The Impact of the Credit Meltdown on Small Businesses

The recent events in the US resulting in the credit meltdown have made one thing crystal clear – there was too much credit available in the market. Institutions merrily leveraged themselves to unimaginable levels which many economists have not hesitated to call it an organized fraud. When the bubble burst banks found themselves in a position many chit fund subscribers find themselves in when the chain gets broken. As financial giants tumble and take cover under the loving motherly canopy of the government, their risk managers are going to face a situation unfamiliar to most of them.
The motherly love of the government is soon going to mutate into the watchful eye of a matron as the entire fraternity busies itself to clean up the mess. After the cleanup we are going to find ourselves in a scenario where the available credit is going to be tightened significantly and all surviving risk managers and their institutions are going to be extremely risk averse. Growing economies will grow at a much slower rate and economies that are not growing will stagnate for a considerable time period.
Will this impact the common man? Or is this something that only the CFOs and the treasury benches of multinationals have to worry about? My sense and my fear is that this is going to impact the common man – and the small business – more than anybody else.
The new environment is going to be one where the credit supply is going to be extremely tight thus driving the cost of funds higher and higher. And while India has been insulated from the crisis, it will not be able to remain insulated from the collateral damage. The Reserve Bank of India will be involved in a fine balancing act – keep money supply restricted to contain inflation on the one hand while infuse liquidity in the market to ensure that the banks do not collapse on the other hand. It will have to ensure that there is enough liquidity – and confidence so that financial institutions keep lending to each other in the money markets. The central bank will also ensure that the lessons learnt in the international market are percolated in the Indian financial system before any damage takes place – no greedy leveraging for us please.
So, when there is a limited amount of money to be lent in the market, how does a bank pick and choose its borrowers? Needless to say, the top priority will be to service the existing blue chip corporate customers, their lines of credit and their term loans. While most corporate entities have already shelved their expansion plans on the fear of a slowdown and higher cost of funds, the banks will bend over themselves to woo and lend to the triple A corporate.
The mom and pop businesses or the ones where the owner-manager is the same are going to bear the brunt of this credit squeeze. Capital required for growth and in most cases money for working capital is going to be very expensive if at all available. The situation is not going to worsen further as India races towards compliance with Basel II norms of capital adequacy.
The story on debt is not looking good. But what about equity? Here again, the picture looks bleak. Foreign Institutional Investors are desperately selling in India to repatriate whatever they can salvage to their home country making the markets crash like nine pins. How many Private Equity firms will have the stomach to invest in unknown enterprises and at what valuation is something that even a tenth grader can guess. Further, of the millions of small enterprises mushrooming all over the country, a very small percentage has access to private equity.
How will the small enterprises react? With no collective bargaining muscle to talk to banks, most would be fighting on their own. Cost of funds will become a large component of the operating expenses and expansion plans will come to a grinding halt as companies discover that they do not have the resources to expand. Most would try to pass on the burden to consumers by increasing the prices and this is not going to go down well with consumers already weary with the long fight with inflation.
At the same time, some financiers are going to view this as a God-sent opportunity. Boutique firms and specialized financiers will get into a deeper relationship with their customers. Several of the customers will be offered unparalleled flexibility in the terms of repayment – at a price of course. Informal credit will boom and the unaccounted money in the parallel economy will be put to productive use. The money lender will flex his muscles once again as banks discover that there is no glamour – nor a guarantee of getting the money back – in lending to farmers and rural artisans.
NGOs and organizations in socially relevant business will probably escape unhurt since the money for their requirement comes from funds and investors who are alive today because they did not get sucked into the vortex of greedy leverage.People have time and again said that these are interesting times to live in. I agree, These times are certainly interesting as long as it does not happen to you. The day your business gets impacted, the day your banker pulls the rug beneath your feet, the day you feel you cannot pursue the growth as there is no one to fund you, the story is going to sound interesting to an economic commentator – but not to you.

Frauds

Frauds are bad. Everybody knows that, right? It is a breach of security, you are shaken to the bone and you suddenly realize that your processes were not sound at all. Someone took you for a ride. Bad.

But once the mess is cleaned up, the losses written off or the fraudster captured, the effect lingers on for a much longer time.

One of my earlier bosses had experienced this first hand. A fraud happened in the department that he was heading in a finance institution. He was not directly involved but had to take the heat of the entire organization. While not much of the money was recovered, he did a good job of redefining the processes and giving the comfort to the organization that now the things are in a much better shape.

So far so good. He went on to do a good job within the organization; was given larger responsibilities and given a plum job in a new area - the one where I worked. The poor chap still carries monkeys on his back. Will not trust anybody. Will not trust any document. Will not trust anything. Goes through everything with a microscope and talks in a language bordering on accusing people. All the time.

Needless to say, morale dropped. People stopped contributing. Several left. But he probably is not even aware of the effect that this is creating on the team members.

And so, that is why I say, frauds are bad. If they colour your lenses permanently, the whole world will look like a fraud to you.

Any medicines for my ex boss?

Coffee

Starbucks coffee is not yet available in India…..not yet. So, when I was in Singapore last month, I jumped at the opportunity to have this world famous coffee.

So much has written about Starbucks - their lovely coffee, the fantastic service and a customer oriented business model that is the benchmark of the industry. So, when I lined up at the counter to pay four times more than what I generally pay for a cup of coffee back in India, I was stepping into a haloed territory.

Sadly, the experience was very poor. The coffee was cold, and the waitress spilled it all over the mug while pouring it. So much for the core product and benchmark service. I sat on a table trying to stretch the experience, taking small sips of the already cold coffee but could not go beyond five minutes. And one strange thought kept coming back again and again during those five minutes – what was all this noise about? Value for money? No. Good coffee? Not at all. Cool experience? Maybe. But will I make this my regular haunt when Starbucks lands in India? Unlikely.

And then today morning I read in the business papers that the Starbucks chief was fired earlier this month. Was there any connection between these two incidents? Maybe. Maybe not. But it certainly gave me a “so there” feeling and a sense of vindication.

And lastly, I don’t know why Robin Sharma keeps singing praises about Starbucks all the time. Maybe I need to travel across the world more and keep sampling the coffee or need a pinch of salt for Robinji…..guess the latter is going to be much easier…. :-)

TEST

The first blog. Aptly named Test. This is what we have been taught to do. Test before launch. Pilot before before full fledged roll out. Makes sense.