19/11/2016
We welcome the current de-monetization initiative taken by the Union Government for eradication of black money in the system. While it may have a short impact on performance of Indian GDP to some extent and result in lot of inconvenience and hardship to Indian Businesses for some time for some time. However, a lot of amount of black money poured in the system for a long time has already found its conversion through real estate markets / precious metal and also in corporate funding through use of dubious means.
We feel that traditional method of lending adopted by Banks and Institutions in appraisal system may have also resulted in promoting inefficiencies in the system to a certain level as the present system also require a lot of white capital of the Promoters than their available total means. As the means with the Promoters are scarce and limited, they tend to fulfil the banking requirements by various money laundering tools.
Towards fulfilment of the objectives of eradication of black money in the system, we present herewith our thoughts on adoption of the following suggestions.
(1) Instead of present debt equity pattern, the Bank & FIs should consider the Project Financing to the extent of 85-90% of the Project Cost rather than present system of 65-70% especially in considering proposals of MSME enterprises as it directly encourages bringing inefficiencies into the system as sometimes the Promoters finds it difficult to arrange their substantial equity contribution in the Project and they tend to increase the Project Cost so as to some how manage their proposed equity contribution towards indirect ways. The attempt to rope in the Project Capital contribution (Book Capital), the exercise sometimes leads to promotion of black money and money laundering activities.
(2) The Duration of loan to MSME should be reviewed for elongation especially when tangibles assets is created. Say for a tenor of 10 years with principle moratorium period of 1-3 years.
(3) Instead of putting greater thrust on the Collateral Securities / Historic Balance Sheet values, the Banks should indulge more in Cash Flow based mechanism for loan appraisal.
(4) Mezzanine Debt Funding / Cash Flow Securitization on the existing business for the purpose of making equity investment in new ventures should be considered by Banks/FIs in case of all types of their business.
(5) Cash Flow based funding like Discounting of Receivables, Factoring Services should be encouraged in a bigger ways. Post sanction monitoring of the bank account for routing of their transaction should be done at periodic level rather than only at the time of enhancement and renewal of the facility.
