Bank merger: Re-entry to the pre-1969 era for small businesses?

There is an apprehension that merger among the PSBs may lead to deprivation of opportunities for small businesses and startups to obtain a bank loan.

Govt has been pursuing the policy of consolidation of public sector banks(PSBS) into  4 to 5. Already SBI subsidiaries are merged. Last year another round of merger was implemented under the Bank of Baroda. Now again we are witnessing one more round of mergers.

We are looking at how this plays out in supporting small businesses that were one of the reasons behind bank nationalization undertaken in 1969.

Contribution of PSBs in Lending to MSMEs

It is a fact that PSBs are shouldering the responsibility of delivering credit support to the needy section of the society- be it agriculture, MSME, etc.  PSBs are always very magnanimous in supporting the MSME ventures, patronized innovations and have extended the long & short term loans. They have been wholeheartedly participating in Govt Schemes like PMEGP.  The support for financially distressed entities is commendable and they are meticulously implementing guidelines from Govt and RBI.

How the scenario may change:

With the consolidation, it is likely that the business at the branch level will also be consolidated like it is done with other mergers in the past. This will lead to lesser attention span for the extra customer load the branch will have to deal with. The attention span is important for the reason that social sector banking activities require handholding of the customers that is the hallmark of public sector banking service since 1969.

With reduced branch presence of PSBs, the access points will dwindle and invariably small businesses will have to have banking business with private peers however what they likely to miss is credit support the way they get in PSBs.

Thirdly even for PSBs, more orientation will be towards profitability since capital efficiency was the reason for consolidation. That may drive them to reorient towards large value exposures.

Private Banks show no or less keen to lend in priority sector lending:

It is a fact that private sector banks show little or no interest in priority sector lending. They prefer other via media to engage with such clients resulting in higher cost of credit for end users. Also, they are happy to compensate for the gap through alternate options extended by RBI.

They are very particular about securing their loans by taking collateral of fixed assets. Even though Govt has implemented CGTMSE scheme to extend credit guarantee for small business loans and it has been here since nearly 20 years, private banks have not shown much inclination to extend loan under this window.

They are obsessed with securing their loan more than supporting the entrepreneurship.  As a result, many budding entrepreneurs will not have access to bank credit and will be forced to seek support from predatory lenders.

If one looks at the profile of the product of many private banks, they are more keen to finance immediate needs than supporting capital investment. Support in distress is a far cry.

Role of RBI needs special mention:

Presently priority sector lending is handled by RBI. Most of the compliance with its directions are coming from only PSBs. With the reduction of their share and the increasing presence of private banks, we may see social sector lending will be reduced to islands everywhere.

Further, the RBI itself has created avenues for private banks to avoid direct participation in the priority sector lending that will further add to the declining credit flow.

Sadly RBI does not measure the flow of credit at the grassroots level rather relies on secondary data from Banks.

One can conclude that RBI action on this front is more of administrative and not accountable for the flow of credit to these needy segments.

How a merger may impact different sectors?

Mergers and consolidation of PSBs may create a huge vacuum of space of social sector lending. We believe that Micro and small enterprise will suffer more than agriculture because agriculture may get support from Coop Banks and Societies.  Also, political activism may help agriculture, that privilege is not available to MSMEs.

The way forward:  “Bring in a new law for creating sustainable financial architecture”:

Since consolidation exercise is underway, it seems there will not be any rethinking. However, Govt has to act to alleviate the apprehensions of a lack of access to credit from this process to small businesses.

In these circumstances, it is necessary to bring in legislation to create a sustainable financial architecture that binds regulator (RBI) and the banks to undertake lending to priority sector irrespective of ownership. They may be incentivized, extended liberal guarantees scheme coupled with provision for punitive action for not adhering to stipulations.

The notable benefits are :
a) It will make lending norms a legal mandate and ownership neutral.
b) It will universalise the access to credit in any region or activity

Conclusion:

Bank merger without implementing an alternative model to support social sector lending will leave a huge vacuum and may affect the economically weaker section resulting in further widening of inequality. This may end up at creating a pre-1969 era of lack of access to credit for small businesses and others. Legislative action is necessary to preempt this scenario. 

By: Anil Kumar Shetty, Founder SME Advisors (email: [email protected])

A financial safety net for MSME workers: simplified

Govt has implemented few products that benefit the workers of MSMEs if implemented comprehensively.

Recently I had an opportunity to survey the financial safety net implementation by the rural population surrounding an Industrial area, near Bangalore. Many of the members of these households are working or associated with industrial units in that cluster or elsewhere.

In our study, we found that a large section of the households have not subscribed or not even aware of the products despite being widely published by the Govt.

The financial safety net for families- a need felt across more than ever

Every family aspires to secure themselves from the shocks and difficulties of through fair distribution of their earning between savings, risk cover and retirement corpus. The flexibility to do so is very limited if the earning barely covers the living expenses. This situation puts the families into a very vulnerable state and that may act as a deterrent to getting them into activities where the perceived risk to themselves is quite high or they remain alert to risk so much that will lead to lesser productivity from them.

Since their income barely covers the living expenses, Govt has taken many initiatives to supplement these needs by introducing an array of products.

These products are very pertinent for workers in MSMEs. The income level of workers, regular or otherwise, is not very high. These products are made very affordable, meeting their needs.

Financial safetynet –composition:

The financial safety net, we are talking about comprises a few assorted products mainly from Govt sources. In recent times, Govt has made access to avail the products and also to secure the benefits under the products much easier than ever.

These comprise savings, life insurance, health cover, accident cover, pension and skill development. Details as below:

Savings products:  Having a bank account is commonplace for employees and it is a good sign. However many of them are just limiting their banking transactions to the savings account and it is no surprise to find some accumulating their hard earning savings in SB account when there are opportunities to maximize their earning even from a scarce amount of savings by opting for products like recurring deposit(RD) and fixed deposits. The spinoff from having an RD account is that it prompts them to adopt a planned approach to save and at the same time maximise the earning.

Term Insurance(PMJJY): Govt has been promoting term insurance of Rs 2 lakhs for an annual payment of Rs 330. It is made available for the people of age group 18-70 years. It is very simple and does not require one to go through any procedure to assess the eligibility.

Accident Insurance(PMSBY): An accident insurance amount of 2 lakhs is available for people for annual premium payment of Rs 12 only. This will help the poor labours to secure the family against accident-related deaths.

Health Cover: To empower poor families against health-related issues. Recently Govt enacted Ayushman Bharat scheme. The coverage is as much as Rs 5 lakhs. This scheme requires one to register and take health card from the nearest  Govt hospital at no cost.

Pension products: It has been since a long time that all the citizens are given an opportunity for having their pension account under the National Pension Scheme( Eligible up to 54 years).  Thereafter Govt has enacted four new products for the benefit of people in the age group of 18 to 40 years for unorganized and skilled labours. It is called PMSYM( Prime Minister Shram-Yogi Mandhan Yojna) Under this scheme the labours who are not eligible from PF and ESIC can have a pension account with a monthly payment of Rs  55 to 200 depending on their age and will be eligible for a pension of Rs 3000 after 60 years. Under this scheme, the Govt will also contribute an equal amount every month.

Also, those employees who have PF benefit may opt for a pension under Atal Pension Yojna non-subsidised.

Skill Development: Skill makes an individual more valuable for society. It helps one to earn more and to enhance his/her self esteem. It motivates the people to become more productive and he/she can become a source of strength to any organisation. Seeing the skill gap and the industry’s clamouring for support, Govt(state/central) have implemented many schemes to support skill development programmes. 

Supporting Employees to become Financially secured-  The best  CSR initiative for MSMEs:

Corporate Social Responsibility (CSR) has emerged as a new yardstick to evaluate the contribution of an enterprise for the welfare of society. Govt has implemented a law compelling large companies to mandatorily spend on their own to the welfare of the society a portion of the income. However, this is not applicable for MSMEs as they do not have enough financial flexibility to engage in such activities.

It is well said that the best CSR activity for MSMEs is to support their employees. If these MSMEs take initiative to educate and encourage the workers working within their company to take the above social security products, it will improve the goodwill and make employees feel secure.  Educating and encouraging these workers to secure themselves under these products does not require any investment. It is the word of encouragement, guidance and follows up will take them to avail these benefits.  Some may incentivise in different forms to make them avail these products.

There are benefits for the MSMEs. A financially and socially secured employee makes the working environment secured. Standing as a socially responsible organisation will be further reinforced.

Conclusion:

There are many new financial products from the Govt to help the weaker section of the society to become empowered. These products are also very important for employees of MSMEs. Many of the eligible beneficiaries are not aware of these products. MSMEs may encourage workers to cover themselves under these products and make their life more secured. This will augur well for the organisation and counted as a socially responsible organisation.

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