Reserve Bank of India (RBI) governor Shaktikanta Das has a word of advice for India’s start-up community. “A word of unsolicited advice to these young entrepreneurs and start-ups: they should constantly evaluate the build-up of risks and vulnerabilities in their businesses,” Das said.
Acknowledging that many of them may already be carrying out such an exercise, he said a focus on risks should always be kept at the back of one’s mind for the long-term sustainability of any business.
Speaking at an event hosted by the Central Board of Indirect Taxes and Customs (CBIC) on Thursday, Das also warned businesses against building models that target short-term growth with scant regard for risk management.
“Business models and business strategies of individual entities should be conscious choices that are adopted following a robust strategic discussion in the board, after considering all relevant aspects. Businesses should avoid aggressive short-term reward seeking culture, without regard for the build-up of excessive risks in the balance sheet,” Das said.
The governor listed the common characteristics of some inappropriate business observed by the central bank, which include inappropriate funding structures and the build-up of asset liability mismatches which are highly risky and not sustainable.
Unrealistic strategic assumptions, particularly excessive optimism about capabilities, growth opportunities and market trends which may lead to poor strategic decisions that imperil business model viability have also been observed, Das said, as has an excessive focus on business considerations with neglect of risk, control and compliance systems.
In the last few years, institutions like the Infrastructure Leasing & Financial Services (IL&FS) group, Yes Bank and Dewan Housing Finance Corporation (DHFL) have seen regulatory intervention following bouts of aggressive and risky lending practices.
Das made a case for businesses to follow prudent accounting practices and provide transparent disclosures. “Sufficient information should be made available to the market participants to enable them to make informed judgments about the health and viability of a business entity. Creative and aggressive accounting techniques and policies tend to overstate financial strength and would be detrimental to the long term sustainability of a business,” he said.
The board of directors and the audit committee should ensure that the integrity of a company’s financial statements is not compromised in any manner. Entities with robust corporate governance and high transparency get rewarded by the investors with higher valuation metrics and are also able to raise capital at a much cheaper cost, Das said.
Das called on even well-established firms to adopt technology solutions if they wish to remain competitive. At a time when there is almost a real-time assessment of customer needs, Indian businesses must gear up to make the right investments sooner than later. “I believe the pandemic-induced changes in strategy, management, operations and priorities are going to stay. Therefore, the success of Indian entrepreneurs will depend on how quickly and efficiently they are able to make necessary adjustments in their business models,” the governor said.