RBI Governor Duvvuri Subbarao said on Tuesday financial markets should not be under the impression that recent administrative steps that authorities have taken to curb speculation in foreign exchange are temporary. David Bloom, Global Head of FX Strategy, HSBC Bank plc, Stephen King, Chief Economist HSBC Bank plc and Leif Eskesen, Chief Economist for India & ASEAN, HSBC, made a brief stop in Mumbai recently while travelling through Asia and talked with BW's Tanushree Pillai about the status of the Indian economy in comparison to its Asian peers and what needed to be done to bring growth on track. Bloom, their global head of fx strategy, talked about how the RBI can help prevent volatility in the rupee. We have seen the Reserve Bank taking measures to save the ailing rupee. These steps include changes in external commercial borrowing policy and non-resident external rupee deposits and foreign currency nonresident deposits. Do you think these measures will help?David Bloom: At the outset, these measures would be partially successful. One way to look at this would be to see it as a parachute. It only helps you land safely, but it doesn't put you back in the aeroplane — it just slows down the move. India's currency position can be compared to that of Turkey, which has 9 per cent current account deficit, but it took some radical steps and stabilised its currency, Lira. So, it is possible to take steps to prevent one's currency from depreciating further. In India, nothing has changed in the past three months, while the situation has worsened in the US and the Eurozone. So, you will have a more active and interventionist central bank going forward. This is a function of the global economy.Stephen King: Investors are increasingly in a mood of surviving and not thriving, which means they are looking to hold the most liquid assets. In emerging markets, it is tough to get hold of assets one can get rid of quickly, and that leads to volatility in those markets. Bloom: We still think the rupee could go to 58 per dollar. It is not a one-off thing, and you don't stand alone here. If you could control the rupee, you would have already done it. This is a fluid situation and doesn't begin and end with this day.Some say that if you consider the real effective exchange rate (REER), the rupee is over-valued and needs to depreciate. Bloom: These valuations are not extreme. Ironically, all central banks were trying to get weak currencies; now that they are getting them, they don't like them. We have seen extreme valuations of both sides and at no stage do we think these valuations and sell-offs have created extreme valuation. Hence, we still think dollar/rupee can head further down. The market is flipping and flopping on what's happening globally and a weaker rupee is going to add to the problem of inflation. Leif Eskesen: The rupee is more or less in line with the REER currently, but there are risks such as a spike in global risk aversion could send it lower in nominal terms. The pass through from the exchange rate into inflation is very high for India and that is a concern.King: (Coming to ) the problems associated with quantitative easing (QE2) — such as capital flowing into emerging markets, these economies adopted what we call quantitative tightening — increasing reserve ratios, capital controls and exchange controls. Conventional economic wisdom suggests these measures work to a certain extent.What are your comments on the future of the euro?Bloom: We are not terribly bearish on the euro. We do not believe in a break up story here. The euro is caught between two scenarios. One, where the US is printing and Europe defaults — a cataclysmic problem — and the other where US prints and Europe prints a little and, in return, does structural reforms.King: Hypothetically, if Europe breaks tomorrow, the value of its individual currencies may rise. So, the value is not in terms of individual currencies, but in terms of bond spreads.Is it advisable for the RBI to intervene at the cost of using its forex reserves?King: If a country has large forex reserves and chooses not to intervene when life becomes tough, why have those reserves in the first place? It is perfectly legitimate for a central bank to use its reserves if it generates stability.Inflation seems to be the RBI's focus for now. If it intervenes in forex market, will it give out wrong signals about its stance?Eskesen: The purpose of the intervention will be to smoothen out volatility and to prevent the exchange rate from depreciating too much — which limits imported inflation — and is consistent with the RBI's policy stance. There has been a change of leadership in PIIGS (Portugal, Italy, Ireland, Greece and Spain). How and when will they take to repair their sovereign balance sheets?King: The issue for these nations is whether their leaders have the political legitimacy to act. We have technocrat leaders in Italy and Greece and they do not seem to enjoy the political legitimacy of an elected leader. So, at first, there are signs of significant civil unrest. Will those technocratic leaders be able to deliver the reforms they are promising? What we need is a Europe-wide solution and not one which simply blames the countries in the periphery. The difficulty will ultimately spread to Germany and other core countries. You need to have collective decision making in the fiscal area and there has to be some degree of sacrifice of national sovereignty.Eskesen: Some of the leaders are acting now, but these austerity measures certainly add to the pain. You can't expect this situation to get resolved by country-specific measures. A broader, pan-European approach will help. In the short term, it is an issue of crisis management.Over the medium term, there need to be tighter constraints on individual countries.Foreign fund inflows have been a trickle of what they were around the same time last year. When will they start again? King: There is a tremendous amount of risk aversion across the globe. The good news for India and emerging markets is that after the first wave of the crisis, these parts were able to rebound faster because of stronger fundamentals and that holds true even now.Eskesen: The pain from the current crisis will have to spread further northward (core countries such as Germany), before they will be ready to take aggressive steps that are needed to contain the crises. We are not anticipating a breakup of the EU, but things will get worse further before the ECB steps in to expand its balance sheet and keep the crises from worsening further. India is more insulated, but not immune to global spillovers.
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In a clear signal that growth is back on its radar, the Reserve Bank of India (RBI) on Tuesday cut the cash reserve ratio (CRR) by 50 basis points to 5.5 per cent. The measure will take effect from the coming Friday (28th January) and release Rs 32,000 crore into a parched banking system.The central bank left the repo rate unchanged at 8.5 per cent. The feeling is that it will done either at the next mid-quarter review for 2011-12 on March 15; or when the Monetary Policy for 2012-13 is announced on April 17. By then, the results of the five state elections in Uttar Pradesh, Punjab, Uttarkhand, Manipur and Goa would have come in. If the political gains from the state elections are to be loaded in favour of the Congress-led UPA government, it may announce a raft of reforms in the Union Budget (slotted for the second week of March at the latest) and do a one-two with rate cuts from Mint Road.The RBI also gave a hint to the government on what it should do in the Union Budget: in the absence of credible fiscal consolidation, the RBI will be constrained from lowering the policy rate in response to decelerating private consumption and investment spending. "The forthcoming Union Budget must exploit the opportunity to begin this process in a credible and sustainable way", it said.On Monday, it gave two suggestions in its Macroeconomics and Monetary Developments Third Quarter Review 2011-12'. The attainment of the Union Budgets 2010-11's rolling target of gross tax revenue-GDP ratio of 10.8 per cent for 2012-13 critically depends on timely implementation of DTC (Direct Tax Code). It is expected that DTC system would improve compliance levels as rates of corporation tax and surcharge are reduced and tax base is widened."While greater uncertainty surrounds the introduction of GST, a consensus needs to be built for the successful rollout of GST in order to further improve compliance and enable overall tax buoyancy to return to pre-crisis levels. In the short-run, reliance on temporary measures such as disinvestment cannot be avoided. However, plans in this regard would need to be calibrated to market conditions, so that revenue proceeds can be well spaced", the Review noted.CRR Cut, But Repo Rate UnchangedThe central bank pointed to the tight liquidity conditions beyond its comfort zone. It used open market operations (OMO) -- wherein it buys government securities from banks for cash -- to inject Rs 70,000 crore from November to mid-January 2011. But the structural deficit in the system increased significantly, which could hurt the credit flow to productive sectors of the economy. RBI said "it presents a strong case for injecting permanent primary liquidity into the system".It is a reference to inter-bank liquidity. It remained tight for most of fiscal 2011-12, but turned for the worse in the second half of November. This was largely due to the central bank's dollar sales to support the rupee which fell below the 50 to dollar to hit a life low of 54.23 on December 15, 2011. Dollar sales sucks out an equal rupee amount from the system; and this also coincided with advance tax outflows of nearly Rs 50,000 crore. As a result, average borrowings by banks from the RBI window increased to Rs 92,000 crore during November and further to Rs 1,20,000 crore by in January (up to January 20th). It had hovered at Rs 48,000 crore in April-September 2011.The liquidity deficit had been consistently above Rs 1,50,000 crore during the past week. The RBI has gone on record that the desired liquidity deficit should be around 1 per cent of net and demand time liabilities (NDTL. This includes saving, fixed deposits and call borrowings) of banks for effective transmission of monetary signals, while keeping adequate liquidity to fuel the growth engine. And 1 per cent of NDTL presently works out to about Rs 64,000 crore. With a CRR cut of 50 bps, the liquidity deficit would reduce to a shade less than Rs 1, 20,000 crore, much higher than the desired level.Going Ahead"The system therefore can expect another cut before this fiscal end, provided inflation numbers are closer to projection. This one step alone takes care of the structural liquidity deficit issue, as CRR is the most effective tool for permanent liquidity infusion. The initial response of the market has been quite positive and the Sensex shot up by about 300 points, breaching the 17,000 mark while the rupee gained to less than Rs 50 per suggesting increased foreign institutional interest in Indian Equities", says Shyam Srinivasan, MD & CEO of Federal Bank.Today's move is the final step of RBI reversal of its crisis-driven expansionary policy in October 2009. Between January 2010 and October 2011, it cumulatively raised the CRR by 100 basis points and the the repo rate 13 times by 375 basis points. This monetary policy response was calibrated on the basis of India specific growth-inflation dynamics. However, in view of slowdown in growth, especially investment activity and expected moderation in infl ation beginning December, it was decided to pause on repo rate hikes from the review in December 2011.The repo rate has been untouched at as the central bank felt it was premature to cut it now. "The reduction in the policy rate will be conditioned by signs of sustainable moderation in inflation". Headline wholesale price index (WPI) inflation, which averaged 9.7 per cent year on year (YoY) during April-October 2011, moderated to 9.1 per cent in November and further to 7.5 per cent in December. But though headline WPI inflation is moderating, it largely reflects a sharp deceleration in prices of seasonal food items. "Inflation in respect of other key components, particularly protein-based food items and non-food manufactured products remains high. Moreover, upside risks to inflation arise from global crude oil prices, the lingering impact of rupee depreciation and slippage in the fiscal deficit", RBI said.The RBI has maintained that the inflation target of 7 per cent by end-March 2012 would be attainable despite the slow improvement in core sector inflation and uncertainties in the global economies. This target appears to be reasonable. More importantly, core inflation should move down for any RBI action on this front. "Speculation that CRR cut is guidance for interest reduction in the future, it is more likely that the RBI would be more cautious before reducing interest rates as it would be premature to begin reducing policy rates before a substantial and sustainable dip in overall inflation. We do not expect this before early 2012-13", says Madan Sabnavis, chief economist at Care Ratings.But there is a catch. The bulk of the liquidity available went into government securities, not credit as few companies were big borrowers at the prevailing interest rates; few had huge capital expenditure plans lined up. "The CRR released funds could flow mainly into government paper and support borrowing programme of government as commercial credit growth is sluggish due to demand and interest rate conditions", adds Sabnavis. Adds Rohini Malkani, economist-Citi (India): "The RBI has lowered its 2011-12 GDP estimate to 7 per cent from 7.6 per cent. It has said that the deceleration is primarily due to a slowdown in investments, where revival is contingent on domestic policy measures. If this does not pick up, growth could trend lower; further aggravating inflationary pressures".The RBI's move today may well be step in the right direction, but much more needs to be done to get the economy going.
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Bajaj Auto has always managed to set itself apart from the rest of the competition. India's second largest two-wheeler maker – with a market share of 31 per cent – has a history of making uncanny changes in the way it functions. So be it downing shutters on the scooters business, or not focusing on entry-level motorcycles or bringing a car-like four-wheeler which are still not cars, Bajaj Auto has done it all.In yet another change, the company has decided not to sell its top-end models Pulsar 220 and Avenger out of its Probiking showrooms, as it converts these into KTM Sportmotorcycle dealerships, after the launch of KTM 200 Duke. Amit Nandi, business head (KTM) at Bajaj Auto, says that the idea behind the Probiking concept was to provide a dedicated space to niche and premium bikes, and now that KTM is here, we plan to offer Duke 200 and Kawasaki Ninjas through these dealerships. "As sales (of KTM 200 Duke) picks-up, we will start exiting the Bajaj products from KTM dealerships," says Rajiv Bajaj, MD, Bajaj Auto. On Tuesday, Bajaj unveiled its first KTM product – the 200cc Duke at Rs 1,17,500 — that will go on sale by the end of the month. The company will offer the naked sports motorcycle through its 32 KTM (previously Probiking) dealerships in 30 cities in India. Bajaj, which has a strategic 39 per cent stake in Austria-based KTM, plans to open six new showrooms in Dehradun, Lucknow, South Mumbai, Guwahati, Kathmandu and Margao to sell KTM bikes. 200 Duke – powered by a single cylinder, 200cc, liquid cooled, 4-valve engine with a top power of 25 bhp will compete with the likes of Yamaha R15 and Honda CBR250R. Bajaj believes that the Rs. 1 lakh and above sports motorcycle category will now pick-up and expects to sell 3000 units of KTM 200 Duke per month. He adds the company will bring a 350cc version of Duke next year. KTM aims to sell 50,000-60,000 units in next 3 years in India.The KTM partnership is much more than investment for Bajaj Auto. The company not only manufactures the 125 Duke and 200 Duke out of its Chakan plant, KTM traits will also be seen on the new Pulsar series. "There is a sharing of knowledge and experience, specifically, for the Pulsar motorcycle of Bajaj," hints Bajaj, without disclosing more details. "The physical product is different," he adds. The company will showcase the new Pulsar range of motorcycles next week, as the iconic brand in Indian motorcycle history completes 10 years of existence.With strong export numbers and presence in the premium bike segment, Bajaj Auto managed to clock operating margins of 21 per cent in the third quarter of fiscal 2012. The company sold 3.3 million motorcycles with exports contributing more than 28 per cent. "We prefer Bajaj Auto over Hero MotoCorp in the two-wheeler segment due to higher profitability of exports and premium product portfolio," says analyst Hitesh Goel of Kotak Institutional Equities. Bajaj Auto – with a market share of 31 per cent in the 2-wheeler market – is a distant second in the volume segment of 100-110cc bikes behind the leader Hero MotoCorp. However, it sold over a million units of 125cc and above capacity of motorcycles in April-December 2011 period, where as Hero MotoCorp sold close to 250,000 units. "With brands like Pulsar and Discover, we are not about volumes," adds Bajaj. Bajaj, which has always positioned itself as a premium motorcycle maker with brands like Pulsar and Discover, expects to make a strong entry in the Rs. 1 lakh and above sports motorcycle market through the KTM brand. So far, the company has been selling the Pulsar 220 and Avenger as its premium brands, amid industry expectations that Bajaj will get into 250cc and above capacity bikes. "You need different brands to capture aspirations of different kind of customers. So, in the upper end of sports motorcycle industry, KTM is very well-placed to tap into that potential," says Nandi.
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The Reserve Bank of India (RBI) pleasantly stumped bankers on Friday with an unexpected 75 basis points (bps) cut in the cash reserve ratio (CRR) to 4.75 per cent. The move, effective 10 March, will infuse Rs 48,000 crore in liquidity.Chanda Kochhar, Managing Director & CEO, ICICI Bank said the 75 bps CRR cut is a proactive step by RBI to inject permanent liquidity into the system. "This is expected to bring down the high level of overnight borrowings by banks from RBI. This would also ensure continued smooth flow of credit in the corporate and retail sector".The immediate trigger for CRR cut, ahead of a planned monetary review on March 15, is that liquidity may tighten further on advance tax payments bang in middle of the Ides of March. In recent times, liquidity has come under strain because of the central bank's dollar sales which sucks out rupees from the system. Systemic liquidity had been short by atleast Rs 1,80,000 crore and banks had been borrowing to make good the shortfall from the central bank. Through 50 bps CRR cut in its third quarter monetary policy review plus on-going open market operations (buying gilts held by banks and infusing liquidity) since since November 2011, RBI had already infused liquidity to the tune of Rs 1,50,000 crore into the system."Even after the CRR cut, liquidity will remain in a deficit. The CRR cut comes less than a week before the RBI's scheduled meeting on 15 March. The central bank could not wait until the policy day because the reporting fortnight (and hence banks' reserve maintenance) starts from the fortnight beginning 10 March", says Sonal Varma, economist at Nomura (India).She added "the timing of the rate cut is not as much a surprise as the quantum". The larger-than -expected CRR cut (Consensus and Nomura were expecting a 50 bps cut in policy) suggests that the RBI has taken care of near-term liquidity concerns and may not need to resort to further open market operations. Post the CRR cut, liquidity deficit should ease substantially in April and May to around the RBI's stated comfort zone of a per cent of net demand and time liabilities or at about Rs 60,000 crore."We now expect status quo on both the CRR and repo rate at the 15 March policy meeting. In our view, today's CRR cut does not automatically imply a policy rate cut. This is because oil prices are already high and the budget is one day after the RBI's policy on 16 March (where the RBI wants to see fiscal consolidation). Therefore, we assign only a 30 per cent probability to a repo rate cut on 15 March and our base case remains that repo rate cuts will start in April. We expect no further CRR cuts this year and expect 100 bps of repo rate cuts in 2012, starting in April", explains Varma.
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Perhaps by a whisker, but the BW Expert and Dartboard indices beat the Nifty 50 Index by half a percentage point each in February. The NSE's Nifty 50 itself ended 3.5 per cent higher at the end of February over January, with the two BW indices bettering that.Compare that to end-January, when the Nifty beat both the BW indices by 3.6 per cent and 4 per cent, respectively. But for the two months, the BW Expert Index and the Dartboard Index are up 13 per cent each, both below the Nifty, which bettered its end-December number by 16.5 per cent.Prateek Agrawal, CIO at ASK Investment Managers who overseas Rs 1,500 crore of domestic and offshore money is unimpressed by the the sharp rise in the Indian equity market. In fact, from a cash position of 11 per cent in January, today Agrawal is nearly fully invested. In the past two months, Agrawal has exited counters like Hindustan Unilever and has included three new stocks – Hindalco, Larsen & Toubro and Siemens in his portfolio. Says Agrawal: "Risk is back into equities and therefore we have got into some high beta stocks." In the past two months the beta of his portfolio has jumped to 1 from 0.7. You can't blame him for his aggressiveness, after all India is among the top four gainers in the MSCI Emerging Market Index gaining nearly 27 per cent in the first two months of 2012.The rebalancing of portfolio by fund managers have paid off, outperforming the benchmark in February. The flow of money into mid and small cap stocks has seen the BW Expert Index and the BW Dartboard Index—which are more of a multi-cap index—gaining over 4 per cent each, outperforming the board-based National stock Exchange's CNX Nifty Fifty Index by half a per cent. The Nifty ended the month with a gain of 3.5 per cent. The flow of money into mid and small cap stocks in February helps explain the performance of the BW Expert and BW Dartboard indices — they are multi-cap indices, compared to the big-cap Nifty 50. The scenario was entirely the reverse in January when the Nifty outperformed the BW Expert and BW Dart Board Index as money came mostly into large-cap stocks. However in the two months, the Nifty still outperforms the BW Expert Index and BW Dart Board Index. (See graph: BW Index) Click To View Enlarged Image "It's a liquidity driven market with money chasing assets. It's a global phenomenon and nothing unique to India. The current rally has nothing to do with fundamentals," says Agrawal who feels that, "Cheap valuation are helping fund managers to take the extra risk that don't want to miss out on the ongoing momentum by making some moolah." According to EPFR, a US-based agency that provide fund flows and asset allocation data to financial institution reported that year to date till 22 February 2012, mutual funds (US-based) have invested over $20 billion dollars into markets, primarily emerging markets. The biggest buying was in markets such as China, Brazil and India, while selling was in countries like France, Japan and Germany. (See graph: Inflow Outflow). Click To View Enlarged Image Meanwhile of the 28 stocks listed on the BW Expert Index, 9 stocks, accounting for 41 per cent of the index weightage, underperforming the Nifty with four stocks — Cipla, EID Parry, Bharti Airtel and Larsen & Toubro recorded negative returns in the range of 0.2 per cent to 9.5 per cent in February. While Bharat Electronics, Oberoi Realty, Jain Irrigation, Bajaj Auto, Cummins India and State Bank of India were the biggest gainers among the BW Expert Index that gained 9 per cent to 15.1 per cent during the month. (See graph: Winners and Losers).For February, CJ George's picks that has been the part of the seven experts and one institution - Axis Direct that constitutes the BW Expert Index recorded the biggest gain of nearly 9 per cent, though the weightage of his picks to the overall BW Expert Index was 17 per cent. This was followed by Axis Direct that registered a gain of nearly 8 per cent and his weightage to the overall Index has been 31.5 per cent. (See graph: Stock Pick).On the other hand in the BW Dart Board Index, 11 of the 31 stocks that underperformed in February included the likes of Hindustan Copper, Reliance Industries, Hindustan Unilever, Dr Reddy's Labs and Apollo Hospitals. Stocks like Lanco Infratech, Indiabulls Financial Services, Unitech and Jet Airways were the top gainers in the pack of BW Dart Board Index. Click To View Enlarged Image Though the worst fears are possibly behind us in 2011, the big question among investors are where is the market heading from here on? Says Nilesh Shah, director, Axis Direct, "The flows will keep the mood positive in the market. However before the budget a correction which is inevitable will be healthy for our market, I don't see the Sensex slipping below 17,000." Adds Agrawal of ASK Investment Managers, "From here on markets would now depend on reforms, interest rate cuts and capital inflows. Though near term positive is the continuing flow of money from FIIs, the near-term uncertainties of Iran (rise in oil price) can't be ignored, which can also spoil the party." Meanwhile, the Samajwadi Party (SP) winning a clear majority in Uttar Pradesh sprung a negative surprise in the market . Market expectations were that SP would form the government with support from the Congress. Given Congress' weak showing, market is expecting the government to get more cautious that would offer more sops, and would move further away from reforms. In such a scenario, in March, investors are likely to become more discerning over the quality of the stocks they acquire given that the market has rallied too fast in the past two months.
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Small and Medium Enterprises (SMEs) are critical to the nation's economy: they contribute approximately 40 per cent of India's domestic production, almost 50 per cent of total exports and 45 per cent of industrial employment. More importantly, they are the second largest employers of manpower, after agriculture. SMEs in India operate mostly in the unorganised sector and are the source of livelihood for millions of people.The social contribution made by SMEs is even more significant than its economic contribution. Within the SME sector, the small sector serves as a seed-bed for nurturing entrepreneurial talent and originating units to eventually grow into medium and large enterprises. The promotion of SMEs, therefore, becomes a major area for policy focus. The regeneration of SMEs must receive public support particularly for village, cottage and micro level enterprises. Despite their economic significance, SMEs face a number of bottlenecks that prevent them from achieving their full potential. Some of the major obstacles in the path of business development for SMEs relate to a wide range of issues:Financing: Lack of access to finance and timely credit as well as escalating cost are cited as the primary reasons for under-utilisation of the manufacturing capabilities of SMEs.Infrastructure: The infrastructural facilities in India have not reached to the desired level. This restricts private initiatives in this sector. Therefore, creation of better infrastructural facilities for SMEs must receive greater priority.Taxes And Regulations: A multiplicity of regulating agencies lead to harassment and inspections with greater impact on operations of SMEs than on larger units.Marketing: With growing access to modern means of communication, particularly revolution in the information technology, the sheltered market for the SMEs product is no longer so. SMEs should join hands globally to create a global commodity chain. In this regard, SME mother units in marketing, similar to mother units in production, may be promoted.Technology: It becomes difficult for SMEs to access cutting-edge technology due to the high initial costs, thus leaving them behind in the race for competitiveness. A major impediment in SME development is their inability to access timely and adequate finance.There are several reasons for low SME credit penetration, key among them being insufficient credit information on SMEs, low market credibility of SMEs (despite their intrinsic strengths) and constraints in analysis. This leads to sub-optimal delivery of credit and services to the sector. As the access of SMEs to capital markets is very limited, they largely depend on borrowed funds from banks and financial institutions. While investment credit to SMEs is provided by financial institutions, commercial banks extend working capital. In the recent past, with growing demand for universal banking services, term loans and working capital are becoming available from the same source. Besides the traditional needs of finance for asset creation and working capital, the changing global environment has generated demand for introduction of new financial and support services by SMEs. There is an urgent need to regenerate SME financing.As SMEs have been the green-field for nurturing entrepreneurial talent, first generation entrepreneurs should be facilitated in accessing desired finance through the creation of guarantee funds. Finance should not only be timely but also cost effective. Among instruments of SME Financing, SIBDI, is the principal financial institution for the promotion, financing and development of industry in the SME sector in the country. SIDBI also provides appropriate support in the form of promotional and developmental services. In order to improve the credit flow to the SME sector, it has tied-up with eight public sector banks in the country. With these tie-ups, it has covered 150 SME clusters, out of the total 388 clusters identified across the country. In spite of the various initiatives taken by the government, banks and financial institutions, SMEs face certain challenges which are universal in nature. These problems relate to the issue of collaterals, cost of loans, delay in receivables, obsolete technology, marketing, etc. In order to address the above problems in the Indian context, some innovative instruments of financing have been introduced and institutional set ups have been created. Some of the major initiatives include:Credit Guarantee Fund Trust for Small Industries: Government of India, in association with SIDBI, has set up a Credit Guarantee Fund Trust for Small Industries (CGTSI) to implement the guarantee scheme.Risk Sharing Facility: While the CGTSI extends guarantee cover for the loans up to Rs.2.5 million, there is a need for offering guarantees for loans extended by banks beyond the above limit. Under a World Bank led Project on Financing and Development of SMEs, a possibility of introducing a risk sharing facility for the SME sector is being examined, wherein the risk in lending by banks to SMEs could be shared on pari passu basis between the originating banks and the suggested entity.Venture Capital Funding: With regard to, many countries are considering liberalising the rules regarding venture capital investments. In India also, various measures have been taken in this direction. SIDBI, along with some other institutions, has taken a lead in promoting venture capital funding in the country.Micro Credit: Realising the potential of micro finance in stimulating economic growth, SIDBI, has laid emphasis on increasing the capacity of the sector to handle credit and growth in the disbursements of micro finance. SIDBI Foundation for Micro Credit has been established. Small and Medium Enterprises Fund: The most important amongst the sectoral initiatives taken by the GoI and SIDBI is an SME Fund, with a view to giving impetus to the fund flow to the SME sector. Under the Fund, assistance is being provided to SMEs at an interest rate of 200 basis points below the Bank's PLR. Direct assistance is being extended to SMEs through SIDBI's own offices at 9.5 per cent rate of interest as also by way of providing refinance to the primary lending institutions.Refinance to SFCs is available in the interest rate band of 7.5 per cent to 8 per cent. The SME Fund provides for routing of assistance, besides SFCs, through commercial banks as well. The Fund, besides upscaling the flow of assistance to SMEs, addresses the issue of cross sector parity in the cost of loans. Setting up of a dedicated credit rating agency for SMEs can play an important role in addressing some of these concerns. In this context, SMERA is wholly committed to facilitating the overall growth and development of Indian SMEs. The agency's primary objective is to provide SME ratings that are comprehensive, transparent and reliable. All facilities to SMEs should be in the form of a level playing field. Boundary-less markets of today can sweep aside which are not globally competitive. At the same time, businesses which enjoy comparative advantages are forward looking and can attune themselves to the changing environment, will have tremendous opportunities. SMEs need to rediscover and regenerate themselves to integrate with the world markets.break-page-breakIn the backdrop of emerging needs, new financial services need to address the challenges of technology up gradation and modernisation, marketing, finance, infrastructural facilities, venture capital, micro finance and factoring assistance. In the non-financial services, information dissemination, technical assistance, early warning, human resources development, environment management and quality consciousness are required more urgently than ever before. Globalisation of SMEs and their competitiveness in the global markets is a priority. Though Indian SMEs have achieved a measure of success, especially in sectors such as, garments, leather and leather products and gems and jewellery, among others, further heights can only be achieved by fostering international linkages between SME sectors of different countries. A concerted effort on the global scale is required to bring SMEs to the mainstream from the periphery and integrate them with the organised sector.Under the WTO regime new opportunities are being created for linkages between SMEs across the globe. It is critical for SMEs to be international in their outlook, competitiveness and costs. Models for clusters are developed to help them integrate with global supply chain. Based on the strengths and diversity of the vibrant SME sector in India, there exists enormous potential for participation and partnership for further development. The crucial role of the Confederation of Indian Industry (CII) has been involved with the promotion of SME sector since inception. CII strongly believes that employment will be best served by promotion of the small sector. The Promotion of the SME sector addresses other larger problems of regional equity, income distribution and strain on urban infrastructure. Thus, approximately 80 per cent of CII's members are from the SME sector. CII has been deeply involved in their development and modernisation, introducing concepts of quality management, energy conservation, globalisation and technology up-gradation to its member-companies. It also undertakes dedicated measures for marketing linkages and access to export markets for SME units. This is done through the following initiatives: An SME division analyses the challenges facing the sector and suggests interventions to the government for improving their efficiency. CII's inputs have been considered while drafting the SME Development Bill. A unique cluster activity of shared learning has been developed in consultation with leading Japanese experts for assisting units in quality management and globalization at affordable cost. CII sets up special exhibition platforms at all its leading high-profile trade fairs such as International Engineering and Technology Fair, DefExpo for defence industry, Auto Expo for the automobile and components industry and many others throughout the year. A conference on globalisation of SMEs is held annually in partnership with the Ministry of Small Scale Industries, bringing to one venue ideas as well as networking opportunities for SME entrepreneurs. CII regularly conducts Enterprise India shows in many countries during the year, where overseas investors and markets are able to view the latest developments in SMEs. Realising the importance of credit ratings in getting finance, CII has partnered with ICRA, the premier credit rating institution, to provide ratings to small enterprises. CII has also set up the Subcontracting and Partnership Exchange with UNIDO to disseminate information about opportunities in these avenues.CII's principle of partnerships and cooperation is especially relevant to small and medium enterprises and its activities, to sustain and grow the sector, are bound to increase as industry expands and funding becomes easier for these units. There are a number of issues in lending to the SME sector, which banks generally face. The key issues among them are outlined below:Information Asymmetry: Accurate information about the borrower is a critical input for decision-making by banks in the lending process. Where information asymmetry (a situation where business owners or managers know more about the prospects for, and risks facing their business than their lenders) exists, lenders may respond by increasing lending margins to levels in excess of that which the inherent risks would require. However, the sheer ticket size of SME lending makes it inviable for banks to invest in development of information systems about SME borrowers. In such situations, banks may also curtail the extent of lending even when SMEs are willing to pay a fair risk adjusted cost of capital. The implication of raising interest rates and/or curtailing lending is that banks will not be able to finance as many projects as otherwise would have been the case.Granularity: This refers to a situation where the risk grading system at banks does not have the requisite capability to discriminate between good and bad risks. The consequence is tightening of credit terms, or an increase in prices, or both. From the borrower's perspective, this leads to an outcome where the bank is over-pricing good risks and under-pricing bad risks. The fact that most banks in India have not developed adequate expertise in SME lending risk assessment exercises leads to the problem of granularity when it comes to SME lending.Pecking Order Theory: Pecking order theory shows from the above two issues, which makes SME lending highly difficult for banks. Under this hypothesis, SMEs, which face a cost of lending that is above the true risk-adjusted cost, will have incentives to seek out alternative sources of funding. Evidence suggests that in such situations, SMEs prefer to utilise retained earnings instead of raising loans from banks.Moral Hazard: Even when loans are made to SMEs, it may so happen that the owners of these SMEs take higher risks than they otherwise would without lending support from the banks. One reason for this situation is that the owner of the ? rm benefi ts fully from any additional returns but does not suffer disproportionately if the firm is liquidated. This is referred to as the moral hazard problem, which can be viewed as creating a situation of over-investment. The moral hazard problem may, thus, result in SME lending turning bad in a short period of time, a situation that all banks would like to avoid. Switching Costs: SMEs may find it harder to switch banks, when countered with any issue. It is a known fact that the smaller the business, the more significant the switching costs are likely to be and, therefore, it is less likely that the benefi ts of switching outweigh the costs involved. This situation results in SME lending becoming a seller's market, which may not be attractive to SME borrowers. Steps for Smooth SME Lending In order to ensure that the Small and Medium Enterprises (SMEs) play a very significant role in the economy in terms of balanced and sustainable growth, employment generation, development of entrepreneurial skills and contribution to export earnings. However, despite their importance to the economy, most SMEs are not able to stand up to the challenges of globalisation, mainly because of difficulties in the area of financing. With the opening up of the Indian economy, it has become necessary to consider measures for smoothening the flow of credit to this sector. The article provides a cross country perspective in this regard and highlights the Indian scenario with reference to SME lending.
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The importance and contribution of the SME sector to the economic growth and prosperity is well established. Their role in terms of employment creation, upholding the entrepreneurial spirit and innovation has been crucial in fostering competitiveness in the economy. India has nearly three million small and mid-sized enterprises (SMEs), which account for almost 50 per cent of the country's industrial output. SMEs are also the second largest provider of employment after agriculture, and contribute to 40 per cent of total exports directly and even more exports indirectly. SMEs are dominant players in some of India's major export sectors, including textiles and garments; leather products; sports goods; gems and jewelry; and handicrafts, among others. They also contribute substantially in industrial goods segments in sectors such as electrical, engineering, rubber, and plastics. The small and medium units in the country have contributed 40% towards creation of jobs after the economic slowdown, and 10 lakh jobs each year.Contrary to common perceptions, these companies are leading the way in innovation, competition, efficiency, productivity, and operational flexibility. They are clocking astounding growth rates, globalizing their operations, establishing their own brands, and have come to be recognized as a formidable force in the Indian growth story. Fuelled by the entrepreneurial transformation in these companies and the incorporation of global best practices, these companies have made significant improvement in areas like financial governance, scale and outlook. Consequently, spectacular tales of inspiration, self-motivation and sheer performance have become common introductory notes to people associated with this community. In brief, SMEs in India present a huge opportunity for global investors looking to access the growing market in India.There are more than 100 lakh SME units in India with investment of above Rs. 1 lakh crore. The sector has recorded double digit growth during last four years. It contributes 40 per cent to industrial production and 6 per cent to GDP.Towards meeting the National developmental objective of a growth rate of over 8 per centon a sustained basis, it is imperative for the industrial sector to grow at a faster pace supported by a vibrant SME sector.Towards this, Government of India has been extremely alert and proactive. The Government's policy initiatives like enactment of the new Micro Small and Medium Enterprises Development Act, 2006, pruning of reserved SSI list, advising FIs to increase their flow of credit to the SME sector, are all initiatives towards boosting entrepreneurship, investment and growth. The schemes comprise of bank credit facilitation, Export credit Insurance, SME Credit Rating, Bill discounting schemes, Government stores purchase programme, infomediary services, facilitating marketing support, technology support and other support services. The schemes have been formulated at both national as well as International level.There are certain schemes which National Small Industries Corporation carries forward to assist small enterprises with a set of specially tailored schemes designed to put them in a competitive and advantageous position.Besides these schemes, the Government of India also runs an International Cooperation Scheme for Technology infusion and/or up gradation of Indian MSMEs, their modernisation and promotion of their exports are the principal objectives of assistance under the International Cooperation Scheme. Deputation of MSME business delegations to other countries for exploring new areas of technology infusion/up gradation, facilitating joint ventures, improving market of MSMEs products, foreign collaborations, etc. Participation by Indian MSMEs in international exhibitions, trade fairs and buyer-seller meets in foreign countries as well as in India, in which there is international participation. Holding international conferences and seminars on topics and themes of interest to the MSME have been focused upon. Here are various schemes run by the Indian Government to boost the SME's in the country to help them become more innovative, efficient and competitive. The enactment of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 was a landmark initiative taken by the Government of India to enable the SMEs' competitive strength, address the issues and challenges and reap the benefits of the global market. SME policy initiatives at the national and state level are aimed at strengthening the role of SMEs at the base as well as at the higher level.The Ministry of Micro, Small and Medium Enterprises (MSME) is implementing the promotional schemes for the development of micro, small and medium enterprises. The schemes and programmes generally focus on capacity building in states and regions, nevertheless, there are a few schemes and programmes, which are individual beneficiary-oriented. Scheme of Surveys, Studies and Policy Research Entrepreneurship Development Institution Scheme Scheme of Fund for Regeneration of Traditional Industries (SFURTI) Rajiv Gandhi Udyami Mitra Yojana (RGUMY) Marketing Assistance Scheme (Implemented through NSIC) Performance and Credit Rating Scheme (Implemented through NSIC) Prime Minister's Employment Generation Programme (PMEGP) (Implemented through KVIC) Product Development, Design Intervention and Packaging (PRODIP) (Implemented through KVIC) Khadi Karigar Janashree Bima Yojana for Khadi Artisans (Implemented through KVIC) Interest Subsidy Eligibility Certification (ISEC). Udayami Helpline — Prime Minister, Dr Manmohan Singh, inaugurated call centre 'Udyami Helpline' which will provide all the relevant information and details to the interested entrepreneurs regarding the scope of the business operations they may want to venture into, loan facilities, government schemes and other modalities of setting small units. With the initiation of toll free number 1800-180-6763, the government primarily aims to serve the needs of the entrepreneurs who face problems on a wide range of issues which include - credit availability, technology, marketing, various MSME schemes and other important subjects through a single point facility. This will further strengthen the reach of the government all across the country. The services are available on this number between 6 am in the morning to 10 pm in the night everyday all throughout the year including Sundays and holidays. The facility that would be available in both the languages - English and Hindi would also help in registering complaints and grievances with various central and state government agencies dealing with MSMEs, including banks.IPR Facilitation Center - Apex industry chamber, FICCI, launched an IPR facilitation centre at Federation House (FICCI), New Delhi, in association with the ministry of Micro-Small and Medium Enterprises (MSME). The FICCI-IPR facilitation centre is equipped to offer quality services in all areas of Intellectual Property Rights and comprises of a panel of technical and legal experts having extensive knowledge in the field of Intellectual Property Rights.In addition to providing general advisory about IPRs, such as, patents, trademarks, designs and copyrights, these centres will also provide services related to patent searches, patent drafting, patent prosecution, facilitation in commercialisation of inventions, trademark prosecution matters etc.Protection of the produce will promote further innovations and will provide a competitive edge to every enterprise, especially to those who belong to MSMEs units. The ministry of micro, small and medium enterprises expects to achieve the target towards setting up 40 intellectual property facilitation centers (IPFC) in the country before the end of the eleventh five-year plan in 2012.Marketing Intelligence cell for MSME — The National Small Industries Corporation (NSIC) has set up the MSME — Marketing Intelligence cell for the assistance of micro, small and medium enterprises in the country. This has been done following the recommendation of the Task Force set up by Prime Minister Dr. Manmohan Singh. This Marketing Intelligence cell will collect and circulate domestic as well as international marketing intelligence to MSMEs which would improve their market capabilities and further boost their competitiveness. Apart from the lack of access to credit, one of the biggest challenges facing the Indian MSMEs is that of marketing as they struggle to grow and develop in an increasingly competitive and globalised economy, wherein, they not only face competition from the large domestic industries but also from companies based abroad. Such an initiative is expected to play an important role in marketing the SME sector, so that it can attract investment in this sector and make it financially lucrative one. The marketing intelligence cell will create awareness about various programs and schemes for MSMEs and will particularly maintain database and disseminate information on the following categories- Data base of bulk buyers (product wise) and buyers in government / PSU's; Data base of rate contracts of various government departments & PSUs; Information on tenders floated by government departments and PSUs; Database of Indian exporters to various countries with products; Database of international buyers with products; Database of technology suppliers & projects for MSMEs and a list of all the micro & small enterprises registered with NSIC for govt. purchase, raw material assistance, performance & credit rating schemes. Upgrading technological solutions and bringing in new, modern and innovative ideas is a key step forward towards strengthening the growth of this sector and such strides are a positive movement to boost the growth of the SME segment.break-page-breakGovernment Policies: What's In It For SME'S?The Government has proposed various policy initiatives in Budget 2011. Some of the key initiatives taken by government towards the development of different sectors are mentioned below: The Government is considering extending the nutrient based subsidy policy, implemented in the financial year 2010-11, to cover urea as well. To provide further impetus to the development of the food processing sector, the Government has approved 15 more mega food parks taking the total number of mega food parks to 30. The Government will launch a national mission for hybrid and electric vehicles in collaboration with all stakeholders to provide green and clean transportation for the masses. The Ministry of Textiles in consultation with the Planning Commission will formulate a scheme to allocate Rs 30 billion (proposed to be provided to NABARD) for handloom weaver co-operative societies which have become financially unviable due to non repayment of debt by handloom weavers facing economic stress. The Government will set up seven mega clusters for leather products during financial year 2011-12. The Government will include capital investment in fertilizer production, cold chain and post harvest storage as an infrastructure sub-sector. The Government will allocate RS 2,140 billion towards the infrastructure sector which is about 48.5 per cent of the total planned allocation. Various Government undertakings will issue tax free bonds of Rs 300 billion to boost infrastructure development in railways, ports, housing and highways. The Government has increased the disbursement target of India Infrastructure Finance Company Limited by RS 50 billion to provide long term financial assistance to infrastructure projects. Further, the amount to be sanctioned for takeout financing scheme has been pegged at RS 50 billion. To attract investment in cold storage projects, capital investment will be eligible for viability gap funding scheme of the Finance Ministry. The Government will raise the total limit available to FIIs for investment in corporate bonds to $ 40 billion in order to enhance the flow of funds to the infrastructure sector. FIIs would also be permitted to invest in unlisted bonds with a minimum lock-in period of three years. FIIs will however be permitted to trade among themselves during the lock-in period. The Government will allocate an additional Rs 20 billion to the corpus of Rural Infrastructure Development Fund to create warehousing facilities. The Companies Bill will be introduced in the Lok Sabha during the current session. The Government has taken concrete measures to improve the agricultural productivity, some of which include:1. The increase in allocation to the ongoing Rashtriya Krishi Vikas Yojana from RS 67.55 billion in the financial year 2010-11 to RS 78.60 billion in the financial year 2011-12.2. Allocate Rs 3 billion to promote 60,000 pulses villages in rain fed areas to increase crop productivity and to strengthen market linkages.3. Increase the target of credit flow to the farmers from RS 3,750 billion in the financial year 2010-11 to RS 4,750 billion in the financial year 2011-12.4. Provide interest subvention of 3 per cent in the financial year 2011-12 (increased from 2 per cent in the last financial year) to farmers who repay their short term crop loans on time. The Government expects the share of manufacturing in GDP to increase from 16 per cent to 25 per cent over a period of 10 years and to achieve this goal will come out with a comprehensive manufacturing policy. The Government will introduce National Food Security Bill in the Parliament during the financial year 2011-12. The Government will provide RS 267 billion towards health sector. All these measures clearly show that most of the institutional support services incentives are provided by the Central Government, in varying degrees to attract investments and promote industries with a view to enhance industrial production. SME policy initiatives at the national and state level are aimed at strengthening the role of SMEs at the base as well as at the higher level.
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The explanations to why the Lokpal bill didn't get legislated come thick and fast. Perhaps Didi down in Calcutta was only in extraction mode as usual and has no real objection to the bill. Perhaps the BSP genuinely believes that politicians do not need supervision. Perhaps the BJP was filibustering only because it wants to stonewall everything the UPA wants to do. It is true that genuine differences of opinion can arise on matters as complex as the appointment of a constitution level super regulator. It is equally true that politicians don't want their thunder stolen. We understand that politicians are human. Nevertheless, it was the argument underlying Melas With Missions that we should give our political classes the benefit of doubt and let the parliament do its job. Behind that belief was the tacit understanding that all political processes entailed both cooperation and compromise between divergent shades of opinion. It was understood that if something is good for the entire electorate, notwithstanding the devil in the detail, politicians would find a middle passage. Unfortunately, our political classes have failed us again. Obviously, what is good for all the people of India is not good enough for our politicians.Contrast this situation with one where a proposal is made which benefits all politicians (as opposed to their constituencies). When this happens, political parties from a diverse range of opinion have no difficulty in coming together and voting in what works for them. When is it last that a proposal to increase MP salaries and perks was defeated on the floor of any legislative body? Frankly, in the larger scheme of things, just in terms of self-serving legislation, salary increases is really small stuff. I can think of far more outrageous laws that have been passed even though political parties were particularly hostile to each other at the time. Here is just one example from Jammu and Kashmir.In 2000, then Chief Minister Gulam Nabi Azad announced that he had seen the light and proposed vesting ownership rights to unauthorised occupiers of public land through a new Roshni Act in order to generate funds and finance power projects in the state. He announced that through this innovative legislation, the state will gather Rs 25,000 crores of revenue. The Jammu and Kashmir State Lands (vesting of Ownership to the Occupants) Act, 2001 became a law in November 2011. If you leave out the embellishments and the hoopla, the substance of the law is found in its Section 5 which states that anyone who has encroached on government land can apply to the Tehsildar to have the title to this land transferred to him. To get this done, he has to supply proof of possession which could comprise of an electricity or water bill, an extract of a Girdhawari (mutation record), a certificate from a NaibTehsildar or an affidavit to that effect. In effect, the Government decided that for a sum of money, they will reward encroachers of public land with ownership.On receipt, the application is reviewed by the Tehsildarand the District Collector and finds its way to a special purpose Committee which determines the price at which the land is to be vested. It is upto the Government to decide how it wants to constitute the Committee so you can take it that the Committee is the least of anyone's problem. Section 12(2) prescribes a criterion for the valuation of this land, a valuation that depends on four factors: (1) its potential value, (2) its proximity to urban infrastructure, (3) irrigation and transport facilities available, and (4) "the market value of land determined for purpose of stamp duty under the Stamps Act, Samvat 1977." The sting as usual is in the tail. No attempt is made to charge for this land at market rates. Instead, land grabbers will pay for land at the notified 'minimum circle rates' which are used by sub registrars as floor guidelines during the registration process. Allow me to confirm to you that these circle rates are already absurdly low everywhere in J & K. That said, it's not as if land grabbers pay even the circle rate. Because he has grabbed the land, this law gives the land grabber a further discount. So, those who grab residential land pay 40 per cent and those who grab commercial land pay a rather less generous 60 per cent of the already absurdly low value determined by the Committee. If you can show the land you grab as agricultural, you pay Rs 100 for up to 100 kanal of land. Net, net, unless you grab land right in the middle of the city, it's basically free to take.The law provides a fascinating mechanism for those who are dissatisfied with the Committee's decision. An appeal from the Committee's decision lies directly under the Government who's decision by the way is final. The courts are excluded from review under Section 14. Thus, the politicians make the law, control its implementation through the revenue department, appeal to themselves when they are dissatisfied and exclude the courts from reviewing what they do.The fascinating part doesn't end there. Under Section 6, "the Government may grant such rewards and incentives, and in such manner, as may be prescribed to theofficers/officials showing excellent performance in administering the scheme under this Act." For those who didn't catch it, this means that if a revenue official zealously helps a politician grab public land, he will be rewarded for his effort with tax payer's money! On the basis of this law, tens of thousands of kanals of prime public land, much not yet encroached upon, was suddenly shown as privately occupied and transferred to those with the ability to make it happen. For instance, all along the Dal Lake in Srinagar, a great deal of land formerly belonging to the Maharaja was taken over by the Government after the land ceiling law come into effect. Today, this land is overrun with private bungalows. Guess how these people become owners of this public land.So did Rs 25,000 crore end up in the Government kitty as a result of this Roshni Act? A decade into the scheme, by 29 July last year, the Government had laid its hands on a mere Rs 73 crores! Naturally, J&K is not overrun with newly build power projects. Not that you expect the Government to see the light in its correct perspective. It is now accusing revenue officials in "having too many misgivings". It proposes to amend the law again to eliminate the need to prove possession through a mutation record extract. I don't have any particular agenda on Jammu and Kashmir or its Government. Self-serving laws are legislatedby legislators all the time. Conversion of public assets to private use through dodgy legislation dates back to at least as far back as the Forest Act of 1878. Independence has not stemmed the tide either of which the Roshni Act is only one small example. But when it comes to a law that has so much popular support, is it unreasonable to accept that our legislators will find it possible to meet our request? After ten failed attempts to enact a Lokpal law in 44 years, should we conclude that we cannot expect politicians to worry about the people or shoot themselves in the foot! There is no great moral to this story. A great many Indians believe that the purpose of our political processes is primarily to allow the winner to usurp public wealth for private purposes.This is one of the reasons why Indians have come to accept that governments will not govern and don't like to pay taxes. A great many Indians also believe that a second purpose of our political process is to allow the winner to extract protection money from citizens. This is why despite all the rhetoric you hear from political parties on their ideological disagreements with the Lokpal bill, it's really down to the fact that they don't want any impediment to the protection rackets they run. This is not a matter of this politician or that, or this party or that. As a class, the politicians have failed the people again. They will have a shot at making amends in the budget session. Hopefully, while there is still time, they will see the real light and do what needs to be done.The author is managing partner of the Gurgaon-based corporate law firm N South and author of the pioneering business book Winning Legal Wars. He can be contacted atrcd@nsouthlaw.com
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