The path of least resistance is higher
The market is behaving as if it wants to head...
Learning the art of doing business from the hardworking and smart Lebanese businessmen. The 51st part of a series describing the unknown triumphs and travails of doing international business
As we entered the fag end of 1969 and having spent some six months in the Lebanon, we settled down well. We met a lot of Lebanese people of different walks of life and realised how hardworking and smart the businessmen were in being the conduit for promoting sale of goods from various countries to Saudi customers, who, in order to beat the heat came in thousands to live in the mountains of Lebanon with their families. Likewise, many came to spend their holidays to have fun in the snow-clad Cedar Mountains.
Yes, I came to know that Lebanon was one of the few countries in the world where one could live in the plains in the city, feel the mild and enjoyable winter climate and yet, in a couple of hours drive reach the mountains to enjoy the beauty of snow. The cedar tree, an important symbol in the centre of the Lebanese flag, I was told, had a religious reason too, in that Jesus Christ was crucified on the cross made of cedar wood! There were some rains too in winter in the city, but, tourists, who flocked to take advantage of the climate, would swim in the Mediterranean, enjoy the sun, and travel back to the mountains so that they could skin the next morning!
Saudi and other Arab countrymen would come down to Beirut with their families and enjoy their summer vacation, instead of going to Europe and facing the unpleasant truth of not knowing the language, whereas, in Lebanon, they were at ‘home’ and enjoy the hospitality at comparatively cheaper cost. It is at this time the Lebanese agents would also travel up to the mountain resorts and sell their wares. A lot of business was thus concluded, very often, we were able to meet the Saudi and Gulf buyers in the city when they came down from the mountains to do their shopping. The Lebanese businessmen had the advantage of being able to speak fluently both French and English, and acted as the ‘tarjuman’ or translator into Arabic, thus concluding business and pocketing a commission.
Many seasoned exporters, who stopped over at Beirut, en route to UK and Europe would invariably take the assistance of these agents to conclude business. Thanks to the arrangement made by Lakshmipathy, my predecessor, they would stay in the Commodore Hotel, get a special discount, as being members of the Council, and walk it up to our office in the Commestra Building. After my taking over, I continued this practice, and became friendly with all the folks at the front desk so that our exporters did not have problems. Though the Lebanese food had a number of vegetarian items to choose from, for the diehard Indian, we were able to guide them to visit Sirena Restaurant, owned by Bisham Verma and his Lebanese wife. Sirena was also catering to Air India.
Thanks to the support received from the Indian Embassy, and spearheaded by Ganga Lal Casewa, the world’s first All-Women Indian Cooperative Society was established in Hamra Street, Beirut, with Pushpa Dewan as president and Pratibha Patel as the secretary. This was the first point of cultural contact between the Lebanese and Indian women where a lot of cultural activities were organized.
We had regular visitors from Syria, who were keen to get supplies of agricultural implements, diesel engines, auto parts and a few other items for the construction industry. The problem, however, was the payment, as the Syrian government was not permitting direct imports, and most of the goods were routed through government organisations. They, however, permitted the imports, provided there was no outflow of foreign exchange. Merchants, being what they are, devised ways and means to short circuit the process by arranging for 365 days credit, and arranging for the remittance from Lebanon, which had no exchange control regulations.
The labour supply in Lebanon came mostly from Syria; thousands of workers would cross the Masnaa Border everyday by bus and share-taxis, work in Beirut on agricultural lands, return back once a week or so. The earnings, in Lebanese pounds or lira, were locally converted into dollars, etc, and this was bought at a premium for remittance to meet such imports. This practice was known to all, but as there was no objection for receiving remittance against exports effected,
The Reserve Bank of India (RBI) apparently did not make any ruling.
Our joint venture committee, meanwhile met regularly and other Indian expatriates like Capt Bedi (representing LN Thapar), Fakir Chand Karani (king of pearls who had a jewellery factory), Zaveri and Lalwani keenly watched the progress. I was able to get some good contacts and advice from these people, which I was able to use to advantage.
Beirut also boasted of the successful running of the AUB—the American University of Beirut, where a large number of students from Lebanon and from all neighbouring Arab countries were admitted. The faculty was both American and Arab and a number of businessmen had their wards here from Saudi Arabia. For the Arabs in general, for education purposes, they either chose the AUB or the Cairo University for higher education.
It was only through the regular visits of PD Patel of Sigil India, Kanthibhai of KB Thaker & Co and Muhammed of Kirloskar Oil Engines I was able to get a lot information and support in our attempts to gather knowledge of the Syrian market, which was practically closed due to centralized imports and exchange controls. We did have a bilateral trade with them, like we had with so many others.
As the market was developing, I was more and more in contact with exporters who were stopping over at Beirut. I gathered the importance of establishing a working relation with Saudi Consulate.
Although I had established a long working schedule for myself, averaging some 12 hours a day, working six days a week, it really became a nuisance when some exporters would stop over for a couple of days, have no contact with me or the Embassy, and then barge into the office and demand service on Saturday evenings. I tried my best to meet their requirements most of the times; but, eventually, decided that I will be out of circulation on Sundays at least to be with my family and kids. Yet, it was only much later that we could take them on site-seeing of places like Grotto or Jeita. Or, for that matter, Mamaari Castle, which was built by a Lebanese engineer and generated its own electric power by the artificial forced flow of water. The other picnic spot was Damour, where a small tributary of Dog River passed by, and from where we could see the Israeli soldiers in the occupied lands.
Lebanon was and is a great place to live with its wonderful people, as long as one kept away from religion or politics, which anyway was the keynote for success in peaceful living in this part of the world.
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts. From being the advisor to exporters, he took over the mantle of a trader, travelled far and wide, and switched over to setting up garment factories and then worked in the US. He can be contacted at [email protected].)
With the ongoing bids for becoming BCs approaching near zero percent, the boards of the banks should be made responsible for any outsourcing done by their respective banks through the common BC
The ongoing bids for becoming bank business correspondent (BC) in 20 clusters across India is getting to be more interesting with Vakrangee supposedly having won the bid for being the common BC for Rajasthan and Delhi at 0.02%. From the time Vakrangee bid and won the Maharashtra common BC bid at 0.48% to their recent successful bid at 0.02% (for Rajasthan/Delhi), they have not been alone. Fino’s and Strategic Outsourcing Services have bid 0.35%/0.19% and 0.11% respectively to be selected as common BC for Jharkhand/Chhattisgarh and Orissa.
What are the implications of very low cost BC bids that are now beginning to approach near zero percent? Can BCs really deliver at such cost levels? Are there any resultant concerns with regard to delivery of quality financial inclusion services through BCs? What should the regulators do in the present circumstances?
While questions such as these are very legitimate ones and need to be answered transparently, I personally think that banks must be held responsible for the success/failure of the BC model, whichever happens over time. When the microfinance crisis happened in Andhra Pradesh in 2010, DFIs (like SIDBI) and commercial banks feigned complete ignorance over issues like presence of broker agents, multiple lending, sharing of clients/JLGs, ghost clients and other frauds, etc. I simply fail to understand how DFIs and banks, who were supposedly undertaking due diligence visits to the MFIs (microfinance institutions) and their field areas (during and after disbursement of every tranche of loans to MFIs), could not spot these happenings over a two to four year period. And conveniently, many banks claimed that the crisis happened because the MFI promoters were perhaps pushed hard by the equity investors—but the irony of the matter is that the 2010 microfinance crisis in Andhra Pradesh would not have occurred but for the banks pumping huge sums of priority sector loans to the MFIs. Let us make no mistake about that!
Therefore, lest history repeat itself, I strongly feel that with the BC model, the board of directors of the various banks should be made (wholly) responsible for any outsourcing done by their respective banks through the common BC. And that is where the buck has to stop.
OK what does this mean in terms of tangible actions?
First, on its part, the Reserve Bank of India (RBI) must ensure that bank boards have a clear policy framework—with regard to outsourcing through BCs—that can be implemented in real time. And it is not a “cut and paste” policy document that I am talking about. I am referring to an outsourcing policy, with regard to BCs (and their sub-agents), where respective bank boards have thoroughly debated the pros and cons of various activities (to be outsourced) after understanding the attendant risks and benefits.
Second, the policy must clearly specify as to how the outsourcing through BC (and their sub-agents) will be overseen effectively by the bank. And without question, such an appropriate governance structure with properly defined roles and responsibilities on the part of the outsourcing bank should exist (in real time) as specified in the policy.
Third—given that it is the bank’s board of directors which has the overall responsibility for ensuring that all ongoing outsourcing decisions taken by the bank, and activities undertaken by the BC (and their sub-agents) are in keeping with its outsourcing policy as well as extant laws—the policy must clearly and unequivocally specify the role of internal audit in helping to achieve the above objective.
Fourth, the policy must specify appropriate (fall-back) measures/safeguards so as to deal with any situation (like the 2010 Andhra Pradesh MFI crisis) when the bank’s ability to comply with legal and regulatory requirements may be diminished in any serious manner.
In terms of specific issues, the board of directors of the respective banks should:
a. Review and approve the outsourcing policy of the bank with regard to BCs (and their sub-agents) and the risk-management policies (for such outsourcing) as recommended by senior management. This will also include approving the framework to evaluate the risks and materiality of all existing and prospective outsourcing to BCs (and their sub-agents) and the specific policies that apply to such arrangements.
b. Review periodically, but at least semi-annually, management reports demonstrating extent of compliance with the approved risk-management policies for outsourcing (to BCs and their sub-agents);
c. Approve any outsourcing arrangement with BCs (and their sub-agents) that exceeds the level of authority delegated to management;
d. Review periodically the content and frequency of management’s ‘status of BC outsourcing’ reports (prepared for the board).
e. Create a special board sub-committee with regard to outsourcing to BCs (and their sub-agents). Among other things, this sub-committee should ensure that:
• People responsible for administering the risk-management policies for outsourcing to BCs (and their sub-agents) possess the quality and competency required;
• The (internal) audit function regularly reviews operations to assess whether or not the risk-management policies and procedures for outsourcing to BCs (and their sub-agents) are being followed and to confirm that sufficient risk-management processes are in place;
• The periodic performance review of outsourced functions to BCs (and their sub-agents) also includes assessment of: i) the fact that the BC and their sub-agents (have complied with and) remain capable of complying with all the extant legal and regulatory requirements in the future as well; and ii) the continued relevance, and safety and soundness of the outsourcing to the BCs and their sub-agents; and
• The bank will not, in any way, be impaired in its ability to supervise the BC (and its sub-agents) at any point in time—both now and in the future.
To summarise, what is required is an outsourcing policy over which the bank boards have complete ownership. This is especially critical given that in the present scenario, some large public sector banks have expressed their lack of familiarity with regard to outsourcing to business correspondents (and their sub-agents). Therefore, even if the RFPs are ongoing, it still makes immense sense for the concerned banks to go through a proper process and develop a clear policy framework that guides outsourcing through business correspondents. And without question, it is the board (of the bank) that must have ownership over the policy and complete responsibility for its implementation. And the policy and its implementation in real time must be consistently evaluated in the light of what happened in Indian micro-finance in 2010. Without any doubt, we must learn from the 2010 Andhra Pradesh micro-finance and other crisis situations and make banks fully responsible and accountable for their actions/activities and outsourcing to BCs is no exception. And who better than the bank boards to do this in real time?
Ramesh Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—Indian Microfinance, The Way Forward—is the first authentic compendium on the history of microfinance in India and its possible future.)