This is the 2nd part of my ongoing
conversation into the Budget and The Indian Economy with Mr Amitabh D Sinha,
carried on from : Comprehensive Vs Bottom Up
We had closed
the previous article with a comment on the MSME Sector, and the problems it
faces, particularly Credit and its attendant problems. Moving on :
Me : The difficulty of extending credit to the rural
sector and the MSME sector is rooted in two problems we face as a people :
corruption, and lack of identity papers and formal banking access. These two
problems together are creating a scenario of trouble. We are a cash economy,
not a banking economy. I recall one of my Sales Officers did not have a bank
account, neither any identity papers of any kind, nor any address proof in his
own name - and this was in Mumbai. That is the hard reality of our economy.
The aspect of cash in our economy is a well studied and
known one. Our industry functions on cash and word {not nescecarily illegal -
cash can be used legally as well!}, where the spoken word, the promise carries
more weight than a banking instrument, where cash is prefered even in metros -
let alone the villages of India!
We are a people for whom a promise to pay is more
valued than an actual post-dated cheque, where legal contracts are mere
formalities that are conducted after all cultural formalities are dispensed
with. That I am aware of personally, having handled two such cases. In this
scenario, credit and support to priority and SME segment requires the evolution
of norms and rules to suit such an amorphous environment. It requires the
ability of capture relevant information of each constituent credit customer
which spans his or her relationships as well as documentary records, and the
complex cultural underlying reality as well
Secondly, Amitji, I call your approach as a
comprehensive approach; while penning our conversation {with credit to you of
course} on my blog, a thought occurred to me : is your strategy - which I call
a comprehensive approach : doable? I would like your detailed thoughts on this
point...
Amitabh
Sinha|Expert - Service Culture, Business Strategy Vishal, any
problem of this complexity has its own hurdles, some natural, most created.
That said, is the holistic approach doable? Yes it is.
The 'Waterfall'
model of development that is still practiced in many cases and places - the
build from the ground up model - has two innate problems. The first being the
forced prioritization, which causes other problems (those that are high
priority yet not highest priority) to fester & escalate. The second, and to my mind bigger issue is
that problem quantum definition is done based on projections from the 'here
& now' perspective, but by the time one reaches predefined milestones in
development, one fins that the problem definition or at least the quantum
calculation is off. This makes the model akin to a dog permanently chasing
its tail.
The agile scrum
model of development or the holistic model builds in a certain flexibility and
course correction capability on the fly, because we keep testing the premises
as we fly. Coming back o the present
scenario, why will it not work? Once we begin from that question and with the
attitude that it needs to be made to work without an alternative, I really do
not see the problems becoming any bigger than they are now, but I do see
solutions coming faster.
Before this very
budget, I am sure a huge number of people would have considered it virtually
impossible for an Indian FM to refocus the country's budget to attaining rural
priorities right?
Yet in one stroke Mr. Jaitley has cracked open that
cage and decided to unshackle a giant. Not just that, he has presented an
industry unfriendly budget and forced industry to hail it as a huge directional
positive. I am glad he has done this, because he has shown
change can be made, even with a completely irresponsible, malafide opposition
paralyzing parliamentary proceedings.
He is already
moving to re-provision banks. Let us take as granted that whatever credit
policy changes he tries to make, the RBI has NO choice but to stay within Basle
framework regarding securitization and NPA norms. What does that leave us to
work with?
Rationalization of
how we assess loans, debottlenecking the application, assessment, disbursement
process, creating contemporary perspective and understanding of business and
industry with the assessors, efficiency in how we monitor them, early warning
and flagging systems, more effective and rational restructuring systems. None
of these is rocket science, just needs a little more ownership and a
perspective that banks are also business institutions that are in the market to
make a profit without unnecessarily escalating risk. More 'do business', less
'cover your ass and toady up to the rich boys'. The gun in his hand is big
enough, if he can forget the vested constituencies long enough this is step
one.
The next part is focusing on what is the single biggest
hurdle to increased competitiveness, productivity and profitability in small
business. We keep talking of complicated compliance framework,
red tape, absence of infrastructure and tech access.
Sorry, flawed
perspective. These are important, but not the most important. The biggest culprit is the liquidity
crunch. Cost of doing business in India is becoming untenable for a small
business simply because the cash does not turn around fast enough - this
also segues back into your observation over preference for cash. That is a huge
fallacy. The preference for cash comes
from inability to realize timely receipts through instruments.
Over the last 20
years I have myself seen businesses go from a 60 days cycle to more than 210
days now. This needs to be sorted not only by creating the TReDS platform, but
also by incentivizing its usage. Money turning round 4 times instead of 1.25
times will deliver a massive boost.
Another attitudinal change that we must make is to work
with incentives rather than penalization. I don't know how many people
registered or understood the PM saying he wants a regime that trusts people.
That is the signal for a huge change and I hope with all my heart that he can
make that happen.
A penalization
framework - much like the one we have today - is wasteful and inefficient,
because it needs constant watchdogs on the lookout for wrongdoing and gives
absolutely no incentive to doing the right thing. A little like old school
teachers saying if you do everything right, I won't slap you. So everyone
derived bare minimum required and adhered to it, while some spent their energy
looking for loopholes - the same energy they could have used for work if it was
worthwhile.
An incentivization framework puts the onus for both
performance and reporting on the doer. He needs to do, to document, to organize
certification and submit. And he has a reason to raise the bar on performance.
Me : Amitji, First of all, let me extend my appreciation for the
wonderful flow of thoughts that you have put forth, very educational and
thought provoking.
Moving on, I see no issues in focussing on MSMEs for
the perfectly simple reason that they contribute more to any dimension of the
economy that you may choose to assess from employment to savings to GDP. This
is one of the lesser known facts of the structure of the Indian Economy, which
is driven on two pillars - MSMEs and Agriculture, which together account for
between 59% - 77% of income and GDP, depending on how you define the MSME and
the unorganised sector. Our inability to tap into the resourceful nature of
this segment must surely stand second only to our neglect of the farming
sector..
Coming to the core question of comprehensive model, I
have no doubts as to its inherent superiority; that is a no-brainer. If you can
develop several strains and solve several problems by parallel processing, you
get faster development. {Think of processer cores, and how parallel computing
improved things}
That models assumes enough system maturity to ensure
seamless integration at the conclusion point; in the field of economics, it
also assumes transparency and building trust - as you rightly pointed out
above. Do have the requisite level of systemic competencies in our internal
mechanisms to deliver on such a tough task?
CONCLUSION :
In this segment of our mutual interaction, Mr Sinha
introduced a series of ideas, some already being thought of and some
out-of-the-box that deserve a serious look and contemplation, leading us to re-examine
some of the precepts we assume as true. For example – our preference for cash,
wherein Mr Sinha is stating that one of the reasons for us preferring cash
dealings arises out of the delay in realisation of payments through instruments.
Second example is the movement from a penalization framework to an
incentivization framework to improve system transparency and reporting.
In the concluding part of this series on the discussion
on the Budget and the Economy with Mr Sinha, we will go deeper into the
doability of the comprehensive approach, MSME sector, Resource Crunch and the
way forward – both from my perspective as well as the perspective of Mr Sinha.
At least I can admit without shame that this conversation of ours has already
cleared some cobwebs, and has enabled me to think beyond the boundaries, and
question some basic assumptions...
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