Making a Departure in Lock Down

Telangana makes a departure on Lockdown Strategy:

There are no two opinions on saving the humans should be of utmost importance when compared to saving the economy, although the economy lives longer than the human being. Therefore, strategically, saving the economy and saving the human life should run parallel as far as possible.

In the case of COVID-19, governments initially had no choice but to save lives by locking down to strictly enforcing people staying at home setting aside the economy’s interests very rightly. As things unfolded, there is broad realization that rescuing the economy from the recession and moving to V curve should also not brook any delay. In fact, compared to several States, Telangana has singular advantage moving on consistently high growth trajectory till April 2019.

The breather given by PM Modi on lockdown relaxation while extending the final date to May 3, 2020 allowed relaxations to keep several working populations in a new normal – barring the barbers who have the largest potential to spread the Covid. Welders, mechanics, electricians and even construction workers were all allowed to go back to work on the strict compliance of wearing the mask at work and maintaining social distance apart from frequent washing of hands with soap.

Those who open the workshops were asked to strictly follow the full sanitization of the area frequently and keeping the rest of the work-space tidy. It is expected that the discipline of 25-day lockdown will hold them in good stead. Telangana State differed on the agenda.

The State has a distinct place in the economic space in the country. Telangana's Gross State Domestic Product (GSDP) expanded at a Compound Annual Growth Rate (CAGR) of 13.40 per cent (in Rupee terms) to Rs 8.67 trillion (US$ 126.81 billion) between 2011-12 and 2018-19. At a CAGR of 16.00 per cent (in Rupee terms), tertiary sector has been the fastest growing sector from 2011-12 to 2018-19 and accounted for 63.68 per cent share in the overall GSDP. As of November 2019, the total installed power capacity of Telangana state was 15,855.87 MW. Out of this, 8,103.65 MW was contributed by state utilities, 5,637.37 MW by private utilities and 2,114.85 MW by central utilities. The second reason for a possible smoother stand is the very confident way in which the State has been tackling the pandemic. A dedicated war room to monitor the cases mandal-wise has been set up right under the glare of the CM.

Agriculture and allied activities have merited the required relaxation on lockdown norms ahead of every other State and the Union Government. Even procurement of paddy and other major crops of the State are receiving active attention. The State also merited appreciation of the Union Government in handling Covid-19 in exemplary manner.

As revealed by the Chief Minister, four districts are free from Covid patients. The intensity of the attack is more localized in Hyderabad Municipal Area and the Greater Hyderabad has already been divided into red and hot zones with intense policing and strict adherence to discipline.

Districts are gradually turning to near normal , which according to his press review, are having a better doubling rate (10days), death rate (2.44% compared to 3.22% for the whole country) and recovery rate of 22% and a larger 354 test rate per million. The State, after seeing the sudden upsurge in Suryapet district, doubled the quarantine period to 28 days, again the only and the first State to take such decision.

In and around Hyderabad, pharma, medical equipment and relating packing and packaging are any way allowed to function even before the relaxations. They are all working to around 50 percent capacity.

MSMEs are the lifeline of the economy. The State has nearly 70000 of them and the most in micro and small sector with nearly 4 lakh employees. Therefore, allowing them to work in two stages - normal districts, near normal, which may commence after a week (27^th May), the State would have many micro and small enterprises from near extinction post- Covid.

Some events have no history; but they create one like the Covid-19 attack that has levelled 210 nations in one stroke. Globe turned upside down during the last two months. In the whole crisis, India of 31 States with several of them having specific strengths in different manufacturing and production spaces has a great opportunity having already become a savior of 55 Covid- 19 affected nations.

Efforts to re-invent our Health sector are already on way with the decision of converting Gachiboli Stadium Temporary Covid-19 hospital into an advanced Health Institute. It is the Hospitals, doctors, nurses, health workers, scavengers, Defense Hospitals, army doctors and nurses – all in the Union and State governments that quickly rose remarkably to the task and rescued millions of lives, where the America failed. With no offence meant, private sector was nowhere near the task.

Telangana’s ability to leverage its strength and create a huge health infrastructure in government that would create new supply chains and new value chains deserves aplomb. It has unique place again in producing vaccines very successfully and CCMB is actively working on a new vaccine along with quite a few others. The other investments that attracted the globe are aerospace, defense, ITeS and Biosciences. Disaster management could be the new strength of the State.

It would be appropriate if the State would review its decision and release the lockdown in stages in districts next week and in GHMC areas during the first week of May 2020.

Drive out Covid-19

                Hell is Hell in COVID-19;
                Wearing mask is your devoted task; 

               Staying at home is your comfort;
               Social distance is your most wanted proximity;
               Driving out Carona is road to Heaven;
               Live like a king and help the popper. 
               Think rational and act national.
                     Author: B. Yerram Raju

Lock down to Continue

The Lock-down to Continue or Not?

B. Yerram Raju*

Lockdown declared on 25^th March 2020 has proved reasonably effective in India due to the two important initiatives: social distance and staying at home apart from wearing masks while going out for any emergency. The lifeline was kept alive – all emergency services, food supplies and medicines are kept available at the hands of the citizens. Police, Doctors, paramedical and sanitization staff have been rendering round the clock. Still, a few violations are seeing here and there and they are being tacked as they should. Even new ‘Normal’ has to wait for a long time. Precaution continues as philosophy of life.

Hon’ble PM Modi asked for suggestions for staggered lifting of lock out and your team should be working on it. CM KCR in a very detailed press conference clearly voted against opening the Lock-out now. In Telangana, people will obey the CM direction without demur.

There could be several other States wanting a partial lock-down till June end to fight the Covid-19 effectively. In such case, it is imperative that we should ensure that the spread is prevented effectively even during the lock-down. Even if lockdown is opened with the precaution given below, it should be re-imposed after five days for a period of one month. During this period, those in home quarantine and several hospitals should be supplied the masks and aprons. All Small enterprises should be permitted to refurbish their machines for production or may be permitted to go in for production of covid-combat materials where they can.

My suggestions for meeting the eventuality of lifting lockdown are:

1.             All schools, colleges and technical education and management education institutions shall remain under lock out till further notice.

2.             Lockout should be lifted every day between 5am and 10am and 4pm to 7p.m.

3.             All religious centres, temples, public offices should be kept open between 5am and 7pm.

4.             Only 10 percent of liquor shops with special approval from the concerned authority may alone be opened.

5.             All Malls should be opened between 11am and 5pm who shall ensure social distance for purchase. Any mall found crowded shall be ordered closure instantaneously.

6.             All public transport duly sanitized may be allowed occupation only to 35% extent to maintain social distance among commuters. The buses should stop only at the specified bus stops and not everywhere on the route.

7.             All Senior citizens, citizens with deformities and women should have separate transport facility. The mini school buses should be used for the purpose.

8.             Metro to colonies connectivity should be arranged through commissioning all the school and college operated private fleet with tariffs well displayed.

9.             Inter-district movement should be restricted between 6am and 6pm either side meaning thereby that the terminal time to reach is 6pm

10.          .All Rythu Bazars should function as now – with 2 hours a day in the morning.

11.          All goods transport across districts shall be given entry up to 8a.m into the city and all goods transport may be permitted to start at 7pm in the night. At each checkpost (may have been abandoned, tea stall may be allowed for the truck drivers to make use of. They should be provided special facility.

12.          All sick persons or patients of any disease other than Carona should be allowed free access and they should show their ID and mobile communication from the Doctor to consult or take medication.

Supplementary list:

1.    No restrictions on movement of dead bodies during any time of lockout for purposes of funeral rights.

2.    The already opened windows for vegetables, fruits and essential commodities and medicines should continue.

3.    Transportation:                 

4.    Any auto should not carry more than two; no motorcycle should carry more than the driver;

5.    All cars whether government or private or taxis shall not Carry more than two persons with masks in the rear.

6.    All sanitized buses public or private should carry one third of the capacity with everyone wearing masks.

All these vehicles shall be sanitized for every trip before boarding new passengers.

7.    All trains should allow only one third of the capacity in all three tier coaches. All coaches should be sanitized every eight hours and washrooms kept clean with hot water cleaning of the commodes.

8.    Offices can operate between 10 & 4.

9.    Factories can work 2 shifts following due precautions. The shop floor supervisor of the shift shall make sure that the toilets and wash rooms are clean, loaded with the required sanitary materials, with clean up every two hours. All employees, labour, executives shall wash their feet before entry and  sanitize their hands both while entering and exiting.

All enterprises should display Cleanliness is Godliness and saves their lives.

Exceptions: -

Companies' staff with ID's and vehicles should be permitted to travel.

Postal service/couriers and electricity and telephone maintenance staff should also be permitted from 6am to 9pm.

Extraordinary times require extraordinary solutions and require tolerance and forbearance. The country so far, has handled the situation exceedingly well and it is our duty to keep the protecting staff in good health. Stop spitting in public; wear mask when outside; maintain social distance and keep clean.

*The Views are personal and the author is economist and risk management specialist.

https://www.thehindubusinessline.com/opinion/should-the-lockdown-be-lifted/article31287496.ece

Coping with post-COVID-19 Disruption

Coping with post Covid-19 Disruption

Post pandemic prediction can’t be a soothsayer’s job. Preparing the economy from a tremendous shock and staying inside home for nearly a month in some States and could be longer as we see the accelerated rate of spread of Covid-19 hit persons, is the biggest challenge. India is not a city state like Singapore or Finance hub like Hong Kong. The optimists expect the lockdown to be lifted by the 14^th April while the less optimistic put it to the end of April. We need to think of the strategies and actions phased over short, medium and long term with matching resources right now. This should be both sectoral and geographical specifics.

While we are the leading global pharmaceutical suppliers, the low and inefficient health sector management with historically low outlays suddenly got the awakening call with the CVD spread and the need for public health systems to step up their capabilities. Yet, the call of the nation has been very ably responded to the greatest consternation of the rest of the world.

The country, with diversity nowhere else existing, is the biggest challenge and opportunity to the governments. Diversity has capacity to cross hold risks across segments and has innate resilience when calamity befalls. It also provides scope for innovation as people think more actively under pressure than leisure. When none can be in laid back comfort that existed before, people keep working out differently different things. For example, there have been more webinars during the last one month than during the last six months. There have also been more video conferences and skype calls as people started working from home. This may gradually turn out as new order of functioning.

One of my nieces from Bengaluru tells me that as Director of a Union Government organization working from home became a true challenge as deliverables rest with her than with other members of her team. Even the forgotten kitchen started demanding her time with children demanding newer tastes and new dishes. This is making her work for 14 hours instead of 7 hours in office. There is a whole paradigm shift in the work environment., not for one but many like her – with no gender discrimination.

What would be the future like? Very many organizations could find new economies of scale in a combination of work from home and work at office. More factories will have to think of reworking their supply chains that thoroughly disrupted due to the CVD, New leadership paradigms emerge. The 10 percent manufacturing small enterprises manufacturing gloves, sanitizers, masks, medical emergency kits to combat CVD will find near extinction of such market. They should expect this to happen and therefore prepare from now on the way to re-engineer their process to newer products and new markets. They will notice that institutions and persons that were after them during their need will turn their faces and likely to hold up their bills in their search for finding cash margins for fresh initiatives.

Our country will have to reinvent itself in workspaces and relationships like never before. In this process, at the micro level, enterprises will re-engineer their production and processes and search for new markets. Many will find the exit to be a problem.

Amidst a supply driven crisis, the unrest and plummeted resources of all kinds, as also eroded markets, MSMEs will require sustainable process consultants to rescue them at affordable costs. Here, the governments in looking at the sovereign dues and the banks looking at the stuck balance sheets of MSMEs should learn the art of turn around management or seek recourse to experts in turn around management.

Every nation will be on the uncertainty horizon. Risk mapping will be difficult. Everyone has been a looser. Non-performing loans will surge unless the thresholds change. Indian regulators need not wait for the world to guide them. They can guide the world. BCBS has already provided for applying the thresholds for SME sector as per the needs of the country. The time for action is now. The threshold should move to a 180day horizon till December 2020 subject to a review after six months. This will automatically provide for higher leverage in lending for the MSME sector, the nerve wire of production that has been contributing 35% of GDP, 45% of exports and employing 112mn persons.

The poor and daily wage earners, the hawkers, the wayside eateries, many disabled, contract workers – both skilled and unskilled, need government subsidies, even salary buffers, supplies and cash to meet their daily needs for at least three more months until the industries and enterprises re-look for employing them.

Fiscal responsibility under these circumstances of both the State and Union governments already hit by the lowest ever tax returns requires out-of-the-box thinking to meet the situation. Several relief funds of the CMs and PM, private donors and even CSR funding even amidst the near 10 percent hit on most corporate balance sheets would be inadequate for revival of the economy. It may take at least nine months to one year to cone to a new normal which would be far less than that we had in the slowing economy.

Even if people have cash in their hands, which itself is doubtful, they will not get the goods and services as the lockdown succeeding the slowdown of the economy, there will be supply driven inflation. Scarcity stares in all areas.

Courage is the watch word. In times of distress people display amazing unity while immediately after normalcy is restored the same set of people will most likely diverge. While the demand to lift the lockdown in toto will surface with more vigor than now, it would be prudent to release in parcels to rework on the efficiency of the health sector infrastructure, doctors, nurses, para medical staff on one side and on to ensure that the wheels of production get back to normalcy gradually, on the other. Second, the discipline enforced should be redirected to finance, transport and manufacturing sectors.

The focus of trade will suddenly think of new protectionism, new direction of investments, newer regional allies in trade and new relationships. The denuded investor firms and the huge number of corporates off-loading the bonds in the markets for liquidity are bound to put pressure on the financial sector. This recession is very unlike the 2008 or even 1930 and it will be a prolonged and widely spread across 200 nations in the globe.

Banks are systems driven and not enterprise driven, Unless the instructions are fed to the system, the concessions do not take effect. In several Banks, even the usual half-yearly reviews of several accounts on a regular basis did not take place. The disaster today is extraordinary and requires extraordinary speed of action post new normal.

At a time when the demand for credit is at the lowest level due to several manufacturing and trading enterprises shut their shops due to lockdown and are seeing future as more uncertain than now, liquidity doors have been kept open by the RBI as though that was the problem area that required urgent attention. Even during the last six months RBI has been extremely accommodative to Banks both in capital buffer and liquidity commitments. But the credit did not move to a higher zone in non-food segments.

“These capital and liquidity buffers are designed to support the economy in adverse situations,” as the Fed said in a statement. Fed’s other hope is exactly what the India incorporated is looking for: less rigidity from the banks in extending the required debt, post pandemic. COVID-19 has caused serious disruption to global supply chains and has a huge impact on financial markets and trade ecosystem. It is important to retain the customers and governments post pandemic and rebuild their lost supply chains to operate sustainably.

India’s biggest advantage is its demographics and therefore, the future needs to be addressed with alacrity so that entrepreneurship will not be governed by the hoary past but a bright future.

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

Published in Money Life 2^nd April 2020; www.moneylife.in

Impact of Covid -19; Review of Measures taken

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

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

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

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

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

A few special efforts that still beg attention are:

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

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

T    

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

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

·      

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

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

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

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

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

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

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

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

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

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

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

Fight the good fight against Covid-19

The Economist in its latest edition titled ‘Dropping the Ball’ rightly mentions – “Talking down the issues is not winning strategy.” India with a population of about 130 crore has around 100 coronavirus cases and two deaths. The awareness created by the Union and State governments and the proactive prevention and curative measures, coupled with friendly hot weather in most parts of the country barring up-North, have stood in good stead.

But it is unfortunate for a slow-growth economy where inflation is down and IIP up that this new scare has caused market mayhem pulling it down to pre-1930 levels. Several weaklings and numerous of MSMEs could see the prospect of unpaid bills. It may be difficult for them to keep the labour engaged with obstructions to the moving machines, more particularly, the export-led ones. Time to seek way out is right now and not later.

Paid Sick Leave

Will it be possible for India to take the call of US democrats – notwithstanding its total unpreparedness and niggardly health system – “paid sick leave rules, expanded payments for programmes like unemployment insurance and the nutrition assistance, and guaranteed payment of all testing and out-of-pocket costs”?

In fact, McKinsey’s March 9, report, anticipates that the global GDP growth in 2020 could fall as deep as -1% to -1.5% even if socio-economic impacts get localised and effective and timely countermeasures are initiated.

A large number of NRI families in several countries — Middle East, UK, US, Canada, New Zealand just to cite a few — are all dependent on imports for their essential food requirements. China and India have been their source. Now that the flights have stopped; visas have been cancelled, and even local movements in several nations restricted, the information is that all big malls like Lulu, Walmart, etc, have even emptied their stocks!

Rising Unemployment

The 73rd NSS 2015-16 mentions that 110 million were employed in the MSME sector. This is despite the sector’s inhibition to disclose the actual number employed for saving regulatory costs and the countless contract labour engaged to keep themselves afloat in the market competitively. According to the RBI Governor, around 50% cent of the total MSMEs operate in rural areas and provide 45 per cent of total employment. Therefore, industrial hygiene needs to improve significantly.

Micro enterprises, which account for 97% of the total employment in the MSME sector, in the context of Covid -19, faces most of the heat. Even if banks have restructured or revived them in the recent past, they should be given further restructuring by way of reduced instalments elongated dues in their working capital accounts.

India is uniquely fortunate thanks to the hot climate catching up down the Vindhyas and in a month even the North would see about 30 degrees. Moreover, with adequate stocks of foodgrains, starvation will be afraid of staring at us unless we mismanage public distribution. Opportunity awaits the MSMEs but their preparedness needs unstinted support from the lenders – be it banks or NBFCs.

Active Banks

Banks cannot be sitting ducks talking of collateral security and failing to convert risk into reward at the right time. Industry associations should aggressively put their strategies in position and rebuild trust between their member entrepreneurs and lenders. The time is for more leg work; more buyer-seller meets; more enterprises must adopt affordable ERP and move to digital platforms because these platforms alone enable speed of transaction and delivery.

Second, they should also be handheld for capturing the local domestic market to the maximum extent by coordinating with the State government concerned under the public procurement policy. The unmoved stocks thus should be quickly turned into cash.

MSMEs should be made not merely preferred creditors under IBC and NCLT but should also get at least 75% of the pendency cleared within 30-60 days of accepting the case on merits. Third, the moratorium period for the new MSMEs and restructuring in manufacturing should be extended by six months to ward off project and cost overruns.

The MSMEs financed by the NBFCs and digital payment platforms should quickly reassess the status of the loans from a practical point of view by speaking to the entrepreneurs concerned to resolve any payments likely to get stuck due to Covid-19.

Worst Hit

The services sector, where the banks and NBFCs lent heavily under retail market and MSME (services) portfolios, would be worst hit. Training-led conferences and seminar-dedicated institutions, which run mostly on promised payments from their hosts, would renege on payments as they are either not held or least attended.

Here, along with the earlier manufacturing MSME credit, it is important that the RBI quickly takes corrective policy decisions and guide banks, financial institutions and NBFCs to postpone NPA thresholds to 120 days and review the position at the end of April, 2020.

Banks beleaguered as it is due to unsustainable NPA levels would be worst hit if Covid-19 impacts their assets right away. Globally, central banks are already ahead of the curve in providing relief to the financial sector both through the zero/least interest rates for bond and credit markets and even Basel may be moving in some unusual remedial stand.

“One scary thing facing us is demand contraction. People will buy only essential goods. New purchase orders will drop further. Payment cycles will get disrupted. Job losses are ahead. All this could be a possible fallout of coronavirus. Also, the loss of GDP may be equivalent to one month of GDP,” says Sameer Kochhar of Skoch Group. But production cannot stop if employment is to be preserved and future demand is to be adequately met.

‘When winter comes, can spring be far behind’? Next monetary policy, notwithstanding comfort on inflation headwinds, could see a rate cut. At least the Chief Economic Adviser asked for it!

MSMEs Need Cash Flow Based Finance

Cash Flow Based Finance to MSMEs:

The Need and the Deed

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hopes, Aspirations and Disappointments - Union Budget 2020

Hope, Aspirations and Disappointments

Nirmala Sitaraman starts on Aspirational Note. The two hour forty minute long budget speech creating record could perhaps prove the dictum: ‘if you fail in logic resort to rhetoric.’ Let me deal with the hopes and aspirations first and then with the disappointments later.

It has for first time addressed the farm sector comprehensively providing end-to-end solutions but leaves no assurance for income in the hands of the farmer. Allied activities get a boost. If a farmer were to hold a few animals in the backyard, a fishpond and a small poultry in addition to crop farming or horticulture, he has everything in the budget to cheer. There is every chance to cross-hold risks among the farming and allied activities.

States should follow the intent and modify the Agricultural Marketing laws to make way for the responsible aggregators and technology. Warehousing facilities in the Agriculture Market Yards and cold storage facilities would insulate the farmer from fluctuations in returns to the farm produce.

FM has announced Rs.15lakh farm credit amidst unwelcoming banker in the rural areas and banks that have learnt the art of showing up in figures that they do not deliver to the intended customers. It is heartening to see the push for Primary Agricultural Credit Societies that were almost forgotten for decades. NABARD that has half of its fleet serving Mumbai Headquarters should have been restructured for focused attention on farm credit. She should have forsaken tolerance for not achieving priority sector targets to take the RIDF window. This is a lost opportunity.

While the erstwhile lost focus on Education, Health and Hygiene has been regained with appropriate budget allocations and set a new direction through internships in higher education, unless infrastructure for primary education and teaching skills are enhanced the foundations will remain weak. Introducing internships in higher education has potential to make education fit the employment bill. We may hope for a correction through the National Education Policy the Government is planning to introduce.

The District Teaching Hospitals and para medical services planned will sow the seeds for sustainable health interventions. This just marks only a good beginning as the effect can be felt only after five years.

With the measly allocation for MNREGS and not linking it to the farm sector the budget left a void. It failed to kindle the appetite for consumption, the trigger for growth. The consumer is not left with much surpluses either for increased investment or consumption. Growth impulses are not generated significantly.

MSME sector has got a new direction with the introduction of sub-ordinated debt or equity funding but it remains to be seen whether the Banks that failed them in credit would meet the new equity route and help scaling up process. TReDs and GEMs are not new interventions to talk of. Unless all the government departments and PSUs enroll on these platforms, MSM|E vendors would not get their due. For those moving to organized way of doing business with just 5% in cash are exempt from audit up to Rs.5cr turnover.

In the last budget, the FM made a reference to U.K. Sinha Committee Report, but she skipped it now. Neither Distressed Asset Fund to ensure that no viable manufacturing MSME downs its shutters, nor Fund of Funds found allocation in the Budget. In a slowdown, it makes lot of sense to ensure that no viable manufacturing MSME exits so that the workforce engaged therein would not add to the unemployed. 

Economic Survey 2020 made a very detailed analysis of the banking in the financial sector. FM did not seem much worried over the increase in frauds and poor credit risk of the Banks. Although it is heartening to see that no further capital allocation is made cutting into taxpayer’s purse, it is disappointing to see the absence of reforms in this sector. It would have been most appropriate to reduce the Government equity in these banks and usher in better governance than now. Bad banking and good economy are not good companions.

Banks irrespective of their size, in the current status will pull down the growth of the economy. The only solace is to the depositor whose Rs.5lacs is insured instead of just a lakh of rupees thus far. NBFCs are empowered to recover their bad debts through the SARFAESI Act provisions on par with Banks.

Extraordinary push to the digital economy with District Cyber Parks, AI, MML and ITES in addition to Travel and Tourism is likely to enhance the contribution of the Services sector. Start up, Stand Up India and Make in India have not thus far led to increase in the contribution of manufacturing sector and this budget also did not make significant strides to reverse the negative growth. Telangana State seemed to have provided inspiration on this count.

Agriculture sector alone may not reverse the slow growth of the economy. Employment intensity has little scope to increase. Unless 20% credit -GDP ratio is attained with better risk appetite among banks, recovery from slow growth is doubtful.

If both the government and private entities depend on market for raising the resources as indicated in the Budget, revised estimates of the budgeted revenues and expenditure fall short of growth expectations. The Budget failed to institute a monitoring mechanism for implementation of the ambitious projects. States should be taken into confidence while formulating the Budget as it is the States that should catch up and cooperate for the aspirational goals and ambitious announcements to turn into actions.

Intention of the FM to keep more money in the hands of the people did not result in compatible actions. Overall on a ten-point scale the Budget scores a liberal six, more due to comprehensive treatment to the farm sector than other sectors.

Published in Telangana Today 5^th February 2020.