Overview
With inflation on the rise, the value of Rupee still dwindling and weak global demand; Technology and Reforms have once again risen to be our saviour and virtue - to once again aid RBI Governor & Ministry of Finance to add high resilience to the banking sectors. As the central bank adopts caution at every move to address credit and market risk innately integrated in liquidity, concentration & correlation; Industry players across category Micro, SME, MSME and Large companies are harnessing technology for cost effective solutions to sustain profitability. However, much can be done in the banking sector with an internal reflection to drive efficiency and effective management of this current situation to overcome challenges of Industrial players across the board to get adequate credit availability from the Bank’s & FI's
The challenge scale
The challenges in availing adequate credit for corporates and managing mounting NPA & growing defaulters list for banks and financial institutions, both are in a delicate balance. On one side of the balance scale is the missed business potential of good corporates and industries who fail to achieve their scalability due to non-availability of enhanced credits for business growth and on the other side of balance is the missed targets for increased credit availability due to corporate defaulters More importantly the scale is far removed from the current economic challenges in India and is closer home with in the banks.
The banks want to lend a helping hand but find themselves stressed out with the stretch. The problem seems to be brewing within, as many industry sectors fail to get enough credit support from banks. The onus lies on the management of banks itself. The growing need to adopt innovative ideas and good strategies for movement and success is lost in translation.
Banks by nature are highly leveraged and interconnected. Hence, poor managements can unduly enhance crises and threaten the very stability of an economy.
To many, it is also obvious that inadequate credits from the bank are due to some issues plaguing the sector already like slower economy leading, deteriorating asset quality, rising NPA with a continuous default of the payment by the corporate. Our current inflation has not been able to bring down the borrowing cost as expected by the corporate & top of it all is the issues like inadequate provision to write-off NPA by the bank.
It's the NPA issue that offers both flexibility and tangibility to be addressed the most.
This is especially true at every individual bank level – as they are better equipped to specifically drive credit extensions with good management based on sound principles. However, the bank management is unilateral in its response, offering one solution for all; be it good and bad creditor or corporate.
Win-win cover
A single basket treatment for both meritorious and non meritorious corporate has the demand for security cover by the banks touching the roof moving way above the normal requirement. This is enforced to cover banker skin while assessing corporate credits. It's possible for the banks management to be and deliver a win – win corporate approach with an operative excellence.
This stance of the bank adds to the growing challenge of the Micro, MSME companies, and rural credits to meet corporate expectation. This standoff by the banks to watch from the periphery can be attributed to multiple factors
Firstly, it could be the lack of understanding the business models of the corporates itself. The fact of the matter is big corporate’s NPA’s accounts for large amount size, while Micro companies, MSME lending, rural credits counts for larger number of companies. Limitation in the product range of credit offer, the skewed scale of balance with more weight given to balance sheets, The regions of operation issues, Bank operational issues especially in the rural areas like People, IT Investment, the capabilities of senior management or error prone process in the system. All these form the collective chorus.
To add to its woe’s the stage is gone global. Indian corporate is no more competitive for domestic demands alone; we have an increasing threat of international competition now. Credit demands are high; but, higher is the need to be more focused in one’s customer services, to enhance credit availability to the real and potent corporate.
A niche road to serve a few, a defined path to prioritize and grow with selective corporate portfolios or particular industrial sectors could be a great beginning. Banks cannot be profitable in all the segment of the portfolio invested. Therefore, every corporate bank needs to redraw its strategic roadmap and prioritize its investments and decide which clients, products and regions it needs to engage and which they need to exit. This looking within, will not only add clarity and specialization but also create additional resources for investing in priority segments.
Banks should enhance this industry specialization. It is critical to determine exactly how industry specialization provides an advantage to the bank versus its competitors. Dedicated Risk Managers can understand the clients’ financials needs better and provide tailor-made solutions that clients prefer. The Risk pertaining to the industry can be mitigated by the team of specialized RM to make better decisions. Essentially, Industry RMs must be able to realize more revenue through client acquisitions and be competitive in pricing. This will enable the bank to better understand its clients, deepen its client relationship, and manage risk thoroughly. This could also catalyze growth for the bank with the possibility of licensing few more banks to speed up the action and to penetrate faster and better credit availability to the corporate.
Another fast growing concept abroad that is yet to gain traction in Indian markets is SCF.
The product of Supply Chain Financing (SCF) like receivable financing and purchase financing (factoring, Invoice discounting, Purchase order, Export/seller finance and buyer finance) will provide better liquidity to the corporate and enable the entire value chain to lower financing rates too. Our best estimates are that SCF, on an average, might reduce working capital burden by 20% to Companies.
In this product, there is no liability of the supplier in their balance sheet. It might be a time-consuming process to validate the corporate customers credential. But, with top management attention, the bank can push for faster sanctions. Here the lending decision is based on the ultimate debtors.
On the other hand, the corporates have their own flaws in management that lead them to a debt trap. Loans and advance to the medium and large segments account for about 50% of total bank advances and of total NPA indicating that the deterioration in asset quality is driven by the medium enterprises. To overcome, these challenges, RBI, can implement the score systems through external rating even to Micro Companies & SME companies for credit exposure even below Rs.5 crore.
The Score Card will assign the score for all parameters including Managements Skills, Executions & Capabilities, Product Demand, Growth Potential, Brand Identity Potential etc. This scorecard will enable the bank management to take a pragmatic decision on any corporate for extending the credit facility.
Regulated expenses for rating services by RBI could well help internalize the service into the system and avoid overcharging by external rating companies. The scoring system can be rolled over for every 6 months or 1 year. Better performance scorecard over the period should enable corporate to get a good discount on the interest rate. This should be focused as a driving factor for the companies.
The bank's top management could pitch in with their skills and experience to drive the corporate with a sound operational knowledge to improve the scoring systems rather than seeing score card as threat to corporate in times of falling scores. Banks can also provide a training program to improve score card and motivate them for more credit with better performance. This scenario is live in the automotive industry with many Large Indian /Foreign MNC companies offering continuing training for vendors to meet, quality, technology and delivery expectations creating win – win situations for all.
Differentiating security cover between Term loan and Working Capital loan would be another major move in adding ease of operations for corporate in providing additional collateral security.
Term Loan has a continuous repayment schedule but security cover remains same. Capital asset value naturally will be higher or equal than depreciated value during the tenor of the loan. Currently, many Banks are demanding additional security cover based on total exposure of corporate credits (Working Capital +Term Loan) raising the challenge higher.
Security on term loan can be restricted to primary assets if the Investments of such term loan is for revenue generated capital assets & assets which have appreciation over the period of the time. There should be no further demand from banks for additional collateral security on these assets provided there is no much principle moratorium period extended to corporate.
Corporates have another alarming challenge to deal with. Yes, most banks imposing sale of life insurance and general insurance policies to Micro & SME companies as one of the unwritten code of business conduct to availing credit is a sure path to NPA.
Work with this, A micro company seeking Rs.10 lakhs credit from the bank both term loan and working capital results in outright payouts of about 20% of the loan before the disbursement are done. Total payouts from the corporate include Processing Charges + Equity Mortgage for security provided + insurance of Rs.1 lakh and a further margin on term loan recovered between 25 to 30%. Total cash outflow before banks disbursement will range something about 30% which will ultimately result in net credit availability of 70% to loan. This is a huge ingrained threat for the Micro and SME companies, indicating high probability to an NPA over a period of time, if not in the first year of the operation itself.
Digital technology or rather the lack of it especially in rural banks to provide corporate bank service is a bigger challenge in the wired world. The lending procedures and systems still are traditional and require massive training to the banking management to ensure that customers are serviced well. This facility would help customers to manage the working capital at minimal administrative cost and create a more cohesive work environment for effective and efficient services for both.
The need of the hour is for banks to put their act together. They need to be adaptive and open to change. It’s important for them to step back and recalibrate their identities while rediscovering their core strength and growth. Their first step of engagement has to begin with understanding corporate’s need and aspiration and not at lending. The very understanding that the issue of NPA is a post mortem activity could perhaps, help the corporate move that extra mile.
None can dispute the strength and veracity of these Banks and Financial Institutions; however they have to be capitalized with good governance and management to earn both their credit and credibility.
(Author GT Kannan Founder & CEO of M/s. elEVAte Business Solutions Pvt. Ltd. He has expertise in the areas of Finance services, Tax consultancy , Financial Management Support, Corporate training, Corporate Funding, Syndication of Loans, Private Equity Funding , M&A and IPO)
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