Bleak future of the acting profession

I strongly feel (but don’t feel happy about it) that in the future, actors would lose their jobs. With the improved quality of animation and superior gaming experiences, the future of cinema could well be “involved” cinema where you can enter and change the story as you wish or atleast, play some role.

We are already seeing creation of alternate personalities and friendships or enmities in the gaming world. We are also seeing interactive TV series on platforms like Netflix. My belief is that the two will merge. The actors of interactive TV series will be replaced by avataars of video games.

Amitabh Bachchan, who?

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Ensuring Debt Finance for All Professionally-run MSMEs.

For several years, a number of policy initiatives have been taken to address the financing gaps for MSMEs. Of course, we have improved over the years. However, a lot still needs to be done. Here is a set of views, that I have, on how to go about doing it. Some of it is about approach and some of it is about actual implementation. Of course, this is a complex problem and I am not denying that genuine efforts have been made in the past. My argument is that those efforts have fallen short and it may be a time for policy makers to do a few things differently (to the extent that some of the suggestions may seem impractical but I am taking the liberty to list them out here.)

Note: Unsecured, small ticket lending to MSMEs based on credit of the individual promoter is largely (on the How to aspect) a solved problem (in India) and has got/getting a lot of attention. (We are miles to go for universal access to finance for MSMEs even in the small ticket, individual credit led lending.) The focus of this write-up is on corporate SMEs with high growth aspirations, where the funding requirements is in crores (individual promoters credit is not a good alternative for company credit) and is generally not done by traditional lenders without mortgage collateral. For new age, asset light but professionally run businesses, it is a key gap, that remains unsolved at scale. Hence, the focus on that segment in this write-up.This write-up is addressed to those shaping policy and regulation. This write-up is specific to the Indian context.

Do NOT broad brush: The MSME segment includes not just the local tea shop, or the puffed rice making factory but also includes the SME corporate with turnover upto INR 250 Cr (as per the recommended Budget 2018 classification) with some of them having raised institutional venture capital. Hence, the funding requirement, credit evaluation process and lending model will not be the same. If we don’t separate out the sub-segments and find specific solutions for each segment based on loan size, security and nature of entity, we will not have a comprehensive solution.

It may make sense to break down MSMEs into categories based on legal structure i.e. individual, proprietorship, partnership and OPC or private limited and have priority sector or lending target setting done separately for them. Have caps on loan amounts for each type of legal structure. The reason why I say this is, I am not sure why a firm with several crores of rupees in turnover, borrowing from banks, etc in crores should have the legal structure of a partnership/proprietorship. It should be a private limited company. The regulators have to make it easier for people to set up companies and be compliant. This will enable access to additional sources of data which can be leverage to take lending decisions.

(A note for SMEs seeking larger loans: If you don’t have mortgage or collateral security AND you haven’t put in much of your money as equity because you don’t have much AND you don’t have reasonable size of operations AND you don’t want to be compliant with additional regulations or provide verifiable data on various aspects of your business AND you still expect funding in crores – time to get some coffee. The purpose of adding compliance and improving access to different sources of data from the SME is to deal with the lack of security. Please note that unlike equity investors, lenders do not get a share on your upside but they do get a share of your downside for sure and hence they need to ensure that downside is limited. )

Accept that only Banks will NOT be able to help us in ensuring complete access to finance for MSMEs: Banks hold public/retail deposits and it is natural that they will have less risk appetite than NBFCs or specialised funds who are typically funded by entities that have the ability to manage risk unlike the retail depositor of a bank. By design, NBFCs or specialised funds will take more risk through sectoral specialisations. Historically, banks have been treated as the favoured child by regulators. If there is genuine interest in enabling access to finance for all segments of MSMEs, it has to be recognised that banks, NBFCs, specialised funds will together be able to address the funding needs of MSMEs.

How about allowing specialised MSME lenders partial access to the payments and settlements system? This will allow them to set up basic escrow accounts and current accounts with zero or close to zero EOD balance and ability to receive funds ONLY from corporates. NO cheques, NO savings or other deposits. This will enable specialised MSME lenders/NBFCs to offer payments, set up escrows to do a cash flow traping arrangements to deduct repayments without having to depend upon banks who create severe roadblocks in letting specialised lenders access to these simple operations. Sounds, kind of, like payment banks but I am talking about larger value transactions. Say, those who offer loans in INR crores to corporate SMEs and need to transact in several lakhs and crores and not in thousands.

Use Govt backed DFIs as market developers: India needs to find a way to use Govt backed DFIs in a market development role and not in competitor role. Their role should be to find ways to encourage other commercial lenders/investors (Banks, NBFCs, specialised funds) to do the job of lending to MSMEs instead of competing with them by trying to reach the MSMEs directly. I understand that there was a time when DFIs had to “show the way” because the commercial lenders/investors were not interested. However, over the past 8-10 years, it has been shown that private entities have been trying to find different ways of reaching out to the lucrative MSME finance gap. Frankly, if all the banks and NBFCs together are not able to directly reach all MSMEs, it is good reason to introspect and accept that one or two DFIs with limited geographic presence can reach out to all MSMEs.

Policy makers should encourage the use DFI funds to act as market developers through guarantees/credit enhancements for institutional investors to invest into NBFCs/specialised funds that are trying to fund MSMEs in India. This opens up a much larger tap of borrowings for the NBFCs and specialised funds (beyond banks) and also enables them to raise funding at a cheaper cost (assuming credit enhancement by DFI will lead to better rating of the transaction.). Oddly enough, I have seen multiple instances where Indian DFIs offer funding to NBFCs/specialised funds at a cost that is signifcantly higher than what the commercial banks or offshore commercial and DFI lenders are ready to offer at.

Consider Bank, NBFCs and specialised funds as partners and not adversaries: Banks in India (DFIs included) do not like sharing of pari-passu or second charge with NBFCs or specialised funds, as a practice, when lending to SMEs. Even though nothing in the regulation or law disallows it. This is a version of caste system propagated within our financial services industry under the excuse of lack of sufficient assets. Interestingly, I have seen multiple cases of companies that are profitable for more than 3 years with INR 50 Cr+ revenues (and fixed and current assets worth atleast INR 15-20 Cr) having INR 2 Cr worth short term facilities from banks backed by 75% cash deposits and security over entire current and future assets of the company (and possibly even the kidney’s of the promoters) NOT willing to share pari-passu charge over receivables (not on cash, not on fixed assets, just receivables) for NBFCs willing to lend higher amount than the bank and under more flexible terms. Since, forced regulation and orders will not solve this “social” problem, a better way is to encourage banks i.e. say that for the MSME loan accounts that the bank has, if the banks are able to demonstrate another non-bank lender on-board, they will be awarded 1.5x the value of their loans as priority sector.

Over-leverage of SMEs has to be addressed differently: Initiatives like the central credit registry is necessary to give a clear idea about over-leverage.(This is already being done.) It should be made compulsory to have all types of financial lenders (not just banks) add the details of the loans on the platform.

Data, data, data: Enable electronic access to data for all types of statutory, regulatory and transaction compliance done by companies. Eg: Specialised lenders or even banks should have access to data on taxes, electricity payments, EPFO, ESI, salary, bank transactions, etc. Security and privacy concerns are paramount but given that they are solvable issues, we need to find ways in which access to all that data is made extremely convenient, if we were to expand access to finance for MSMEs.

“World Domination”​ of the Agri Supply Chain

Historically misdirected/misutilised subsidies of the Govt made it very difficult for private players to operate in the agriculture supply chain. With the easing of regulations, we are seeing a large number of new private ventures (traditional and new age startups) entering agriculture. That is a good sign.

However, what worries me is that some of these companies (startups) and their VC investors are looking at the agri supply chain “domination” game with a similar approach like the Uber/Ola/Flipkart/Amazon model of “world domination” by burning huge volume of money to deliver market distorting “subsidies” to capture market share with the hope that the last startup standing will win it all. (Remember the days when drivers and riders were being paid to ferry you around? Or deep discounted sales prices for products?)

While Uber/Ola/Flipkart/Amazon is still to prove business viability, they are already shifting gears and causing significant distress to the affected. It may be argued that they have distorted local transportation markets for riders (costs have gone up significantly and availability is still a major problem) and have left several drivers with debt burdens they can’t service. We don’t know how this will end. (Anybody who knows, I am ready to buy you a coffee.)

If the startups and VCs replicate the same model of “world domination” in the agriculture supply chain (particularly when dealing directly with the farmer), they will most certainly leave the agri ecosystem with much more pain and damage than what the Govt did with misdirected subsidies.

VC Associates and Partners with no special expertise or knowledge of agri markets but with boatloads of cash will continue to wear Rolexes purchased with fund management fees whether or not their invested startup works. Startup entrepreneurs with “game changing” ideas but no capability to build a profitable business or achieve frugal growth, will buy mansions in Koramangala or Lutyens and select the next “Entrepreneur of the Year”, whether or not their startup works. But the farmer will be stuck between the devil (Govt) and the deep sea (startups) after enjoying a brief period of money induced trance and exuberance.

I know some will agree with all that I wrote. Good to know. Let’s get some coffee and discuss more. I also know that some will disagree with all that I have written and say that I can’t see the “big picture” and worse I am a “communist”. True, I can’t see the big picture but atleast, I am not blind or a communist. Let’s get some coffee and see if you can help me see the “big picture” and if I can get your eyesight back.

What is it to have succeeded?

This quotation has been a long time favourite, thought I should put it up here. It is by Ralph Waldo Emerson.

To laugh often and much; to win the respect of the intelligent people and the affection of children; to earn the appreciation of honest critics and endure the betrayal of false friends; to appreciate beauty; to find the beauty in others; to leave the world a bit better whether by a healthy child, a garden patch, or a redeemed social condition; to know that one life has breathed easier because you lived here. This is to have succeeded.

Readings 2nd fortnight Nov 2017

Something that I (and possibly others) felt intuitively but didn’t have the research to back it. Digital innovation leads to greater income inequality. Digital Inequality : 

A much publicised do-gooder faces criticism for not doing what he preaches.  Some sections seem like an overreach but some do sound like a real problem. In our world, hypocrisy and showmanship is what gains people’s trust. Why else would we have a history where self centered businessmen and sexual exploiters be called amongst the greatest men just because their PR agency can pay for a news article that features them in good light? While those who work silently never get any recognition. Hypocrisy of Bono and One.  This is another article.

He has said this before and is saying it again, Tim Berners Lee, the father of the world wide Web thinks that the web of the future is in trouble. The article is interesting because it points out a few interesting cases of how it is being misused for fake news, political propaganda and others by people who do not have a sense of responsibility. Tim Berners Lee on the future of the web.

It affects the US (may be even us) but in general the new lowered normal blood pressure is a matter of concern. Or is it not? New blood pressure levels.

Readings 1st Fortnight Nov, 2017

I am trying to get back to listing out what I read recently and thought it to be interesting.

Bitcoin: The “bubble” is back. After the last crash, people had slowly started looking at the technology behind Bitcoin that helps Bitcoin run – blockchain, as being a more long term technology that could yield benefits. However, the value of Bitcoins have shot up significantly in the last two years. I personally feel that the ability to run a completely annonymous & decentralised currency while there is a State is naive. I don’t believe Bitcoin has become a currency already because a currency to be able to sustain cannot have fluctuating value. So, Bitcoin is still a wannabe and it doesn’t look like the State will leave it unregulated. Blockchain, however, could have potential (again, not in its current envisaged form) but it is very early. Two articles seem to reflect the same opinion and share some other data points.

The Bitcoin Bubble

Crypto Fool’s Gold

I believe that most food consumed should be available at the consumers’ doorstep at the freshest form possible i.e. less or no chemical additives or with long shelf life packaging innovations. One way is to innovate food processing. The other is to grow food closer to home. With the urban sprawl increasing, food production is moving farther and farther away. With increasing urban sprawl, this will get worse. Longer distance from farm to consumer means greater need to improve shelf life (possibly through heavy treatment). A possible solution is planned Urban Farming. This is slightly utopian but possible, as solutions emerge. Not just startups that are making urban farming easy, city planners and administration need to plan and encourage urban farming especially for naturally low shelf life produce. It has implications on nature of diet. Unlike the Western World where there is dependence on sugar/salt laden highly processed and preservatives added “convenient” but harmful food, the world needs food that can keep humans healthy.

Urban Farming 

Dark Chocolate is good. Fat is bad. Etc. Etc. Proven by scientific research (fine print: research funded by chocolate companies and sugar based companies). An article on how Mars (and others) spend money on research that “prove” the benefits of consuming their products. 

Dark Chocolate is now health food. Here’s how that happened.

Work from home has recently been abandoned by a number of big firms who made an attempt to implement. The benefits for the society and the employees are huge but takes a toll on organisations which thrive on collaboration. Telecommuting leads to inability to have a “complete” conversation and establish emotion connects. Lone Ranger jobs may be suited to telecommuting or jobs which are by design spread out across multiple geographies. However, jobs that requires coordination and collaboration is often best executed at a central location. Add to it, the near impossibility of ensuring that all employees are equally committed to work because your hiring and incentive practices can never be perfect.

The Economics of the Office. Why do we still commute?

Access to Finance for Financiers

dKXGkaWhile enough literature is available pointing out to the lucrative business (and impact) that local financial institutions could target by reaching out to the micro and small businesses in any economy, there is very little written about how these “local financial institutions” can access funding to re-lend to this segment underserved segment. By nature, small businesses are risky and lack of formally verifiable income makes it difficult for banks to lend to small business. To some extent, it is right that banks avoid getting into financing risky business at a large scale given that they risk putting retail deposits at risk in case they build a very risky loan book. This means that there is clearly a need to address the credit needs of smaller enterprises through a network of more nimble financial institutions. In fact, in India some specialised lenders have come up over the years catering to different types of small businesses. Such financial institutions are recognised by the Reserve Bank of India as well.

They reach out to the “lucrative” MSME segment through customised appraisal mechanisms and lending processes and often due to their close ground presence manage to have a fairly good quality of loan book. Higher risk is adequately compensated by higher yield AND additional measures like closer monitoring prevents high default rates. This makes it look like an attractive proposition for people who want to invest (as debt or equity) in such businesses. In fact, a lot of these business have got significant equity interest. And that is where it starts to get interesting.

They have an interesting problem of being able to raise equity while not being able to raise enough domestic debt. A clearer inspection would reveal that the equity raises have largely been from foreign sources and often result in companies facing hurdles around the guidelines that guide loss of shareholding vs FDI amounts invested.

While the debt could have also come in from offshore sources, bringing debt into India from foreign jurisdictions faces lot of obstacles in terms of process (which has become significantly smoother over the years but it still continues to be a pain). These small financial institutions depend largely upon banks for debt funding and banks in India don’t fund anything unless the borrower is large enough or unless they the borrower is classified as priority sector. If a corporate entity doesn’t fall into any of those categories, their growth expectations are doomed because banks just wouldn’t fund.

Of course, banks have their own reasons. Most of these small financial institutions would be less than investment  grade (as per rating agencies) or just about investment grade. “Risking” money in something that the rating agencies don’t call investment grade is criminal in a bank setup.What banks miss though is that there is a way to assess such companies by moving out of the branches and observing the operations of those companies, their people and their practices. A small group of debt funding companies (companies that I have worked for most of my career) understand that and provide funding to such small financial institutions based on strong/relevant evaluation practices. In my experience of working with such companies and debt funding of more than INR 9000 Crores, there has not been a single case of non performing assets, be it in the form of on balance sheet loans or in the form of off balance sheet transactions.

Beyond banks, we also have other sophisticated financial institutional investors who can measure and establish appropriate risk mitigation strategies but even they don’t because the size of funding that each individual small financial institution seeks is not economically interesting. Honest and successful efforts have been made by the organisations that I have worked with to bring larger investors to fund these smaller financial institutions but it still takes a lot of push to make such transactions happen. It is not the norm.

As a result, the growth of new small financial institutions which have the ability to cater to smaller enterprises and customers, enabling financial access for all have been very slow, painfully slow. Entrepreneur interest in setting up new financial institutions to reach out to smaller enterprises and households have waned in spite of all data/reports and literature suggesting that there is a large market to be addressed. The number of new NBFCs coming up in the Indian market have slowed down in the last 2-3 years. The only ones who continue to move ahead are the ones with significantly large equity backing. Crossing the Chasm before success is dependent entirely on equity.

A portfolio size of INR 100 Crores in portfolio outstanding seemed to be like something that could garner interest of banks. Such a portfolio size could also give rating agencies enough track record to consider a rating upgrade. It seems that the number is of INR 100 Crore in portfolio size is becoming less important now. It is more important to know how much of that INR 100 Crore is funding with equity because more often than not, debt wouldn’t be easy to get for such companies anyways.

In other words, bootstrapping as a strategy to enable access to finance for SMEs in India is a very challenging job! So, banks won’t fund small enterprises because they are small and risky and no body would fund those who can fund small enterprises because they are not large and not priority sector. How do we then make it easier for small enterprise to access debt in India?

Photo Courtesy: rgbfreestock

Also published on LinkedIn.