Small firms facing cash crunch seek cheaper funds, leniency on bad loans
NEWDELHI: Small businesses facing liquidity crunch are seeking cheaper funds and a long rope before lenders consider it fit to start recovering dues.
Micro, small and medium enterprises (MSMES) say that the government and the Reserve Bank of India (RBI) should do more so that they have easy access to funds given that anaemic banks have been placed under lending restrictions and non-banking financial companies (NBFCS) are facing a liquidity crunch.
Earlier this month, Prime Minister Narendra Modi had announced several benefits, including an offer for loans of up to ₹1 crore in 59 minutes, and a 100-day drive to help MSMES to secure loans. Small businesses had welcomed the announcement, but now want the measures to be more liberal.
They said the cost of funding, which ranges from 9-24% depending on the funding facility and risk, hurt their competitiveness. Banks charge about 9-16%, while NBFCS, bank-like financing institutions most of which do not accept deposits, charge up to 24%. One of the biggest problems of small businesses is that many do not have assets to pledge, which pushes up the cost of funds.
According to Chandrakant Salunkhe, founder and president of SME Chamber of India, while the authorities should ease lending restrictions on banks placed on prompt corrective action, bank officials should proactively implement the relief given by the RBI, especially those on classification of loans.
In June, the RBI had temporarily allowed banks and NBFCS to show loans of up to ₹25 crore given to small businesses as standard assets even if dues were unpaid up to 180 days. The norm is 90 days for big businesses. This relief was available only till the end of this year, and will be rolled back to 90 days gradually by May 1, 2019, for Gst-regiswork, tered firms. For others, it will kick in from the beginning of 2019.
Salunkhe said that despite the RBI circular, the relief was, in effect, denied to small firms, as bank officials waited endlessly for instructions from headquarters. Once classified as a bad loan, banks either give a chance to correct the default, restructure the loans or initiate recovery. There are about 65 million MSMES in the country, but only a fraction are Gst-registered.
Loans to small businesses of up to ₹25 crore are covered under a special regulatory window, wherein either a bank official or a panel examines the best course of action in case of a default. Defaults of larger loans are covered under a rigorous frame- which was introduced by the RBI in February, and the Insolvency and Bankruptcy Code. Small businesses, which endured the liquidity problems during the 2016 high-value currency ban, and the subsequent business disruption caused by the goods and service tax (GST) roll out in 2017, are a major support base for political parties, including the ruling BJP.
MSMES said the top brass of the banking sector was not interested in listening to them. “Monday’s (RBI board) meeting is crucial. We find that chairmen of banks are not available to listen to small businesses. We will stage road shows and in December,” said Salunkhe. Small businesses also sought quick sanction of loans above Rs 1 crore for feasible projects, besides land for starting projects at a lower cost.
RBI data shows that bank credit to micro and small businesses had jumped 9.5% at the end of September from the corresponding period of the previous year to ₹9.4 lakh crore.
morchas
Like an upright CFO who dares oppose the writ of the promoter and creates a blasphemous situation by seeking to make a distinction between the interests of the promoter and those of the company, the RBI governor too must stand firm in the larger interests of the country. Unlike the typical CFO, though, has the luxury of seeking support from his constituency by placing the core issue in the public domain.
In a liberal democracy such as ours, RBI is mandated to play an independent role in the interests of maintaining macro-economic stability. This essentially means ensuring growth with stability, adopting prudent policies to contain risk, and building sufficient buffers to protect against shocks. Those with elementary economic knowledge would thus recognize the inherent conflict built into the institution’s mandate itself when it interacts with other constituents including the government or the public.
For example, ensuring macroeconomic stability is a complex interplay of interest rates, currency, control over the aggregate level of liquidity and inflation. A depreciated exchange rate will imply stronger exports but higher inflation which in turn will necessitate higher interest rates on government bonds if liquidity norms are to be in control! Someone will always be dissatisfied. Hence, the challenge is all about choices being made by a highly competent set of professionals who are not elected representatives, but ones selected based on their competency to evaluate such choices and maintain the delicate balance required. Brazil, Russia, and Argentina are examples where experiments of simultaneously lower interest rates and a depreciated exchange rate had a devastating impact on their objective of growth with macro economic stability.
Such choices must therefore be left to professionals, not those who represent the majority. However, as in any liberal democracy, frameworks must be enacted to determine the appropriate scope for discussion and institutional oversight.
Despite problems in its decision-making structures, the RBI Board is one such mechanism but it must not be forgotten that its role is advisory and restricted to policy guidance. Like any other Board it has representation from luminaries of various backgrounds but they must ultimately be guided by the inputs from those who have both the technical understanding and accountability to manage the economy.
Understanding central bank balance sheets are key to interpreting central bank policy actions : the structure of the balance sheet, and changes thereof over time, can then provide significant insights into its goals and their efficacy, and economic consistency, over time. In this furore over the transfer of reserves from RBI to the government, this aspect has been completely ignored.
Else it would have been apparent that, even if RBI did agree to the transfer of unrealized surplus as a special dividend, the move would not help the Government with its fiscal budgets as this would require creating additional permanent reserves (a.k.a printing money) and, thus, to maintain the budgeted levels of money creation in the economy, exactly the same amount of bonds would have to be sold by RBI from its portfolio holdings.
Hence, the effective public sector borrowing requirement will not change and the entire core objective of financing Government spending with this special dividend would not be achieved as Government bond sales to the public will not be reduced!
Furthermore, apart from the fact that distribution of unrealized surplus is not legally permitted, it must also be remembered that the RBI Board has adopted a risk management framework which is consistent with its need for AAA rating for RBI in international markets and, therefore, the appropriate level of equity it needs given the risks it faces is ₹10 lakh crore—the current level of aggregate reserves as per the latest balance sheet ! Hence the battle cry over “excess” reserves is simply inexplicable.
S Gurumurthy, a director on the board will most certainly push his views as he sees them from the lens of his well known perspectives though they will be in stark conflict with those of trained economists. The key will be how the other Board members react. Apart from Dr. Ashok Gulati, none of the other 12 nominated external directors ( including the two government officials) are career economists. This can cut both ways as far as informed support to the Governor is concerned and will indeed be a case study of how conflicting viewpoints are resolved in a liberal democracy. Bravado, or blind support of the government is not the preferred option; economic reasoning is. How truly independent are the nominated directors in their thinking despite the pre-eminence in their respective fields will be known on Monday.
I will end this article with a historical fact. Though quite serious, the Taper Tantrum led 2013 crisis is not remembered in our economic folklore. This is because it was quietly steered and professionally handled by RBI which took some brave calls in consultation with the finance ministry, on the strength of its strong reserves and a highly credible balance sheet.
Despite the perceived difficulties of government finances, the international banking system did not question RBI’S ability to honour the FCNR(B) swaps which formed the basis of a bold rescue plan. The message for decision makers is this : do not mess with the balance sheet and the credibility of the institution built over generations.
The present tussle should not be viewed as a matter of ego, but one of handling difference of opinions in a liberal democracy whose interests are best served by staying on the path of economic consistency.
We shall know by the end of Monday where we stand.
ONE OF THE BIGGEST PROBLEMS OF SMALL BUSINESSES IS THAT MANY DO NOT HAVE ASSETS TO PLEDGE
Prabal Basu Roy is a Sloan Fellow from the London Business School, PE Investor and Corporate Advisor, the author has formerly been a Director and Group CFO in various companies.