Doing Business In India

Discussions by eminent credit experts have highlighted the pure dependence of credit risk assessment on financial statements and payment history. Whereas good business research thrives on ‘Alternate data sources’ then why shouldn’t credit risk assessment incorporate alternate data for a robust model? Whether financial statements are more reliable is debatable point especially in the context of MSMEs (they form the bulk of business enterprises all over the globe). Most developed economies do not insist on audited statements from business owners and in developing economies, we are aware of what happens. The business owner decides what is to be presented….. Yes, payment history is credible and can be used as a source of information but can be misleading if relied solely upon. Credit rating does consider ‘alternate data sources’ but as a product is used for a minuscule segment of the universe. When you consider credit scoring or internal risk assessment processes, invariably ‘alternate data sources’ are disregarded. Moreover, majority of the credit officers are unaware of ‘alternate data sources’ and their relative weight in the risk assessment model. It seems that we all want to follow the system that has been established………….. Are we doing it right?

Dun & Bradstreet (D&B), a leading Business Information company, is continuing a program in India to collect trade payment information from industry participants. What is the rationale of such a program? There are several key issues that figure especially in an operating environment where Credit Bureau referral systems are not fully developed. Moreover this has global implications especially in light of the failure of large corporations all over the world.

Let us first take a look at how does the D&B program work? The program operates as a ’shared information network’ that gives that gives 24 hours online access to payment information on businesses. The trade participants have to provide their receivable information on a monthly basis. In return the trade partner receives free of charge data to reduce risk. Additionally D&B would provide Business reports, for a charge, that would incorporate trade payment data alongwith financial and operational information on the subject business.

This ‘shared information network’ is a private company initiative that does not have explicit regulatory approval in the form of licensing. Licensing is an important criterion in developing markets where any form of monopoly is shunned. But then…….how does it affect the trade participants? Well there could be positive and negative implications……there could be legal liabilities for masked sharing of ‘mutual’ information between trading parties but on the other hand a wider information base will support better credit decisions.

The Credit Information business environment in India can be a perfect example of a developing market that is maturing. In the current scenario, only regulated and licensed credit information entities, those that have been licensed by Reserve Bank of India (RBI) under the Credit Information Companies (Regulation) Act, 2005 are allowed to operate. Presently CIBIL is the only licensed and operating Credit Bureau in India. Last year RBI had called for applications for fresh licenses. Large Global players like Equifax Inc and Experian Ltd had applied in partnership with local financial institutions. Thus the credit information space will see lot of action in the coming months. The Credit Bureaus will collect and share information with specified members that are participants from the financial markets.

Under the licensing arrangements, Credit Bureaus are expected to carry out the following business:
(a) providing credit information to individual and corporate borrowers his/her/its own credit report;
(b) providing data management services to the Credit Institutions who are its members;
(c) collecting, processing, collating and disseminating data/information related to property mortgaged to credit institutions;
(d) collecting, processing, collating and disseminating data/information related to investments made in Securities other than those issued by Central Government; and
(e) any other function as notified by the Reserve Bank from time to time.

What do the Credit Bureaus do? Credit Bureaus collect information on borrowers from the member institutions, process the data on proprietary and advance risk management process and collectively store it for usage by member on demand. Typically the data collected would be on the account performance of the borrower. Account performance will include indicators like number of credit lines the borrower enjoys, current outstanding status of those credit lines, number of credit applications among other information. CIBIL is faced with several disputes on account of deviation and differences in the data on the credit reports. This is the case even when the underlying data comes from established data sources like the banking system.

Currently there are no established data privacy laws prevalent in India. Another tricky issue is that of data ownership. In the financial markets, financial institutions and other licensed entities that are governed by their respective regulatory authorities are prohibited from sharing personal data on customers with some exceptions (e.g. sharing with Credit Bureaus). But for other industries there is no clear law that allows sharing of trade information. In such a scenario, sharing of information without explicit approval from counter party will attract legal cases with civil liability even though proving the guilt will be an onerous task. But the possibility of legal cases will become a deterrent for the trade participants to share information with private networks.

How does the industry gather credit information? The trade finds its novel yet practical ways to address this function. Informal process of reference gathering from local trade players is the most prevalent option. Another way of getting information is through insiders like employees and other vendors. Competitors also form a good option to gather information. These methods are mostly disorganized, are loaded with an element of bias and are conducted in with least technical knowledge.

D&B’s Trade Exchange Program prima facie is an important move in the right direction. With trade payment information details the quality of Business Credit information will improve considerably. The quality of risk scores will improve. But there are some serious challenges that it will face.
1. The basic hesitation of private businesses to share information.
2. The credibility of the information that is being provided. It is common knowledge that Account Receivables seldom reconcile between trading partners.
3. Retribution by warring parties. The result would be that the credit report of one partner would deteriorate and that could harm its business prospects.
4. Payment delays could be on account of other differences such quality issues
5. There are legal issues in sharing mutual information. Account Receivable information is not proprietary to one party. Unless there are definite agreements in between trade partners that clearly spell the ownership of the data.
6. Additional cost in using business information reports.

“Building Databases @ ur cost“. Effectively D&B attempts to build databases at the cost of the Trade partners. The implied usage of data is in the Business Information reports that it primarily produces. On the other hand we have Credit Bureaus that are spending crores of rupees to gather data and on substantial license fees.

What is the alternative? Credible information from Credit Bureaus would be a good answer. But currently they have a limited scope of operation and are primarily focused in the financial markets.

The other option can be a central repository that stores all trade payment information. This would ensure the credibility and correctness of information that is stored. The information can be accessed by all licensed users for a minimal charge.

The third option will be of professional firms that provide specialised services in the Account Receivable management vertical. For example IBD’s AR management solutions. IBD is a professional services firm involved in risk management.

IBD’s AR management solution adopts proactive processes such as “Dynamic Credit Limit Setting” whereby the organization incorporates the system of ‘know your customer (KYC)’ and will set credit limits based on events. The advantage is that you gather current and credible information on your trade partners. More importantly you continue to respectthe trade relationship that your business has built and nurtured over years.

Vivek Parti, CEO, India Business Database.com, Risk Management and Forensic Company

In any economy small business are the real drivers, they generate employment and distribute wealth widely. All governments recognise this fact and implement policies that encourage entrepreneurship. In the US, by statute, percentage of the government orders are allocated to the SME segment (though findings revealed that orders were being cornered by large Corporations through front businesses). Coming back to the SMEs, the way forward from the Global meltdown could be by providing ‘real’ impetus to the SME workings.

Lets take India as a case point. The Indian business economy is well characterised by Micro, Small and Medium Enterprises (MSME). The sector provides employment to 42 million people and contributes 45% of total manufactured output and 40% of the total exports. The sector has consistently registered higher growth rates. But the policy makers are underestimating the collateral damage of global economic crisis on the MSME sector. To counetr the Global crisis, the government has provided two stimulus packages having thrust in fiscal measures and an additional plan expenditure of Rs. 200 billion. Along side the Central Bank has taken measures to pump liquidity into the system and assist MSME in meeting their immediate need.

On the face of it the stimulus provided has helped the financial sector but the real economy of Infrastructure and MSME are still lagging behind. The reasons are simple, firsty the institutional funds are bypassing majority of the small units and secondly, there is no ‘real’ demand. What is required is to provide greater purchasing power to a larger section of people by stepping up the public expenditure that is targetted specifically at the MSME sector. Similarly in the US, the government is providing bail out packages to the perpetrators of the great economic slide. But that wouldn’t stimulate demand.

As President Obama says “It’s about time…..It’s about change”. Governments needs to change too- their outlook….from Large Corporates to Small Enterprises. Thats the way forward.

We need voices in support of the SME segment that reach out to the policy makers and bring about this change.

Vivek Parti, CEO, India Business Database.com, Business Credit Information Company

Mr. Joseph E Stiglitz, professor at Columbia University, believes that the US economy is the downward part of the trajectory and will get worse than getting better. The measures that are necessary to get out of the downturn have not been taken. The stimulus package has to be passed by the US Congress and the president elect would sign it once he assumes his role. This would take time. US economy is about one fourth the global economy and thus collateral damage is inevitable.

The Central Banks of nearly all large economies have been shoring up the credit lines to their respective financial markets inorder to arrest the downward spiral. Their presumption has been that by providing liquidity to the markets they induce some immediate demand. The flip side of the argument has been that the investor confidence has been so badly shattered that it would take while before the dust settles.

Will the deficit financing of demand really stimulate growth in the sagging economies. Isn’t it really the same that was being done earlier. Cheap and unsecured credit to those who do not have the repayment capacity. The problem lies at repayment capacity of individuals and this should be addressed as a systematic change.

The world has reached a stage where redistribution of income has to take place. The poor and low income groups have to be provided with higher disposable incomes. This could happen through differential tax rates from the revenue point of view and the same could be redistributed by increasing salary levels (along with accountability levels), higher farm reserve prices, social security, etc. All in all, more money with more people. This would stimulate real growth.

Vivek Parti, CEO, http://www.indiabusinessdatabase.com, Business Credit Information Company

Global recession to last 2 years: Morgan Stanley

Chetan Ahya, Managing Director of Morgan Stanley, feels economies will take more time to come out of the global recession. The recession, he said, will take long to get over, and can last for as much as two years. As real economy comes under pressure, we will see rise in non-performing loans, he said, adding that credit markets will recover only once the recession is closer to an end. Ahya added the current account deficit and strong credit growth compounds problems.

Ahya also said the issue of exchange rates remains a key challenge to emerging markets, adding that he sees rupee depreciating to lows of Rs 54-55 per dollar in five or six months.

Catch the entire interview on moneycontrol.com

Ajit Ranade, Group Chief Economist, Aditya Birla Group believes that the current credit crisis is a function of temporary shortage of Cash. The shortage of cash has been aggravated by:
1. FIIs fleeing the sensex;
2. The RBI’s unwillingness to inject liquidity by buying out MSS bonds;
3. The government of India delaying making cash payments for the first instalment of Pay Commission awards, and fertiliser bonds;
4. Government delaying the release of advance tax collections.

India’s Chief Economic Advisor, Arvind Virmani sees the global financial crisis as benefit to easing the inflationary trends. The three main commodities, edible oil, steel and refinery products were the main cause for these cost pressures. With the possibility of a global slowdown, the prices are moving southward, this would have a positive impact of the balance of trade. The negative of the financial crisis has reflected in an risk aversion to lending and utter loss of confidence. But the macro economic indicators of the Indian economy are good as reflected in the growth rate of exports at 36% (April-Aug), overall growth rate of around 8% and the reverse trend of commodity prices.

The high short-term rates is going to hurt working capital costs in the industry. This is credit taken from banks to tide over, until the customer pays. In times of downturn, firms try to instinctively delay payments to vendors, and collect quicker from customers. But clearly at the systemic level this is disastrous. The SME sector lacking deep pockets, suffers the worst, and a rise in working capital costs can wipe its profits. This sector contributes the bulk of industrial employment and exports, and hence needs liquidity support urgently. The Central Bank is keeping monetary conditions tight inorder to tame the inflationary trends. Given that commodity prices are collapsing worldwide, and even agricultural stocks are piling up, the Bank may not persist with this strategy.

As small business owner we need to understand the importance of accurate and timely accounting reports where we will need precise financial information to make the very important decisions we make as owners and managers. Very often I meet small business owners who have put themselves into a pickle by not managing or paying attention to the valuable information provided in many accounting software packages.Accounting operations to any business, small or large is like the fuel in your car. If you don’t have the right fuel or enough fuel in your car, you will not go very far.

Over the years I am still amazed at how many small business owners fail to see the value in managing the accounting process of their business. I was always puzzled at how small business owners could get away with running their business without even using Quicken or QuickBooks. I figured it out. Most small businesses grow so fast that some of us don’t have the time to learn if not worry about the accounting side of the business. Why should we worry about accounting when we’ve got orders to fill, customers to make happy and vendors to manage?

Well, the importance of accounting not only lies in the requirement to file and pay the appropriate amount of taxes at the end of the year, but accounting also affords us valuable information in various report formats that allow us to make smart decisions in our small business. These reports tell us many things about our small business that we would never think of and these reports also allow us to plan the future of our business as it relates to sales and expenses.

Sure some of us have CPAs or accountants that we give information to on a monthly or even yearly basis, where we should be calculating our sources and uses of cash flow everyday if not every week. Sources and uses of cash is exactly what it says it is. It defines where are money is coming from (sales) and how are we using it (expenses). The reporting document that helps us determine this process is our Statement of Cash Flow. This report actually tells us in a summary format where our money came from and where it went.

Another very important report is the Income Statement report which tells us how much we sold, how much it cost us to sell what we sold, how much we spent to operate the business and finally our profit from all that work. There are four pieces or elements of an income statement and they are; sales, costs of goods sold (COGS), expenses (fixed and variable) and income. Some small businesses will classify cost of sales (COS) rather than COGS. Costs of sales are for those businesses that really don’t have to purchase items in the raw material form and re-produce it to make it sellable. For example, as owner of a consulting firm, we identify ours as COS where if we are a plumbing contractor or a manufacturer of wooden chairs, we would identify ours as COGS because we would have to buy plumbing material as well as wood and reproduce both to get a final product to sell.

The next report that is just as valuable as the previous two is the Balance Sheet report. This report tells us what our business is worth via a particular window of time. For example, I want to know what my business is worth today for the last month. The balance sheet would tell me what I own and what I owe. This report basically has three really important pieces; Assets, Liabilities and Owners Equity. Each of these sections identifies exactly what it says. Assets are those things the business deems worth something or those things we can get cash for in a pinch if we needed. This section is also the section banks and other lenders measure a business’ worth. Machinery, inventory and sometimes your accounts receivables are considered assets. Yes, accounts receivables can be converted to cash via a bank loan, but I absolutely do not recommend this for any business. Although many businesses do borrow against their accounts receivable, I would never do it for any of my clients. Liabilities are those things the business owes such as short-term loans, long-term loans, wages, taxes, etc. Banks measure this as plain old debt and it’s not good to have allot of it.

Finally, Owner’s Equity is that which is owed to people or groups of investors that pretty much have a right to be paid regardless of the success or failure of the business. It’s just that. We have to identify that other individuals or groups have actually invested into our business outside of a typical bank loan. Is it OK to have both a bank loan and a particular amount of owner’s equity as a liability? Yes it is, as most businesses do. It is estimated that most business in the U.S. is 80% financed via a mix of both.

So great, now we know about a bunch of reports. These reports are available to you through any accounting software package you use, but you must be using an accounting software package because these reports come from the accounting process that puts the information in the appropriate accounts or sections that will eventually produce these reports.

For every sale there is a corresponding affect within the accounting process that will eventually compile data in one of the reports mentioned above and give you the right information to make a decision. Accounting operations allows us to see our successes and failures day to day, week to week and month over month. We need to review these reports often in order to stay in business.

I have seen quite a few businesses go out of business where when you ask the owners what happened, they will all say the same, “we ran out of money”. Had those businesses paid a little more attention to the accounting process they might still be in business. Remember, accounting in your small business is like the fuel in your car.

There are many programs out there that will help you understand the basics of accounting where all you have to remember is that accounting functions off of a cause and effect principle. Every transaction in your business must be recorded where that transaction is managed by an accounting software process that basically works behind the scenes. All you have to do is understand what is occurring.

For example; if I purchase $25.00 worth of office supplies I need to let the accounting software package know what accounts I want that transaction to affect. Another example would be if I sold $200.00 worth of products, I want the accounting side of the business know what I sold via what I purchased to sell. This last example is a bit complicated and I will save the detail for another article where you should take away the idea that you first recorded the purchase of the raw material, produced something from it, inventoried it and finally sold it for $200.00.

Bottom line is that accounting operations is of paramount importance to your small business. Often we rely on hiring individuals that say they know accounting but how do we know if those individuals know accounting when we aren’t too sure about it ourselves? There are many programs available to us as small business owners where we can learn the basics of accounting. Sign up for a seminar or take a class at a local college or university. Your small business is just too valuable to not understand it.

Article Source: http://www.articlesbase.com/finance-articles/operational-accounting-for-small-business-293793.html

What small business lack is the internal resources to raise finances. Commonly the businessman himself has to prepare all documentation inorder to avail finance from the banks. Alternatively, professional help can be availed for a cost. Incase you plan to do it all yourself, here are some suggestions:

1. Specify Your Needs in Detail- You should provide specific details to your bank as to where the money that they will be giving you is going to end up.

2. Provide Sufficient Guarantees- Provide sufficient collateral or arrange for a guarantor for your loan. In India, the government has put together a fund for guaranteeing the loans that are provided to SME sector. Here you do not require any collateral, but the amount is restricted to Rs 2.5 Mn (may be increased to Rs 5 Mn). Ask your banker about it or visit their website http://www.cgtsi.org.in.

3. Maintain a Good Banking Record.

4. Mention Your Credit Rating- You can ask CIBIL (Credit Information Bureau India Ltd) for your credit rating details. Visit their website http://www.cibil.com

5. Mention Your Past to Solidify Your Future- You should mention all your significant business achievements in your application.

By being honest and specific in your application and by maintaining a healthy financial past, you can look forward to a wealthy future.

For small business owners this would prove to be a challenge to have their business plan evaluated for future growth. Businesses that are engaged in new technologies or are involved in technology-oriented service sector can apply. Incase the challenge is close for further entries one can look for this space for other such challenges.

Such initiatives provide a platform to small businesses to explore and understand a larger vision through the mentoring process by industry experts. One can visit the Venture Woods for more details.

Small businesses are always looking for money to grow. Traditionally they would rely on banks for funds. With the rise in new concept businesses and with the rise in entrepreneurship among younger generation there is a growing incidence of private capital investments.

The above article posted on”www.livingoffdividends.com“, briefly outlines the check points before investing in any business.

Research the Market
Talk to people from the industry or those connected to the business
Financial number crunching
Management Profile
Sensitivity Analysis

From the point of view of Small Business owners these recommendations could be demonstrated through their business plans for any prospective investor.