No surprise that everyone of us , as individuals, struggle hard to protect our hard earned assets, like house property, land, gold ornaments, vehicles, bank deposits, household appliances so on and so forth. That struggle starts right from mobilizing funds (of course hard earned savings is a part) to acquire these assets, purchase decisions, best selection among the alternatives, utility value and yield, life of the assets, comfort and conveniences, etc.etc. Any loss in these assets be it in the form of damage, theft, decline in value will cause irreparable loss, both financially and psychologically, which, sometimes, cannot be compensated during life time.
Situation is not different when it comes to the assets of financial institutions. Here struggle starts with mobilizing funds. After mobilizing funds, it cannot be kept idle. These funds are to be utilised in creating such assets which are not only safe, but also yield enough returns to take care of the depositors’ interest and overheads. Of late, the topic of creating quality assets and maintaining them has become a matter of concern to every Banker, whether in Public Sector or Private Sector.
Increasing delinquency of assets is having many-faceted impact not only on the performance of the banks, but also on the economy as a whole. Soundness of the banking system, inter-alia, depends on the soundness of its assets. The NPAs of the public sector banks put together has crossed Rs.3,50,000 crores as of September 2015. Besides, heavy restructuring of specially the corporate accounts undertaken by the Banks before withdrawal of forbearance on such restructuring from 1st April 2015, is adding to the woes of Banks as these accounts may slip to NPA any time if not monitored very closely. The total restructured accounts have crossed Rs.3,25,000 Crores, thus putting the overall stressed accounts of the Public Sector Banks (NPAs plus restructured accounts) over 11%. Most of the banks’ NPAs have risen sharply during December 2015 quarter and few of the Banks have also turned red because of slippages and heavy provisioning. The statistics given in Table I throw light on the way the NPAs are heading over a period of last 6 years.
Grey Areas & Measures for Improvement:
Proper selection of borrowers makes a difference to a quality portfolio. Most of the times, the information mis-match leads to wrong selections. The information which the borrower has got about himself, his income, his activity, project and his property and the information which the banker has about all these areas, there is bound to be a gap. The information gap is due to the fact that the borrowers may not like to reveal everything to the bankers apprehending rejection of his case if some information so revealed does not appeal favourable to the banker. More the information gap, more problems banker is likely to face in due course. Though some gap is bound to be there, narrower the gap, safe it is for the banker. More informed decision always helps in protecting the asset quality. Here comes the role of proper due diligence. Due diligence is done to bridge the information mis-match. It is to be remembered here that rather than what sort of due diligence is done, ‘how’ it is done makes all the difference. Besides meticulous scrutiny of the papers/documents, the ability of the borrower to run the activity successfully and his willingness to repay should be the main focus points while considering the proposal.
Improper supervision at the time of disbursement:
Many a times, problem starts at the disbursement stage. Improper supervision at the time of disbursement leads to diversion or siphoning of funds. Post disbursement inspections have to happen immediately after disbursement to ensure end use. Further, constant watch on the operations of the account in case of running accounts like cash credit is a must to ensure there is no diversion of funds and that the activity is carried out on the desired lines.
Not watching Early Warning Signals:
There cannot be fire without spark. No account turns NPA overnight. They are bound to throw some signals in advance, may be in the form of slowing down operations, depleting stocks, not complying with terms of sanction, non-maintenance of assets/securities, disputes, pending taxes, manipulations in financials, borrowers avoiding meeting bankers, style of living etc.etc. The list is endless. The skill in the banker lies in identifying such signals in time and then acting upon them to find out the solutions. Most of the times, such signals, though noticed, are ignored for conveniences (?). These conveniences, when I say, it may be for fear of losing business, fear of getting strictures from higher ups, fear of some lapses coming to light, fear of transfer, and fear of losing promotions. As it is rightly said “a stitch in time saves nine”, little inconveniences in the initial stages would avoid great inconveniences at a later stage. If this is understood in right earnest, then, I think, proactively Banks will be able to catch up with the signals and take remedial actions in time.
Lack of seriousness in using Monitoring tools:
There are numerous monitoring tools available at Bank branches which, if used effectively, can help in monitoring the accounts. These tools may be stock statements, audit reports, various control returns, Credit Audit, account operations, inspection reports, financials etc. A little extra care in obtaining and scrutiny of these tools will help the Banks in knowing and analyzing the problems and then finding out the suitable solutions.
Under-utilisation of technology:
The operational software like finacle in some banks and applications like Lending Automation solution (LAS) used by the Banks render a great support in identifying the problems through various reports. It provides accurate data and information which helps in regular monitoring of the accounts. Tools like CIBIL, CERSAI, availability of information of properties through many State Government sites, information available through face-book etc. if used in all earnestness will play a major role in not only acquiring quality assets but also in guarding them.
Forgetting the fact that borrowers also keep a watch on the Bank:
Don’t ever forget the fact that borrowers do keep a watch on the activities of the bank, how the Branch Managers and Officers behave, how they carry on their duty, what is their approach to work etc. In other words, Bankers do the due diligence and monitoring of borrowers, similar way borrowers also do a sort of due diligence on Bankers and they also constantly keep a watch on Bankers’ activities. Hence, it is necessary for the Bankers to be professional in their approach and give a signal in their area of operation that they cannot be taken for granted. While a Banker is duty bound to serve the customers/borrowers, borrowers are duty bound to adhere to bank’s norms and also come upto the expectations of the Bank as regards to compliance with various terms of sanction and repayments. Most of the times, it is observed that borrowers take advantage when there is a laxity on the part of the Bank. Bankers need to shed “will do” attitude in order to protect the bank from the recalcitrant borrowers.
Above issues are only illustrative and not exhaustive. It can be said that around 50% of the borrowers keep up their commitments and meet their obligations in time. This segment is also sensitive and tries to protect their reputation. Bankers are safe in their hands. Say around 10% can be considered as tough for the banks to deal with. Rest of the (40%) borrowers can be either side depending upon the Bankers’ approach. As later 50% ( 10%+40%)cannot be identified in the beginning for strict supervision, Banks need to focus on entire 100% of the borrowers when it comes to selection, due diligence or monitoring with which the present menace of ‘Bad Assets’ can be contained to a great extent.
About the Author
B.Com, LLB, CAIIB
Chief Manager (Faculty)
Union Bank of India
Staff College, Bengaluru