Where is the Focus?

There have been some very interesting books in the recent past on the Small Industry.  With competition increasing and protection for various sectors being selectively removed, it is time that we looked at some sectors which have been accorded protection in the past – like co-operatives and small industries and see how they have been performing. It is also important for us to get some insights into recent research and practice in these sectors. In this context, KC Nanda’s book raises the level of expectations with a rather pompous subtitle. However as one reads through the pages and pages of hand-waving conclusions and off-the-cuff tips, the expectations get belied.

There is no doubt that the book has very useful content. The whole book is divided into 16 chapters – which focus on legal and procedural aspects pertaining to the banking sector as applied to the small industry.  However, the problem lies in the focus. While the author could have done a great job sticking to his core competence of looking at the legal and procedural aspects of banking – he makes a foray into strategic and policy issues where he falters. The audience of the book is also not very clearly defined by the content of the book – because it tries to be everything to everybody.  In this enthusiasm of being omniscient and omnipotent there is a constant drifting and even the core aspects of the book do not get the attention they deserve.

In fact, the tone of the book is set out in the preface where the author says: “The most expressed cause of small business failure has been the lack of working capital….. Some attribute the inadequacy to over investment in fixed assets or to the big boss complex.  Others maintain that failure is due to ineptitude, laziness, overextension, chicanery or some other non-financial reason. Yet others blame excessive dependence on one buyer and on marketing myopia.  Some lay it on the use of informal money……”(p.14). While there are extensive bibliographic references to the case laws in the notes to every chapter, there are no references to the above observations. Surprisingly, most of the reasons given above can be found in a single book “How Not to Ruin Your Small Industry” by Phansalkar (Response Books). In fact this constant disregard for the earlier academic work done in this area is the single most significant drawback of the book.

Being from the legal profession, the author has done a good job of taking the readers – intended to be small entrepreneurs through a tour of all the day-to-day legislation, notifications, circulars, case-laws and procedures.

The book starts with a perspective of the small industry and goes on to analyse the need for funds.  Chapter 2 touches upon the most significant aspect possibly often ignored by the small entrepreneur –  that the best way of looking at the working capital problem is to look within. Bring in efficiencies in management of inventories, receivables and get rid of non-productive assets. In Chapter 3, the author looks at sources from where funds can be generated. This covers a description various financial instruments – such as equity, preference shares, commercial papers and venture capital. Apart from this, he also deals with various ways in which the small enterprises can fund their capital assets – hire purchase, using deferred payment options, resorting to private borrowings – from money lenders and chit funds. He even goes to the extent of suggesting Share Application Money in a public issue and Security Deposits from suppliers and dealers (p.58). Surely, there must more sustainable ways of funding the business than these! Where the author fails is in going beyond just listing these sources. There is no analysis of how difficult or simple it is to tap these sources, how it would affect the cost of funds. The chapter just talks about the legal aspects of these sources.

Chapter 4 describes the Banking Industry in India and its functions. The author gives an exhaustive list of the types of loans an enterprise can seek from the Banking industry. Chapter 5 describes the banking instruments – cheques, bills, letters of credit and the legal intricacies related to each of these instruments.  Chapter 6 deals with Banking services – the type of bill discounting, cheque repurchase facility etc., which the bankers offer. The three chapters put together again, give out a lot of information on the intricate differences between a bill discounted and a bill purchased, and the legal implications of each of these.  As we proceed reading the book – it becomes more and more clear that this is a book on banking regulation and negotiable instruments as applied to small industry pretending to be a book on financing strategies for small industry. Obviously there is a world of difference between the two.

Chapter 7, 8 and 9 deal with the broad norms adopted by the Bankers in general in appraising and administering loans. One should not be misled by the title “Bank’s Viewpoint”.  It does not talk about how Bankers look at small industry, but talks about the criteria adopted by the Banks in appraisal. There is a mandatory listing of all the popular ratios, talk of credit rating and health codes. He even reveals the ratios used by CRISIL and ICRA in arriving at the rating – till now a closely guarded secret in the rating industry! There is also some discussion on the interest rates and how they are arrived at under various circumstances.

Chapter 10 and 11 discuss the security sought by the Bankers in dealing with any lending programme.  It has a detailed discussion on the primary security and collateral, the difference between a hypothecation and pledge and so on. Chapters 12 and 13 deal with sickness and turnaround – again mandatory chapters when one is dealing with the small industry!  The next two chapters concentrate on dispute resolution and legal recourse as far as banking is concerned. The last chapter offers some tips for the small entrepreneurs.

On the whole, the book is very patchy and lacks focus both in content and presentation.  There are several factual errors and misconceptions in the book. Similarly, there are too many opinionated statements that are more like coffee table arguments and do not emnate from any organised work. Here are some quotes from the book:

• The scams in the NBFC operations are the result of inabtion on the part of RBI…..I believe that many NBFCs invested in good scrips and within the knowledge of the Reserve Bank of India.  They are now finding it difficult to find liquid cash in the face of government’s failure to control share prices.
• The capital issues of the small sector would not be dealt with at the stock exchanges, theoretically these monies (share application money) can be used by the small sector….
• I am not opposed to mechanisation.  In planning, however, priorities have to be determined.  Perhaps we are worrying too much about automation. What is worrying is, are we prepared for it? Is it necessary for our social agenda? Do we really need efficiency?
• Banking in India is either nationalised or controlled by the Reserve Bank of India.  All scheduled and unscheduled banks have also been covered (under the scheme of Banking Ombudsman), with the exception of rural reconstruction banks (actually meaning Regional Rural Banks)
• It is sad for the judges the attraction for becoming a judge is the leisure the position brings.  In fact, judgeship is attractive for practising lawyers who are in poor health. It is not unknown that many successfule practising lawyers have fled to the judiciary at an enormous sacrifice in income in order to escape the tedium and constant pressure of law practice.

And if the above conclusions were not enough, the author gets into an argument with Amartya Sen:

• Amartya Sen may be right in his assertion that equity is possible without growth. However, without growth, equity just cannot be sustained. We have already seen how the new economic policy has adversely affected growth generally and the small scale sector’s growth particularly.

Unfortunately such statements which are plenty in the book bring to doubt the basic credibility of the arguments extended by the author. In summary the book has a wealth of information lost in a maze of disorganised flippant and off-the cuff statements.  It is like a pocket dictionary that has most of the functional words and their meanings – but not arranged alphabetically! Surely in case of every publisher of repute there would be a system of refereeing the book and editorial assistance before publication. This does not seem to have happened in this particular case.

Credit and Banking

What Every Small Entrepreneur (and Banker) Must Know

By K C Nanda

Response Books, New Delhi 1999

pp.289

Price: Rs.395 (Cloth) Rs.225 (Paper)