What RBI’s recent ban means for businesses in the country
on Mar 16, 2018
Mother addressing her three children.
Mother to child 1, angrily: “You kept stealing the chocolates from the kitchen.”
Mother to all the children: “Now there will be no chocolates available for anyone!”
Child 1’s wrong practice and the mother’s inability to keep a check led to all the three children getting punished. This is essentially what the RBI’s regulatory norm can be relegated to.
Lehman Brothers went bankrupt not because it lost all the assets, but because it has no cash, no liquid assets and no ability to stay afloat. The financial crisis of 2008 induced by the US subprime mortgage made them the largest victims of the hard-hitting situation. They are the classic example of how policies and reforms in the name of regulation can end up ruining businesses.
Policies like reverse charge on GST is already hurting the cash flow in the country. RBI’s decision to ban LoCs and LoUs in the name of regulatory reform is another barricade for business, especially for SMEs and startups. It is not only anti-business, but it has also provided a mechanism to private lenders for increasing interest rates, thereby, hurting businesses even more.
Let’s put numbers in perspective. A company with a 10-crore revenue is looking to grow 20% YOY. Considering a cash cycle of 90 days, it will suddenly need Rs. 50 lacs more in cash. We, as SMEs, understand the importance of cash and use all kinds of cash-based abilities (from payment terms to Line of Credits) to grow our businesses.
Basically, this decision by RBI is a case of "I can't put my house in order. So, let me punish my customers." What makes the situation even worse is that RBI doesn’t even consider us as customers. We are but reduced to capital slaves placed in a system where government and its policies cater beyond the needs of business and economic growth.
We are in a Sisyphean Circle of endless capitalism!
Disclaimer: OMLogic is a debt-free and investment-free company. We haven’t taken any kind of loan, letter of credit or investment till date.