Bankruptcy Code – Borrowers Beware

Now becoming an NPA is a more serious problem for the borrowers. Earlier plethora of laws governing recovery was used by the borrower to their advantage to delay the process. Thanks to the new law which is coming up soon and approved by both the houses of Parliament.

The message from the bill is clear. Restructure, repay or wind up. Read more..

Dangerous DEBT

The NPA is a fraction of the problem for Indian banks. They will employ a team of lawyers and / or sell NPA to ARCs to get rid of such accounts. They will get capital from the Govt.

But for entrepreneurs having an NPA, it is the mega problem for them. Their other good accounts will get affected; no one will lend them, they will be at a risk of selling of property mortgaged to the bank. It’s a very stressful situation. Mostly most small NPAs are not willful but ignorant NPAs. Read more.

Do you know your account could be the next NPA?

The whole India is debating about Vijay Mallya. But he is sitting somewhere in the world and addressing his high debt worries. On the other extreme, there are farmers committing suicide, due to unbearable debt exposure.

In between there are SME borrowers who are the most vulnerable to the debt crisis. Most do not know the implication of debt – its short-term and long-term usage, cash flow mismatch, interest impact and in the case of default all other implications that comes with NPA status. Continue reading...

How to avoid Financial & Social Bankruptcy?

A few years ago, one of our clients approached us to help them in raising finance for their packaging unit. Two entrepreneurs, well one entrepreneur and one technocrat. The entrepreneur was riding on the passion of the technocrat. (Technocrat’s blind passion is many a time reasons for business failure).

They had identified machine from Germany to manufacture packaging items for the food industry. Technocrat was extremely passionate about the capacity and quality of output of the machine. They were confident about sweeping the packaging market with the first of its kind machine imported in India. 

Read rest..

The single most reason why financial literacy is must for every entrepreneur

Mr. X, who was once a very dynamic entrepreneur engaged in the pharmaceutical business, is now under depression for many years. Family expenses and cost of two daughters' education was borne by other close family members. His wife was doing some domestic work till both daughters completed their studies. Marriage of both the daughters was solemnised with the help of close family members. This is a real life story. Read More...

Rs. 1 Black Money outside India = Rs. 6 NPA with Indian Banks

We are concerned about Rs.30000 crs black money outside India but what is our concern for six times of that amount lying as banking NPA? 

When Govt wants to draft a law against the criminals they should involve some of the hardcore criminals. Who better than them know the mindset of criminals? But since we cant do that we involve Police because they deal with criminals therefore second best to know their mindset.  

Similarly when RBI wants to deal with mammoth NPA problems they should not only involve branch managers who deals with borrowers but also should involve financial consultants engaged in fund syndication and advise entrepreneurs. 

New RBI guidelines of asset classification before accounts becomes NPA is interesting but these kind of guideline make banking extremely procedural and only compliance centric. Branch people are finding it difficult to address customer service properly and on top of that so many compliance , reporting & auditing is paralyzing the banking operations. 

Rather than spending time in data analysis of borrowers performance bankers remain busy with compliance and reporting. Asset classification etc is fine but RBI must change the way credit is being managed in the banks. 

Some of the pointers for practice need to stop and new practice to start:

-  Excess funding just because security is adequate should stop  

-  Non adherence of adequate promoters contribution must stop

-  Auditors must be made accountable for fudged data certification 

-  Smart mechanism to be in place to get data filed with Income tax directly

-  Relationship banking which is ignoring financial prudence

-  Surprise check of accounting data and factory/office  

-  Credit monitoring independent of credit processing and branches

-  Involving CAs in monitoring who can understand intricacies of accounting & implication of ratios.Branch people with their work pressure cant do proper monitoring. 

-  Making it strongly deterrent for CAs , Advocates and Valuers to certify wrongly

-  Active monitoring mechanism even during pre SMA 0 level. Bankers need to engage talent who can play consultative role with borrowers who lack financial prudence. 

There are four class of defaulters:

1) Willful Defaulters - Borrowing with malafide intentions (Must come down substantially)

2) Ignorant Defaulters - Borrowing without managing capacity , low financial acumen , not able to understand implications (Needs to be provided desired support)

3) Potential Defaulters - Not willful but neither genuine. Risk takers at the cost of bank's money (Must be monitored closely)

4) Genuine Defaulters - Market, policy and external factors makes them defaulter (Needs support for recovery)

Along with rigorous compliance and reporting , proactive engagement and consultative approach will yield better results in the management of PA & NPA both.

Deadly DEBT !

Yes its deadly. 

Inadequate debt wont allow your business to grow and entrepreneurs will suffocate & die. (business will die)

High debt will drown you in the burden of interest. Yes more debt without adequate productive use will eat into your profit. Invest excess debt thoughtlessly and inability to repay will make your account NPA and your otherwise profitable business will also sink. 

No bank /institutions will finance NPA accounts. Inability to raise finance means stagnation.   

Debt is necessary for growth but its adequacy is what matters the most. Many businesses are out of business today just because of either of the two scenario mentioned above. 

Understanding play of -  cashflow , adequate sustainable leverage (debt) , criticality of  margin & contribution , cash conversion cycle  , inadequate working capital , debt trap , fixed and variable cost , current ratio , cashflow to debt ratio etc are very fundamental to every business. 

Even if you do great business, illiteracy of financial implications will undo all your great marketing efforts. 

All entrepreneurs deal with money & work for money but unfortunately many entrepreneurs do not understand money part of the business. 

Is your business making money?

Is your business making money? 

Answer may be NO but you may not KNOW. Yes many businesses are just managing cash flow and not making profit. 

Is it your money that you are splurging on ? 

It may be of your creditors or banks or government. 

Is your networth positive after you writes off dead stock , dead investments , difference between book value and scrap value of your assets and bad debts ? 

Is your ROI more than risk free rate market return ? 

You may have money in bank but do you have assets value more than your liabilities? 

Take a critical look at your MANAGED financials.You may cook the book to fool government and investors but be cautions about your uncooked real books that is fooling you and taking speedily you on the road to bankruptcy.   

Many companies survive before they burst merely on the basis of positive cash-flow. Cash flow is critical but at the same time it misleads. It makes us believe that our business is making money. But unless you are vigilant on the above aspects of profit and loss and Balance Sheet , only positive cash flow dependency can be a disaster.

Ignorant NPAs !!

We are bound to have NPAs, tax evasion and everything else that is wrong with business and corporate sector.

Every profession needs training and subject knowledge to practice.  There is nothing such for entrepreneurs. No entry barrier. No prerequisite or training or skill set check – nothing.

Everyone wants to become entrepreneur.  Form small Panwala to large businesses – all are entrepreneurs. Whether one like it no, many of our  entrepreneurs do not know WHAT and HOW of business. We have degree holders engineers, textile designers, graduates , under graduates, uneducated everyone you will find is doing business.

Why many of our real estate developers are in trouble? Asset rich but Cashflow crisis , why many are good at borrowing but do not know neither their overall  cost of capital nor profit margin ? why many business just survives on tax evasion?  Why smartest of IITsians fails in business? Why smartest of MBAs are failing in business?

There is a large number of entrepreneurs who do not know difference between cash-flow and profit   They assume cash flow as their own money and live accordingly. Many would assume hefty margin to be the only think they need to take care of.

Business acumen is one part and its is necessary however knowing what is the success and what is the parameters of financial success is equally if not more important.  Many of the entrepreneurs illiterate about this.

Deduct from your stated profit tax evaded, dead stock , bad debt , required provisions not made  and you will know what your real profit is.

Deduct from cash-flow , creditors to be paid , dead and slow moving stock , add receivable debtors and salable stock to know whether you are spending your own money or borrowed money?

Knowing all these critical data is very important for every entrepreneurs to know.  Unless these are known acted upon to improve, leakage will continue and entrepreneurs will keep living on borrowed money, bankers will face splurge of NPAs and tax department will have long list of defaulters.  How many businesses can afford to hire CXOs ?

Even the biggest entrepreneurial example we give of our time faces charges of business without integrity. That success story is based on many wrong doings.

There are entrepreneurs who thrives on tax evasion, who thrives on corrupt business practices, who thrive on bending rules of the land and who thrive on ignorance. Rest are really thriving. Select your real category.

Entrepreneurship is in vogue , it is important however we also need preparation for that.  Institutions like TIE and many others are doing great job but its spread must expand and expand very fast to all size , sector and geographies.

Are there any lessons from the death of Mr. Lalit Sheth ??

Our heartfelt tribute to Mr. Lalit Sheth (Owner of Raj Travels). This is very unfortunate incidence and shaken many who are in business world.

Are there any lessons entrepreneurs can learn from his sudden and  tragic death ?

Well I think many.

Borrowing is easy but its servicing of debt and repayment of debt drown many families. Be it farmers in interior Maharashtra or entrepreneurs like Lalit Sheth, unmanageable debt is a killer.

We have many many cases of NPA and over borrowing and situation is close to alarming. As long as cash flow is sustained (not necessarily profit) one would not realise the gravity of situation.

How analysis of viability of the project is critical and me too kind of approach is disastrous. I have also known many such cases where entrepreneurs merely on the basis of gut feel ventured into the project , borrowed heavily than the project can sustain and ultimately  they had to sale their even their personal assets , faced legal battle to save their mortgaged home and suffered socially enormously.

Lenders and bankers are also not playing proactive and supportive roles while lending and during the tenure of the loan. They have access to the critical data and can very well play a vital proactive role more than just collector of interest and then filing suit when something goes wrong.  Prevention of foreseen disaster is a joint responsibility.

This kind of financial status is also very difficult to manage socially. There is a club run by a CA made up of entrepreneurs who are facing bank’s action and whose assets have become NPA. This kind of club helps their family members to realise they are not alone and learns how to face the reality and even come out of the same also.

Having a strong internal CFO is a must these days. I know many entrepreneurs in SME segment who do not understand the reading and implication of their balance sheet. Its very dangerous. Entrepreneurs must know their financial status i.e. actual and not fake as shown to bankers /tax authorities. Alternate MUST have CFO, absolutely dependable and proactive. He must see problem coming, warn the management /owner and know the corrective measures. SEBI is making efforts to spread investor education on a large scale but there is also strong need for entrepreneur education.  Everyone is working for money but ignorance about its PLAY is wide spread.

Last but not least, I do not know what is the brand value of the Raj Travels? Must be very high. Such a great asset could have been leveraged to taken care of liabilities, atleast some.  This is where CFO or Investment Banker can be of great help. Do you know what your real assets are !!!

This is written merely with the public information about Mr. Sheth’s grave financial situation we all have from news papers. No advice or analysis of his real situation. This write up might benefit some readers.