vigilance arms: Enforcement Directorate, Central Bureau of Investigation, Intelligence agencies etc.

For 75 years, we still think of good governance and good institutional framework devoid of corruption. We are a witness to collapse of some of the newly built bridges killing lives. On the other side, we see that villages became more habitable. We see less land producing more grain – distancing absolute poverty and hunger.

I pleasantly recall that during my young days, we had in the school syllabus, civics, history, and geography as subjects under the broad heading of social sciences. We had at least two sessions for drawing, craft and play in the ground a game of our choice – not just cricket. The National Education Policy claiming a progressive higher education intervention that ensures opportunities for those who have the economic muscle to pursue – a four year degree course, a double degree simultaneously, has not rebuilt the foundation for a student to blossom under ethics, respect to colleagues, and respect to elders and an awareness that the student has an ocean to swim the tides of learning.

Therefore, next twenty five years of this growing nation are really challenging. The challenge lies in building a generation that loves peace, that embraces ethics in living, that sees security in building a good society, that witnesses any young women walking in midnight without fear of assault and in absolute comfort, that every young lady would like to be a good mother and a good wife nurturing a good family even within small means. Cooperative federalism should see the end of riparian water disputes so that we have universal safe drinking water and not sanitary paper. This should be the new year 2023 pledge for all of us.

Future is going to be more uncertain than the present. There may not be pestilence but there could be wars over weapons and women. India, known for cohesive families, should not be a victim of cultural incursions from the west. It cannot afford to blame the present for what their fathers and forefathers had done to them and their families.

It is a great recall from Pundit Nehru’s Discovery of India (p.61), where he described the Culture of the Masses. “ ..I saw the moving drama of the Indian people  in the present and could often trace the threads which bound their lives to the past, even while their eyes were turned towards the future. Everywhere I found a cultural background which had exerted a powerful influence on their lives. ..The old epics of India, Mahabharat, Ramayana, and other books, in popular translations and paraphrases, were widely known among the masses, and every incident and story and moral in them was engraved on the popular mind and gave richness and content to it.” There is need for great resurgence in this direction. ‘Let not thy winged days be spent in vain, where gone, no gold can try them back again.’

*The views are personal.  

 https://timesofindia.indiatimes.com/blogs/fincop/the-future-is-not-so-much-hindsight-as-foresight-uncertainties-still-cloud-us/

 

 

 

 

 

 

 

 

 

 

 

 

 

Recalli ng the child in you

 

Recalling the child in you today?

B. Yerram Raju

November 14 is remembered as Children’s day. I recall my younger days when standing among the crowd on the roadside of the Main Road of Visakhapatnam, I was standing with a rose in one hand and the national flag in another to greet Pundit Jawaharlal Nehru, the then Prime Minister, who came for launching Jala Usha. When Nehru picked up the rose from my hand as from a few of my neighbouring children standing like me, I truly thought, I made the day. There were no mobile phones to catch it on a camera to show to posterity my joy.

Nehru had love for children is very well known. He believed today’s child is a responsible citizen tomorrow. The right of a child to grow and blossom has permanence. He believed in nurturing the ambitions of a child.

The smile on an innocent child face unfolds to us the grandeur of nature. His/her ambition is the future of the world. His innocence is infectious. Traveling in a train, that too driven by a coal engine creating a smoke screen on the face, the question that the child puts to the parents is why are the trees moving backwards when the train is moving forward? Why would the birds travel along with us? Whenever the train stopped in the night why would I see the same moon and stars and why they do not move backward?

Similarly, when I stood on the shores of Vizag beach, why do the colours of the sea keep changing? Why would my feet soaked in water sink in sand?

I hear the small-size carts selling ice creams, fried groundnuts, a tasty dal mixture made just ready for you but packed in a news paper cone. They are mouth-watering and irresistible. I make a pressing demand and when not responded readily cried so loud that the world would be lost without having them. The parents concede. There was no fear of pollution, contamination, or threat of food poisoning!!

As a child, perhaps I never thought that my neighbour belonged to a different caste. I happily shared whatever I had with him. I sat by his side in the government school, for there were no private schools. I played with him and soiled my clothes in the process only to have a beating and a bath on my return. The days were merry and 14^th November etched in my memory. How many children from a poor or lower middle class still enjoy the same way? May not be many as the schools are no longer the same.

Teachers in the primary and secondary schools were a great inspiration not withstanding their unsparing rod to teach a lesson. The parents never questioned the teacher. But they used to question the teachers if their children got poor marks in a subject! Those days were different but certainly worth a ton of lovely remembrance.

https://timesofindia.indiatimes.com/blogs/fincop/recalling-the-child-in-you-today/?val=3728

Mahalaya Amavasya - the Day Leads Many into myriad of lights.

 

This Dark Day Leads Many Into Myriad of Lights

B. Yerram Raju

‘Mahalaya Amavasya’ is a day we recall our ancestors and pay homage to them. There lies the culture, compassion, a colossus of learning that shaped lives for those who recall them. At least for me, scripting my autobiography at the dawn of eighty years – ‘Roots to Fruits: The Journey of a Development Banker’, is a partial justice to the ancestors as it covered only the upbringing by my beloved parents and shaping my career and life as a banker and beyond.

My grandfather, bearing the same name as mine, for, all the eldest sons in the family are so named if the first child was a male, was a courtier under a zamindar in Madugula in Visakhapatnam district. This is just a village now. He never gave the feeling of something wanting in his life.

Families were large in those days. If Varaha Venkata Giri, our former President had fourteen children in his family, my father gave birth to twelve. They believed that children well brought up would be true assets to the family and nation. At least my parents proved right in this thinking. Six sons and six daughters – family balance sheet is balanced.

Parents taught through the way they lived and the way they shared their beliefs. They taught us calling them ‘nanna’ (father) and ‘amma’ (mother) and not dad and mom. The four letters in Telugu – nanna and amma – are a symphony of nature, a bondage for life. The only earning member, nanna, was a poor cashier in a leading bank of those British days. Work discipline led him also to disciplining the family. My mother, daughter of a police sub-inspector was the third of the fourteen siblings of her family. Amma lost her father young while my father lost her Amma young similarly. Amma studied up to fifth standard. That did not deter her from reading Ramayana, Mahabharat, Bhagavadgita, Devi Bhagavatham etc., to teach her children all they should learn to lead a life of honesty and simplicity.

Austerity was the watchword for my dad although ostentation was the watch word for my grandfather since he was with a zamindar. The reason: he had no mother to teach and was borne under the munificence of his elder brother who used him as a servant in the house though educated him up to intermediate of the British days. Nanna taught us the austerity and some may say in hindsight, it was borne of necessity. This austerity among the twelve of us was reinforced by the economics taught by my Amma.

Atithi Devo Bhava – was scrupulously followed. When Nanna was posted to Tirupati as Head Cashier of SBI, he felt jubilant. Both Amma and Nanna felt that they would have the opportunity to visit temples everyday and visit Lord Venkateswara closely and play host to several friends and relatives who come to Tirupati on pilgrimage, irrespective of their capacity to entertain them at home. My father used to walk up Tirumala Hills as buses were few and far between the day those days, not once but sometimes twice, just to accompany the guests and help them have good Darshan.

Amma just asked for a cow and buffalo at home to take care of the nutritious requirements of her children and feed the guests. Her dairy economy gave us the freedom from want. My second brother, self-made, became a professor in Yoga at Chennai, post retirement. My teachers’ kindness and charity helped the brilliance of my third brother to pursue medical career. Nanna did not hesitate to borrow a few thousands to send him to write the qualifying examination that was being held in those days only in Singapore – ECFMG (Entrance Course for Medical Graduates). He is a gold medallist in Medicine. He settled as a leading gastroenterologist in Texas, US. The Eleventh among us, settled as a chartered professional accountant in Austin.

Integrity, honesty, austerity, simplicity, philanthropy  and courteousness, the cultural moorings of this great country are all there in this big family to which I have the honour to belong. Ancestors have much to teach and this darkest night of Amavasya has many lights twinkling in the minds of one hundred eight siblings of my parents. Life may be hard-earned but fully worth every penny and my ancestors are watching with joy and pride.  

https://timesofindia.indiatimes.com/blogs/fincop/this-dark-day-leads-many-into-myriad-of-lights/ - a couple of corrections carried out.