Small and medium enterprises (SME) which are considered growth engines of our country, have seen some really difficult time over past year with the slowdown in economy and investment drying up. In a chat with Shereen Bhan, ICICI Bank, managing director Chanda Kochhar said that resilience factors for SMEs are smaller.
"So even when we talk of elongated working capital cycles, in a way they see pressures of not just slowing sales growth but people in a way pulling away the working capital that was normally given."
She is however hopeful that with the pick up in investment cycle interest in SME will return. She pointed that SMEs from pharma and education sector continues to see new investment, however others SMEs from construction or infrastructure sector will take some more time to revive.
"Their ability to invest or bringing back the investment cycle will be dependent in a large way on what happens to the economy and the overall investment cycle in general," She said. Recent initiatives such as an exclusive exchange for SMEs, easier access to private equity investor would help SMEs to grow in future.
Below is the verbatim transcript of the interview.
Q: It has been a difficult year for India and for the small and medium-sized enterprise (SME). They have borne the brunt of the slowdown that we have seen in the general economy. How would you sum up the experience for the Indian SME in the year gone by?
A: It has been a challenging year for the Indian SMEs. In a way we have to remember that for them the resilience factors are actually smaller and in a way when the pressure has worked the presser has worked from all sides. So even when we talk of elongated working capital cycles, in a way they see pressures of not just slowing sales growth but people in a way pulling away the working capital that was normally given. I am not saying the other way round but for them the trade cycles just get more and more elongated whether it is from their suppliers or from their buyers both ways. So in that sense they do face the pressures all the time.
To be fair to the banking sector banks look at the SMEs with a very open mind and wherever we believe that the viability is intact the banks have been taking a very comforting kind of an approach towards the SMEs as well.
Q: Are you seeing any offshoots in terms of the performance within the SME sector? There has been a lot of talk on a revival of sentiment and a revival of the investment cycle, sentiment has changed for the economy in general but there has been no pick up in the investment cycle. However on the ground as far as SMEs are concerned are you actually seeing any pickup in terms of the investment cycle?
A: The SMEs are moving, the experience is very different across different industry segments. So if you look at some of the industry segments like pharma, education, in some sense investment continues to happen. However in some other industries like construction or infrastructure, just their ability to invest or their requirement to invest just depends on what is happening to the larger economy in a much bigger manner. So that is where the pressures are but in general therefore their ability to invest or bringing back the investment cycle will be dependent in a large way on what happens to the economy and the overall investment cycle in general.
Q: Are you beginning to see any turn in the capex cycle, any signs of the investment cycle picking up? Anybody can crib about the fact that approvals are pending or clearances are pending but we hopefully will get past that. If that does happen do you actually see a turnaround or is the consensus really going to be the earliest we could see a big significant turnaround summer next year?
A: If we talk of turnaround let me break this into two. One is the broader sentiment movement and the other is on the ground capital investment. In terms of the broader sentiment movement a lot of positives have happened starting from September-October as we saw a lot of announcements and even the fact that the Finance Minister went out, met investors. We have a much open and better communication with the credit rating agencies now and in a way I would think that the Budget really did what it could because we always rely on Budget as a one day cure for 365 days.
Q: He has clearly said expect more steps over the coming weeks.
A: Absolutely so in that sense a Budget did a lot frankly if you ask me to that extent that the Budget can do. But from here on the biggest thing in my view that is required for our economy to kick start or restart is really getting back the investment cycle. And there not much change has happened.
Q: What is the feedback that you are getting because we don't see enough evidence on the ground of breaking this logjam, of actually expediting the process of getting clearance as well? There has been a lot of talk and we actually have seen the CCI meet and so on but it hadn't really translated into very much on the ground?
A: I am an optimist and I try and look for the positives. The first positive that I experienced and I want to just remind all of ourselves because it is always good to also remind ourselves of the positives that just look at this, as a country we have achieved that run rate of setting up almost about 20,000 megawatts per year. So if we want to say that five year plan we want to set up 80,000 to one lakh megawatts, in terms of implementation capability we have reached there. So that is one.
The second is that some of these issues at least now I get the sense that they are very well worked upon and there is a lot of understanding about what needs to be done. Without really getting into too much details as I attend even the meeting on this power advisory group about what needs to be done for the power sector I must compliment the ministry that they had a full analysis of what needs to be done. And not just for a few projects but what needs to be done in generation, transmission, distribution, and so on. So the understanding of what needs to be done is also there.
However the final result does not come only from the understanding. We need to make sure that we take decisions. We must also understand that some of these decisions are in a way more difficult to take when you are in a more politically sensitive environment. But we need to finally take that call, take a decision, every decision is going to be good for some, not so good for the others but that is what is urgently required.
Q: Do you believe the finance ministry and the government's assumption or forecast at 6.5 percent is a tad too ambitious or do you think that on the basis of what we have seen currently we can get to 6.5 percent because that is the assumption they are working with in their budget arithmetic?
A: Even our internal assumptions – while there is a range, there is a pessimistic range and there is a optimistic range, but the higher end range goes up to 6.5 percent. However that hinges on three big things, it hinges on the fact that we are assuming that the monsoon would be normal, so that in a way as regards to agriculture. For services sector we are saying at least to some extent the growth will accelerate from here. The biggest assumption is really on the manufacturing side to say that the investment cycle will start. Start doesn’t mean that it will start fully pumping in from Q1 but at least it will get started. We need to do all these three things.
Q: Is the case of further cuts by the Reserve Bank of India (RBI) being able to spur growth and being able to get us to that 6.5 percent number a bit overstated to your mind?
A: I always believe that growth does not depend on only one factor. Interest rates are not the only thing that can spur growth. Everybody prefers a lower interest rate. A lower interest rate is good for the economy in many manners. It enables more people to buy homes, it enables more companies to setup projects, not just that it actually improves the viability of the project and so on. So, a lower interest rate is always a good factor to have. However just lowering interest rates is not going to bring back the capital investment cycle, we also need the facilitative environment, that confidence that I was talking about in the minds of the corporate sector to say that as we start implementing our project, it will get completed and the projects will see cash flows. Many of these things have to work in tandem for us to get to our potential.
Q: One of the problems that the banking sector has seen is non-performing assets (NPA), the corporate debt restructuring (CDR) route has been something that we have seen record numbers over the last year or so. As far as the small and medium enterprises (SME) side is concerned are you seeing more pain there or are they actually being better behaved than the large corporates?
A: The pain is all across. The difference is that when you look at a large corporate, you are able to project the future in a more specific manner, in the sense that you work on the cash flows, you work on the assumptions and draw up a more specific plan and see what kind of restructuring can help. When it comes to banks handling a large number of SMEs, in a way a case by case detailed analysis of what kind of restructuring is required sometimes doesn’t seem feasible and one goes by much broader assumptions of how that industry will move and how that economy will move. So, in that sense I would not say that SMEs are less behaved or more behaved, I would only say that always the performance of actuals versus assumptions becomes more difficult in cases where you handle large number of cases but the values are small. Otherwise I would really say that the experience is more to do with the way those particular industries are moving rather than giving extra credit or discredit to the SME sector.
Q: We have seen couple of interesting things happen in the past year to do with SMEs. We have got the SME platform both the BSE and the NSE have set that up. There has been a lot of talk on whether we are going to see this flood of listing actually take place, whether the pipeline as far as the listing process is concerned is looking robust enough, what is your own sense because sometimes a lot of this talk doesn’t translate into action on the ground?
A: These are facilitating factors. Over a period they would definitely help - the SMEs have more access to capital. So, they add one more avenue of having access to capital. What some of these initiatives do is, recognise the fact that all the detailed processes that we have to follow for larger corporates would not be feasible to follow in the SME. So, the SME exchanges therefore make sure or allow that there is no minimum limit of capital cut off, any size can go and list and the documents that you have to submit to securities and exchange board of India (Sebi) are simpler and ofcourse the last Budget announcement to say that you don’t necessarily need to do an initial public offering (IPO) which means that if some of the venture funds or PE funds want to put in some money in SME they can just come directly and do it through the exchange. So, all these are facilitative factors, if these were not there then nothing would happen. Some progress will take place because of these facilitators.
Q: Do you continue to see private equity investment into the SME sector being strong because in general for India it has tapered over the past year, but do you believe that once we do see the investment cycle perhaps pick up, private equity interest would perhaps be back as well?
A: If we see the investment cycle pick up and we really see a little bit of comfort on the working capital side, you would see the interest coming back again.
Q: What is your own sense on the working capital side because that is where you guys are involved?
A: In a way it is again linked to growth. So, as you see the revenue and the sales of the larger companies pick up I think that eases the cash flow for the SMEs. So, when I say working capital I just don’t mean bank finance, that goes to some extent to meet the working capital requirements – the basic, the net working capital comes from companies operations there if the receivables cycle gets elongated too much then that creates a problem.
Q: Outside of small and medium enterprises (SMEs) one big significant headline for the banking sector is the Finance Ministry’s insistence that we must actually get more bank licenses on ground and we have actually seen the Reserve Bank put out those guidelines. I am sure the standard response will always be more competition is a good thing, but what’s your own take on how many because we don’t know how many there will be? How many is good and do you believe that the guidelines that have been put out are fair, are too stringent. What’s your own take?
A: First of all, the guidelines that have been put out are actually very comprehensive. So in that sense it is a very comprehensive and good work done by the regulator in terms of taking into account any eventuality or any risk factor and building that in as they have drafted the guidelines.
Yes, they may appear stringent, but they are very comprehensive and very well thought out in that sense. In terms of just my opinion towards new banking licenses I would say that first of all, I have always believed that banking sector in India will grow at two and half times the gross domestic product (GDP) growth rate.
So in that sense there is a lot of banking business to be done. This banking business can be done by existing banks becoming bigger, new banks coming in or maybe a combination of both, but I would also simultaneously say that while there is enough business for everybody banking is not a very easy business and therefore it takes time to build a franchise it takes time to build that scale, it takes time to build those core competencies. During that period you would see intermittent competitive practices whether a war on talent or whether competitive lending rates, competitive deposit rates, but I guess those are intermittent events, which the existing banks will have to go through, but in the long run, the exiting banks will have their strong franchise to go by and will have enough business to do.
Q: The Finance Minister on several occasion has said while we have world-class banks in India, we don’t have a world- class world size bank in India and again this business of consolidation, we have seen bits and pieces of that, but do you believe that we are going to see a lot more consolidation in the Indian banking sector?
A: I definitely think that we need bigger banks in India. Clearly, as the economy grows not just the growth in the economy, but we have to remember that for many years to come the credit intensity of our economic growth is going to be higher because our growth is going to come out of consumption. Our growth is going to come out of infrastructure investment and that would require credit.
So, we need the banks to become bigger, but I don’t see too many appropriate opportunities of consolidation currently, but it is the growth that will in a way propel the banks to whether organically or inorganically become much bigger. We have the example of China to go by. The size, the scale for the Chinese banks 15 years ago was very different from what it is today and most of that growth, almost entire growth there has been propelled by their domestic growth. So, it is the Indian economy that will necessitate or the Indian economy’s growth will necessitate the banks to grow and in a way provide the opportunity for the Indian banks to grow.
Q: One issue I want to talk to you about in that ICICI Securities was instrumental in working with the government in sort of putting together the disinvestment roadmap, big plans Rs 40,000 crore – that's not accounting for the residual stake sale and the monetisation of Specified Undertaking of The Unit Trust of India (SUUTIs) assets as and when they do take place, but what's your own take on the disinvestment calendar that's been put out and the plan that has been put for the disinvestment side because the Finance Minister very clearly yesterday saying that since I took over there hasn't been a single disinvestment that's gone bad. Infact every single issue has been a success?
A: I won’t say that it is a cakewalk or that it is a very easy target, but I believe that in an environment where we have to look up to a lot of positive things to happen and hope for a lot of positive things to happen and we have to plan for the economy to grow from the current low levels. There is no harm in taking a little bit of ambitious target in everything that we are wanting to do. As CEOs that’s what we do for our companies’ as well. We believe that even if India is growing at 5.5-6.6 percent we want to grow our business, but we want to grow our business prudently. So, you set a little stretch targets for yourself, you set a little ambitious targets for yourself and then you make sure that you get close to them if not entirely meeting them.
Q: Do you believe Rs 40,000 crore is a stretch target?
A: It is a stretch target. It is a target that’s worth taking because if we don’t stretch ourselves we will never aspire to that.
Q: The SMEs who are listening to you and they are going to be the part of the eighth Emerging India Awards that will be held shortly – what would your message be because they have probably ridden out the worst that the year had to throw up to them. What would your advice to them be?
A: We have to tread cautiously, but optimistically in the sense that we cannot assume that all the challenges are over. The path that the country is taking seems to be a positive one. In terms of a potential, there is a huge potential. We as a country need to do a lot to realise that potential, but the biggest positive that we as a country have is that structurally we have a lot going for us. The other countries can’t change their demographics overnight. They can’t change the size of the middle-income group overnight. They can’t change the size of their young population overnight - atleast we have those going for us. So, a lot of the challenges that we have - the solutions lie in our own hands if we get them right- we are going to be able to take our country to our potential.