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Atmanirbhar Bharat Abhiyan demands fresh look at risks and facilitating institutions

Rupees 20 tn Atmanirbhar Bharat Abhiyan (ANBA) package has set out a formidable and challenging agenda for two main drivers of Indian economy – viz., agriculture and MSMEs. Agriculture sector reforms over the medium term are investment and strategy driven while MSME tolerance is driven by credit. Both call for specific perspectives and change in the mindset of institutions. Land, Labour, Law, Technology and Communication are the pillars on which ANBA stands. Governance in the financial sector plays a pivotal role. This article will look at the institutional reforms that underpin the success of its roll out in future.

The economy was limping even earlier on slow growth, a fall out of the inefficiencies of the financial sector, unreliable growth rate statistics, regulatory ambivalence etc. The Corona added a new dimension: failing health sector. For long, Indian economy suffered from poor health and education infrastructure abetted by poor budget allocations, irrespective of the parties held the fort.

Market-led reforms of the past have replaced social banking with profit-banking objective. ANBA claims to be just not a Covid-19 package but a reform agenda that skipped the economy for two decades. The efficacy of ANBA rests on private investment and easy flow of credit to agriculture and MSMEs. It relied on NABARD and SIDBI to roll out the package in good measure as investment and refinance arms in their related domains. Public private participation holds the key for investments which, depend on the initiatives of SEBI and the stock market movements.

Investment Climate & Expectations

Global sentiment has been down and under for the last four months in a row and commodity markets as also forex markets have been on unsteady track. Oil market has been at its lowest growth in decades with no hope of early revival. In India, mutual funds have been hit with Franklin & Templeton, an investor in the failed Yes Bank warned its investors with a long wait. FDIs and FPIs are on withdrawal mode.

Amidst this pandemic, a Hindu Business Line analysis (6 June) says:: “Instead of panicking, many investors are recognising the opportunity thrown up by the sinking markets. Tier-II and Tier-III cities continued to repose faith in the markets despite the lockdown.… The story in the metros, too, seems to be one of confidence. “

The hopes are further buttressed with the scope for travel, tourism and luxury-spend reaching their tipping point. Savings and Deposit rates bottomed out due to the RBI rate policy favouring cheap credit policy. Enigmatically, inflation curve is also looking northwards, somewhat. Investors, even non-traditional, are looking for safe options. Gold Funds are not in the negative in the pandemic. What is the scope for governments to invest? It has planned Rs 1.80 lakh crore investment in infrastructure through public participation. 

Government pitches its hopes on sale of a few public sector undertakings – reducing them to four; it also intends to go for merging the left out in the public sector banks and would not like to widen the fiscal deficit to meet its promises to the people.

Its cash outgo is highly restricted to MNREGA. It has deafened ears for cash replacements for the lost labour days in the MSME sector. Its stubbornness seemed to pay off with the large industry reconciling to reopen its shutters without repeating its request for similar pay-outs. This may leave many micro and small enterprises end up as debris. It hopes to consolidate the gains on MSMEs through definitional changes. These are all in the private sector.

Reforms in agriculture, bold in character, announced in ANBA also call for huge investments in digital infrastructure as e-NAM, aggregators, PACs and FPOs. These are the drivers of market reforms. Farmers rejoice and look forward to selling their produce wherever it fetches the price they expect. Price discovery will take a departure from the reliance in MSP. Unheard of and unseen investments will be seen in the farm sector. Stability of growth in farm sector will eventually lead the $5 tn growth of Indian economy.  Thus far, so good on hope horizon. The worse is on the credit front.

Credit Climate & Institutions

Banks and financial institutions are burdened heavily with non-performing loans and frauds. Government has not budgeted any capital flows its PSBs. Basel regulations are set to sleep for quite sometime with Europe and West fighting to survive the pandemic risk shocks. Balance sheet size by itself is not going to be the point of confidence so much as delivery on credit for the promised sectors.

Governor, RBI in a recent address indicated that he would like to look at the priority sector categorisation afresh to ensure that it delivers the intended. This assumes greater importance in financial inclusion agenda as efforts hitherto like Jan Dhan, MUDRA, SME 99-Minute Loans etc could make only numerical and not qualitative advances. 

Direct credit programmes in Korea, Japan in 1950s and 1980s revealed the need for narrowly focused and nuanced programmes with sunset clauses delivered the results. The problem with directed credit is essentially three-fold: First, pricing at its true market level, second, avoidance of the persons who are not credit-constrained, and third, selection of focused areas and regions without political interference in undefined democracy.

Credit discipline and equity, the twin principles of credit dispensation suffered a systemic failure with unwarranted interventions and perverse incentives. Both farm and micro and small enterprises require credit with extension, handholding, monitoring and supervision as key deliverable. This calls for out-of-the-box thinking. Re-engineering the stressed institutions is one challenge while bringing integrity and transparency is the second challenge. 

NABARD, with the new team having vast field experience, at its vanguard can be expected to give the desired push to the cooperative sector. With farmers’ working capital tied to KCC, Banks will no longer be able to show the crop loans at the levels the Union Budgets have been ordaining them to deliver. Tenant farmer to a fisherman will be able to draw his credit requirements on KCC. The new leadership may usher in organisational changes that would promote cooperative investments in agricultural markets and digitisation of the required order and not let the treasury investments alone be at its steering wheel. 

Rupees 3 tn roll out to the MSMEs with Rs 25 crore outstanding credit and a turnover of Rs 100 cr with an incremental 20 per cent secured to the extent of default threshold of around 14 per cent from the guarantee of National Credit Guarantee Trust will be worth watching. Most MSME surveys reveal that only a few up-end enterprises of the sector will benefit. Micro will be the least beneficiaries. Banks have already competing to be popular in the eyes of the MoF by rolling out the sanctions under the scheme. The announcements hopefully are only the incremental 20 per cent working capital credit and not the total outstanding!! RBI should keenly watch the disbursements.

Government has failed to pay up its dues to the MSME sector excepting a loud noise of the FM on 15 October 2019 followed again after the announcement of ANBA by Nitin Gadkari with a 45-day hurry! The dues are estimated at Rs 5 tn from the Union Government departments, PSUs, State Governments and State PSUs. Had this been arranged for payment, MSME sector would have turned green. 

Ministry of MSME on its part has done all that it could do: GeM, TReDS, real push for digitisation, procurement policy, redefining the sector at the right moment combining investment in plant & machinery and turnover in different proportions, and a new threshold of Rs 200 crore for tendering process. Any issue relating to MSME – whether related to finance or infrastructure or trade or export,  although should be dealt with the respective domains, falls to the lot of the MSME Ministry to resolve and hence takes inordinate time to coordinate and resolve.

Credit Risk in the MSME sector is difficult to identify in the first place; and manage in the second place and resolve in the third place. For both financial and non-financial risks, the continued development of risk expertise is vital. A great risk professional possesses the following qualities: (1) a balanced and logical temperament; (2) experience, over-the-cycle; (3) critical thinking; (4) analytical leanings; and (5) an action-driven mindset. What’s more, on-the-job training is essential, because we are all at least accidental risk managers.”

Banks, with their emphasis on technology, have let loose the domain knowledge in handling credit portfolio, particularly of MSMEs. Due diligence, mentoring, counselling, extension, monitoring and follow up have all been sacrificed during the last two decades, due to two principal reasons: shortage of staff; lack of attention on increasing the knowledge base of their officials at different levels. Authority does not convert NPA into performing asset. 

The mindset of the officials need change; knowledge base on credit needs to improve and monitoring credit, if need be through external assistance will alone take the MSME sector and not either guarantees or freebies from the government. Hence, ANBA packed in Rs 3 tn for performing assets, and Rs 20,000 cr subordinated debt for stressed assets require far too many things to succeed. 

For performing assets, incremental credit is the solution while for the stressed asset equity partnership with the borrower is the solution. In order that the latter succeeds, Banks should first take the call on restructuring and reviving the NPAs thus far held only in recovery by sale of assets bucket and then extend to those found viable for revival, roll-out the equity. They should plan for converting the NPAs into performing assets and thereafter plan for recovering their sub-ordinated debt. After all, it is only sub-ordinate to the principal debt! A bold move worthy to watch in its roll-out. 

SIDBI has been the trustee of too many Funds including those under ANBY and most surveys revealed that this institution has not been of much help to be the guardian angel for the MSMEs. Transparency and accountability towards the Funds it held was in for question. Therefore, with the new Rs 50,000 cr Fund and Rs 10,000 crFund of Funds as part of ANBA require re-engineering of this institution upfront or should find a different institutional framework for the Fund to work for the MSMEs.  

(B Yerram Raju is an economist and Risk Management specialist. He is the author of The Story of Indian MSMEs. The views and opinions expressed in this article are personal and do not reflect the views of INCLUSION.)

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B Yerram Raju

Dr. Yerram Raju Behara an economist was a career banker of nearly 3 decades' experience in SBI (1966-1994) holding responsible positions. One of the 1100 economists participating in World Economic Survey of ifo-WES, Germany every quarter since June 2018. Authored/co-authored 15 books and around 2000 articles in financial dailies and reputed national and international journals. Forthcoming Publication: - The story of Indian MSMEs -Despair to Dawn of Hope.

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  1. नमस्कार सर
    महोदय
    हम गांव से है ए म। ए तक पढाई की है टेलेंट कुट कुटकर
    भरा है। लेकिन बेंक हम गरीब पर विश्वास नही करता
    हो सके तो इस विषय पर सेवा प्रदान करे
    धन्यवाद ।

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