By Guest Author – Sudip Bhattacharyya
An area where professional leadership and decision making can be questioned is lending to Small and Micro enterprises. SBI, Chairman was quoted in Economic Times on 11th May 2009 saying that as SMEs mostly supply to large units, the risk perception is more there and accordingly higher interest rate is applicable to SMEs. The logic for higher risk perception is not quiet understood and in any case, no authentic expert study supporting such assertion was seen. This is despite professed national policy for inclusive growth and support for MSME. In stead, banks prefer lazy banking. (Indian banks now have investment of nearly Rs.85500 crores in Mutual Fund and Rs.82000 crores in Govt. Bonds.).
A report says lack of credit fails Bengal weavers. Only private money lenders fund them at about 30% cost although, repayment is not a problem for banks because receivables can be escrowed. It has quality product with established domestic and export market. It has the co-operative form of organization and Amul, a co-operative is a great success with 28% growth last year. We know how industrial co-operatives in Spain contribute substantially to the economy and are now coping with the recession with appropriate cost cutting measures.
SMEs are an opportunity area to be discovered by banks through strategic marketing for prime lending and it is lack of objectivity and exclusion especially when micro-financing in similar areas at about 20% interest rate has been a global success and responsibility lies with professional leadership in banks.
But the banks appear to have more confidence in Big business despite the fact that. 80% of M&As fail. According to ET Intelligence Gr., total bank borrowing by Reliance Industries alone in FY 2007-8 was Rs. 27463 cores. Many large companies, when in difficulties, have been allowed debt restructuring.
Similarly, lack of objectivity in investment decisions are largely seen in large companies. Take pharmaceuticals. Wockardt had gone for reckless overseas expansion in volatile and competitive market, piled up debt, gearing to 3.5. Yet, priority loan of Rs. 500 crores was approved. Ranbaxy had gone big in global market but could not take many new molecules/patents. Neither competition in generic market could be overcome mainly for failing compliance with FDA regulations. The promoters left preferring Financial Services. Dr. Reddy’s Betafirm in Europe is facing bankruptcy. Sun Pharma’s subsidiary in Michigan is facing big problem with USFDA Take aviation sector – Jet and King Fisher. After so much of expansion and borrowings, are they viable now? Has operation stabilized? One is going for job cut while the other is unable to pay fuel bill. Yet, even King Fisher airlines brand has been accepted as collateral by SBI for additional funding. Air India is in total mess with Rs. 15000 crores of debt. The three companies entered international routes when in only aviation, recession was on, despite an untapped domestic non-metro market. This is proved by Spicejet adding 4 aircrafts and fresh pilots and cabin crew.
Let us consider some overseas investment cases. Tatas were perhaps pioneers in overseas investment setting up marketing presence in Africa. Thereafter came Tetley acquisition in UK for market expansion of Indian tea utilizing Tetley network. So far so good. Follows two acquisition of manufacturing unit in developed country – Corus and Jaguar Land Rover. Both have run into difficulties. Tatas are the 51st top global brand, 11th most reputed and 13th most innovative group in the world. Yet these investments defy logic. Manufacturing in old plants with old technology in high cost country is not a viable proposition. Trend is to shift production from there to low cost locations with new plant and technology. Volkswagen and Ford are setting up hub in India for smaller and fuel efficient car. Rolls Royce is concentrating on India. Car exports from India have gone up by 57% in 2008-9.. So proximity to market can’t always be the overriding consideration. That is why less than 10% American workers are employed in manufacturing. Hire and fire policy is no longer possible in developed economies. Recent attack on Arcellor Mittal HQ by European workers and resistance faced by M Tech with British workers reflects the mood. Even in China there were 700000 cases of labour disputes involving 1.2mn. workers in 2008.