Price of Living Dangerously - Part-II

In the past, Kings, Emperors and Dictators truly believed that their reign would continue forever, but everyone dissipated to oblivion and only a miniscule of them are remembered now in History books. Because they had historians and sculptors who carved their glorious days on stone tablets or quilled on papyrus. Today’s kingdoms are large corporates, business entities, brands, etc. Like those sovereign past, in the present too we have enterprises of all sizes. Every corporate entity, even though not incarnated by the Almighty, is recognised as a living person according to law, bereft the voting right. Hence, I had evolved the doctrine that, ‘Every enterprise is a living thing, which is also susceptible to sickness like all other living things'. Like obituaries, you can identify dead businesses in newspapers when their assets are auctioned or their burials published under the Bankruptcy Law.

I wish to share refined perceptions from the earlier part of this blog. Debt, as such, is indispensable and inseparable until we last, if it is borrowed for meaningless unending ‘wants’. If debt arises out of an original idea, then the borrower will find an ‘exit route’ in the process. That’s exactly when the real enterprise is born. I wish to improvise my statement from the earlier blog where I stated that ‘Managing debt has no special technique, except to settle’. It should rather be stated that, ‘to manage debt, the best mantra is not to borrow for happiness, i.e., for needs that do not generate wealth. The second technique is to have a repayment plan with a deadline date. The third is to contain it or limit it equal to whatever you can sacrifice or set off from your present wealth. Not future wealth. One will not be perturbed by failure or fear debt when he makes a provision to repay for success depends on a factor or factors, the outcome of which we have little control.

In a nutshell, a debt with a properly worked out exit route guarantees respite. Certain people make loans to generate mythical income because they do not have original ideas. In my younger days, a distant relative of mine, whose family owned a small readymade garments shop, always had a bundle of exciting plans that depended only on borrowings. His daily routine was only purposeless ‘borrowing’. At the same time, there was a friend who always spoke high of his business skills in the paper industry. Having noticed my interests, one day, my friend proposed a paper ‘gum-tape’ manufacturing project. His father, who was an Engineer at Erode Paper Mills, authoritatively endorsed his son’s proposal. My cousin took the lead on this project. As for my share of the capital, my uncle, who was the head of our joint family, purposefully arranged a loan from a friend of his, instead of adjusting from our joint family funds. I signed my first Promissory Note in the year 1978 at the age of 22, a year after my graduation. I borrowed the required capital of Rs 35,000/-, with all the excitement to become an entrepreneur. But after struggling for about 5 years, I realised my friend was no different from my cousin. They were isotopes. Resultantly, I paid my share of Rs 1.5 lakh towards the accumulated losses. The gum-tape industry was a outworn idea. Fortunately, no bank financed our project, despite my cousin’s serious perusal. That was my first bitter experience at the age of 25.

When young, we possess this excitement which has no reasoning. Young entrepreneurs want to prove something to get recognised, hence make stringent efforts. Even after tasting failures, there’s still ’hope’ as an everlasting strategy most young entrepreneurs have. So did I. Several episodes of mine continued as an entrepreneur in different fields until I was 50. It also included producing a Telugu film in the year 1981, a pet project of my famous uncle whose earlier films were blockbusters. The film bombed so badly that it caused fissures in our joint family, apart from public embarrassment. Thereafter, I indulged in three more business activities until my last, the export business. My journey as an entrepreneur ended. I was not a bad entrepreneur, but failed because I started off without a manual and a chart to navigate. The common feature in all the businesses was that I was successful in the beginning but, towards the end, withered after the magic run, which pungently proved that I had no foresight. Only later it dawned on me that I never had the required knowledge to do business. I had no access to a manual that could guide me to be an entrepreneur. Experience educated me only about my failures. It was then I realised that I had no knowledge of the statutes that govern an enterprise. So also millions of entrepreneurs groping in the dark with fear and failures. I started my self-education of law at the age of 52. Only at that juncture I realised that I lived in danger for almost 30 years and paid the price for such mindless adventures. I realised that I did not know a single law pertaining to business.

A few days ago, I visited my friend Sarma who was once very active in Financial Consultancy, but presently semi-retired. He presently volunteers to advise and help only genuine cases. I met Sarma for some valuable inputs from his humungous experiences in ‘debt management’ and he recalled one incident to prove that many entrepreneurs in our country are not only least adventurous, but also reluctant to try alternate modes of financing their business. A few years ago, he was approached by one of the biggest automobile dealers of a Japanese brand of cars whose annual turnover was Rs 2,000 crore. But his bankers were not enhancing further limits to his financial requirement. Going through the financial statements, Sarma was shocked to note that the annual margin was only Rs 2 crore. The interest on bank borrowings at 12% to 14% were devouring his meagre margins. Apart from this, the car dealer’s investment on land, building, equipment and skilled men at the service centres was so huge that it became a major portion of the capital without much return. My friend suggested that the dealer should insist his Principal for a SBLC, a ‘Standby Letter of Credit’ from a Japanese bank, whose interest rates are a mere 2%. The dealer in turn could use the SBLC for sanction of bank guarantees from the local bank, thereby saving a minimum of 8%. The expert stated that all the local banks have the mandate to extend such facility against a service fee. An 8% margin on Rs 2,000 crore turnover is a mind boggling Rs 160 crore. Disappointingly, the mega car dealer did not find the advise interesting. He was afraid that his Principal might cancel the dealership if such demands were made. He preferred to continue building assets and provide them as collateral to his bank for additional limits. My friend says that his advise might have some hiccups, but at least one has to try. Dwelling in the same environment is nothing but inertness, as per Sarma.

Empires are being built mindlessly. Bankers, instead of rendering the services they are licensed to extend, prefer the easiest way to secure themselves. Offering gold loans, mortgage loans, personal loans, car loans are not the core business of banking. They can be termed as 'Money Lending'. It then dawned on me how most of my clients could have been saved if such banking services were extended to their industry. One of my clients, who manufactured Technically High Value Electrical equipment, was reduced to rubble for only one reason — his maximum supplies were to State-Owned Electricity Boards and Discoms. They not only abstained from payment for the supplies, but found ways and means to raise complaints in maintenance and manufacturing, despite their testing and approval on the shop floor before endorsing their consent for delivery. The lesson: Never partner with the State either for supplies or for joint venture in an enterprise. Court records vividly speak that both the State and Central are the biggest defaulters and are the largest litigants in our country. It’s nothing but ‘the fence’ grazing the ‘crop’ which it is supposed to ‘guard’. That's a stark example to demonstrate the ‘unease’ of doing business with the Government, unless your brother is a Cabinet Minister.

Reserve Bank of India, the apex banking regulatory authority, releases a dozen guidelines per day for all the licensed banks in India to strictly abide by, but none are followed except a selected few. The RBI is daily indulged in formulating such policies but it does not monitor whether they are being followed in true spirit or not. The reason is that they too have no clue as to how all those Guidelines and Directives can be put to practice. There was this RBI Guideline passed in the year 1985 which clearly states that when the bank sanctions any high-value loan to a company, the bank is supposed to closely follow up the functioning of such enterprises by nominating one of its experienced officers in the Board as a Director. Further, at the first sign of any ‘incipient stage’ of sickness, they are supposed to take the RBI prescribed remedial measures. The signs of ‘incipient’ sickness include reduced sales, stock deterioration, cheque bounce, debtors beyond 90 days, etc. The best biological illustration of ‘incipient stage of sickness’ is the symptom of sneezing from cold, headache, indigestion or even the experience of vertigo. The banks take all such symptoms casually. If the RBI suggested remedial action was put in practice, there would have been fewer financial disasters and scams. The banker selectively picks up those guidelines where only the borrower has the obligation and discards all those into the dustbin where the onus is on him. The above are conspicuously omitted in the syllabus of Business Schools.

The Law is pro-bank. There is absolutely no argument that the country’s economy has to be protected from frauds committed by entrepreneurs, but it doesn’t exempt the banks from their accountability. Only in one in a million cases, the banker is questioned by the courts when impleaded in criminal cases. The banker is questioned only in the instances where it is found that the banker had provided loans beyond the credibility of the borrower, especially when the borrower turns out to be a fugitive. The Ruling Political Party requires a scapegoat so that its leader can make a responsible statement in the Parliament. There is not a single instance where the banker is prosecuted for breach of his duties that likely caused the death of an enterprise. The rise of defaulters is because of disproportionate lending, the origin of which is because of certain ill practices passed on to the entrepreneurs by the banker himself and adopted by the borrower religiously. Ultimately, the entrepreneur is in a maze, unable to find the exit route.

A few days ago, Sri Subramanian Swamy, the 82-year-old maverick leader of the ruling party at the Centre, approached the Supreme Court of India for a CBI probe against RBI officers. He claims that “Banking scams have led to loss of faith in India's banking system". Whatever Mr Swamy does, it has a meaningful objective in the interest of the country and its citizens. The move deserves huge applause, as it’s the first of its kind. As such, the mission to accomplish ‘Swachh Bharat’ programme in letter and spirit is much more possible and practical, in comparison to the proposal to cure the ill-practices in the banking industry of our country. Unfortunately, even if the IMF Special Agent, Ethan Hunt of the ‘Mission Impossible’ fantasy franchise is brought to life in flesh and blood, he will fail miserably. Leave alone the CBI. Special Agent Hunt might do all the daredevilry, chased by helicopters, gymnastics on motorcycles, jumping over high-rise buildings, etc., to save the world from terrorists and nuclear attacks, but he will definitely not last in this case. If the antagonist is a person, you can take him to custody, but if it’s the system, then how can anyone proceed?

Further revelations in the next edition...