The Nirav Modi, Dwarka Das Seth International, Rotomac and Simbhaoli Sugars incidences only define the tip of the iceberg. There are more betrayals in the books of our banks.
Steven Philip Warner President (VMPL) & Editor-in-Chief The Dollar Business | February 2018 Issue | The Dollar Business
To tempt men to buy diamonds for women, advertisements of diamond companies attempt to tickle their “blinded” hearts and gently knock in the nail of emotions that overemphasises the impact of the sparkling stone's power of "surprise". Sometimes though, the companies fall for their own advertisements. Blinded by the sparkle of greed and easy money, they end up surprising their bankers and lenders, while leaving another small crowd of 1.3 billion men and women in shock!
Recently, a few big nationalised banks were caught on the wrong foot, having allowed a few traders and exporters over a stretch of years to get away with loans won through fraudulent means. These borrowings included high-valued credit facilities obtained through corrupt practices. If you are reading this and are an Indian, you would have by now, heard about how a few so-assumed crony capitalists got away with nation looting! And while everyone – from CXOs to garbage collectors – must be wondering how lucky or unlucky the accused now are, what many aren’t bothered about is how this makes “India” – yes, the entire nation including you and me – look shabby and corrupt in the eyes of four-fifths of world population.
As an outsider, when you analyse a nation for the purpose of doing business with it – whether it be decision-makers on FDI at an MNC or a small-time foreign buyer who wishes to import from India – you view the system as a whole. So that means, a financial system that couldn’t auto-highlight theft or anomaly amounting to over $2 billion at some of India’s largest PSBs is bound to be downgraded perception-wise. And with that the entire business culture alongwith infinite versions of it, get downgraded.
Reputation is hard to build. But in a matter of a few weeks, a couple of billions dollars reported in loan default and bank fraud, pulled down many notches the reputation of a nation whose GDP last year was nearly 1000 times that. Reputation is also that easy to destroy.
Many-a-time, when the question of a nation’s reputation (in terms of being corruption-free and the strengths of both its financial and ethical systems) affecting exports and even imports have been raised, people dismiss it as “hardly anything” worthy worrying over. “Should Indian exporters be worried about US government’s temporary shutdown?” is probably a question they feel has a similar weight. Reason – they often miss what lost reputation adds up to. Just like lost time. Every negative physical indulgence in your life (could be high sugar intake, smoking, excessive alcoholism, etc.) adds up to ageing. And we ignore it to begin with. But it’s not long before “premature” old age strikes. And then old age usually has its way of demanding attention for being invited early. The case could be the same with India’s reputation.
Such incidents add up and before we realise, for our exporters, dealing with foreign buyers may become tougher than imagined. Why wouldn’t a foreign buyer want a sustainable relationship with a “trustworthy” Indian supplier. But for all that he may know, that Indian exporter may have obtained funds from the banking channels through inappropriate means. And when trouble strikes the Indian exporter, the foreign buyer may be at the losing end too!
A nation’s reputation matters in foreign trade. Reputation could come in many forms. It could be about how foreign investors are treated. Or it could have anything to do with its banking vigilance system, quality of ports and infrastructure, quality of produce or even how bribe-free its system is. But far bigger than the question of how much of India’s reputation is at stake due to recent events is whether the dirt was just as publicised. Here’s the answer. The Nirav Modi, Dwarka Das Seth International, Rotomac, and Simbhaoli Sugars incidences only define the tip of the iceberg. There are more betrayals lying in the books of our banks. In an RTI response, Reserve Bank of India (RBI) data stated that our PSBs had accumulated (reported or not) about 8,670 loan or fraud cases totalling nearly $10 billion until FY2017. (That figure of course doesn’t include much of the recently exposed scam of $2 billion.)
"It's not easy to do away with the negative effect of your country's bad reputation in exports. Reason - your market's reputation can significantly impact your negotiation power on the pricing front."
You can debate that much importance is being given to recent bank-fraud or default cases due to them being widely reported and debated. (I’m not sure how many reading this would be aware of the Rs.7,000 crore plus fraud that had affected over 14 banks in India by another diamond jeweller Jatin Mehta of Winsome Diamonds and Jewellery – formerly known as Su-Raj Diamonds and Jewellery; the case had surfaced four years back.) But such incidences do affect even Indian banks’ attitude towards lending to MSMEs, especially to exporters in the diamond and jewellery business, which has been under the scanner of late owing to incidences of widespread multi-nation ‘round-tripping’ of consignments by exporters to inflate their balance sheets. Credibility issues will hurt exporters at both the borrowing and sales fronts, especially if banks decide to make their approval processes for MSME units excessively rigorous.
Another area where such damage to reputation will hurt India is reduced FDI, especially across sectors where such discrepancies are reported. “The worst effect of financial frauds is on FDI inflows into India” states an Assocham report titled ‘Current fraud trends in the financial sector’.
India is already vastly unpopular across the world as many studies show.
The Reputation Institute (often heralded as the world’s leading reputation-based research advisory firm), in its 2017 report has categorised India as a market with “weak and vulnerable reputation”.
As per The Global Corruption Barometer for the Asia Pacific Region released by Transparency International (a globally-renowned, anti-corruption global civil society organisation), India had the highest bribery rate amongst 16 APAC nations surveyed. 70% of those surveyed in India had reported having gained access to public services by paying a bribe. In fact, Transparency International’s Corruption Perception Index 2017 released in February this year (which ranks 180 countries based on the level of public sector corruption in 2017, according to businesspeople, journalists and civic organisations) has a significant point to make. As per the study, India is more corrupt than Serbia, China, Lesotho, Burkina Faso or even Sub-Saharan Africa. And compared to recent years, India was “more corrupt” as a nation in 2017. That for you is the world community's perception of India, its policy system and indirectly, the way businesses operate in our country.
Kroll Inc., a US-based intelligence and investigation firm, in its 2018 Global Fraud & Risk Report stated that in India, given the "relatively close nexus between companies, politicians, and bureaucracy in India, businesses often get pushed into practices which are potentially inappropriate". And this makes foreign and inside investors unsure about "whether the costs and performance of a project reflect its true health" and that the wide "difference between what is reported versus the actual performance of the project casts doubt on the overall integrity of the quality and financials of a project". For those who still wonder whether a country’s reputation really matters to an outside investor or importer, you have your answer there.
For those who may even be questioning how bad news in one sector cannot affect perception of foreign buyers (and investors) about another sector in the same country, there is plenty of research to counter this view. According to a Harvard-Chicago combined study titled, ‘Collective Reputation in Trade’, “Understanding how reputation spreads within an industry or a geographic area is important for informing development and trade policy. Quality shocks about one firm’s products could affect the demand for related products from the same origin country.” Not just a particular occurrence, perception of a certain nation’s exports quality is also transferable from one industry to another. More so, countries with higher perceived corruption levels and lower reputation are expected to have a higher default risk, which is a key factor to consider while signing up with a buyer in foreign trade.
There is a big effect of reputation of a market on the final prices its exports can command. In a joint research paper by Leuven-based LICOS Centre for Institutions and Economic Performance and Paris-based Le Groupe d'Economie Mondiale de Sciences Po, it has been concluded empirically that, “a shock to (a country's trade) reputation has a downgrading effect, reducing the (exporters') capacity to participate and benefit from trade”.
Shocks therefore don’t help our exporters.
On the contrary however, we need to understand that news is about what happens and not what doesn’t. And what is reported, is “often” negative; it's purely meant to feed the irrational pessimism and interests of those who want to hear what has gone wrong. You will never read a headline about a company or an exporter having made timely payments of even thousands of crores of bank loans. Even if you do, the excitement about the news is subdued.
World buyers have shown no immovable loyalty to Indian exporters. Even today, the only differentials for the foreign buyers are quality and price, backed perhaps by some growing reputation of Made in India. We can avoid incidences that scare them away. We should. And that will happen if incidences like Nirav Modi, Dwarka Das Seth, Rotomac and Simbhaoli Sugars are treated as reminders of problems in our financial and economic systems and we implement effective measures to solve them for the better good of the ordinary Indian citizen and exporter. Believe me or not, but the world does care about India’s reputation. As for foreign buyers, when it comes to dealing with Indian exporters, we’d like them to be careful, not doubtful.
They care about our reputation. And we will never achieve a trading world with India at its centre with poor reputation. Just because you can swim doesn't guarantee your survival in the oceans. Similarly, an identity of being non-corrupt doesn't guarantee a country's exporters success in foreign trade. But it gives them a better chance at it.
India's reputation is a strategic compulsion for its exporters. Period.
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