Black Data: Manipulative and Misguiding

Post independence we have heard almost every day about black money i.e. Money which is in circulation without any record or tax payments. Such money is earned by legal and illegal ways. In recent times we have come across about the Black Data. Data which are not correct or adjusted suitably and published by the government/corporates/Individuals or Business entities to show the achievements or hide wealth. I define such data and statistics as 'Black' as these are also manipulated and unauthentic. Such data are later replaced but the basic purpose of misguiding the public is served. Being short memory, public does not care about the correction at later stage. Black data are also generated by corporates, Institutions, Insurance companies and Banks. The whole purpose of such black data is to cover up the failures or show better performance for time being. In my view this is also unethical and more harmful than black money. Recently the data manipulation was used by stock exchanges to prove the rally in share market and show sharp increase in index by replacing the non performing shares with new better performing shares.

Banks have long been hiding their poor performance under ‘black data’ causing severe damages to the country. Insurance companies mainly life insurance are notoriously manipulating the claim data. Even the GDP growth figures, IIP, Per Capita Income etc. have been adjusted in last five years. Many times the Base is changed for this purpose. Such change in basic parameter depicts rosy picture and misguiding message. Industrial growth and many other national figures are manipulated and fall under black data.

I suggest that black data generation should be controlled and not encouraged.

C P Jain

How Banks Un-ethically benefited with Rate Cut

The Banking system of our country is increasing continuously with the sustainable growth in GDP of the country. Currently the Banks have total lending of almost USD 2 Trillion or Rs. 134000 Billion which is quite significant. Any fraction of amount adjusted or retained in the banking system may look meagre percentage wise but in terms of amount it is abnormally high.

When NaMo govt. came into the power, RBI Lending rate or Repo Rate in technical terms was 8% which is currently reduced to 6.50% after lot of persuasion and requests.

In our our country major players are public sector banks covering about 80% market share and the balance 20% is shared by host of private banks including foreign banks. Currently our banking system consists of 26 public sector banks, 20 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks, in addition to cooperative credit institutions. These banks and institutions handle about $ 2 trillion funds.

After assuming the office by NDA, the interest rates were reduced from 8% to 6.50% by RBI. Indian banks collected huge sum in the form of Jan Dhan banking at dirt cheap cost and FDI also improved during this short tenure of 2 years.  Despite all these positive factors coupled with infusion of about INR 25000 Crs. to the Banks, the interest reduction is not passed fully to the borrowers who were genuine owners of this rate cut. As per the data available, the banks passed the rate cut benefit in the range of 0.60% to 1.00% and retained the remaining benefit with themselves. Thus Banks retained more than INR 100000 crs. or USD 15 billion and improved their own books by hiding the inefficiency.

Had this fund passed on to the borrowers many industries would have survived and grown further. Many small units could have been saved from getting into NPA or atleast this fund could have been properly utilised for the various government schemes for upliftment of poor and needy people. I wonder had this margin not adjusted in the books of the Banks, the NPA reported would have been substantially higher.

Such practice is not ethical and damages the business environment of the country. I am not sure under huge guidance and support, such decisions were taken. On one side NaMo govt. supports growth other side their own establishments are killing the plans. Is n’t it pathetic?

Above calculations may not be accurate but any time these are eye openers. Considering the total lending assets of the Banks of almost $ 2 trillion and RBI cut in the Repo rate in following manner during last two years after assuming the office by NaMo govt., the amount comes at very high level. Irrespective to the accuracy of the amount, the matter is quite serious:

15.1.2015    0.25%  ( In first seven months no rate cut.)

04.03.2015  0.25%

02.06.2015  0.25%

29.9.2015    0.50%

05.4.2016    0.25%

C P Jain

INDIAN BANKING SECTOR: ISSUES & SUGGESTIONS IN REGARD TO STRESSED ACCOUNTS

There has been lot of talks on growing NPA cases in the Indian banking industry.  I wish to share my views in regard to this which need to be addressed at the earliest possible .

1. ARCs should be scrapped with immediate effect and an enquiry should be initiated as to how many accounts have been revived or reconstructed by them? ARCs have caused tremendous loss to the economy as their sole purpose was to encash the dying units and avoid the accountability of the banker. No more assignment of Loans to ARCs unless they come out clean. If an unit is acquired by ARC and the same is not revived within 3 years, the same shall be returned back to the Bank. There is no point in paying the management fee to the ARCs for no achievement. There are many other flaws in ARC rules and regulations.

2. Appraisal Systems should be revisited. There are lot of flaws in the current loan appraisal systems. Bankers have only developed the machines to make better presentations not the content.

3.  Forensic audits done in the past and also being done currently are by the agencies/ CA firms appointed by the Bankers themselves. In this situation, the independent views can’t  be accepted. The forensic audits must be carried by the CA Firms/agencies empanelled with SFIO/CBI/EOW or any other government agencies.

4. Accountability of the bankers in case of defaulting accounts should be ensured along with the borrowers.

5. Bad Loan Asset Bank shall be created to handle the distressed assets and sincere efforts should be made to revive the sick units.

6. Sector specific banks are need of the hour. What is logic behind 28 Banks owned by the government competing each other in same market and trying to prove better than others. This way these bankers are creating borrowers’ market and ending in huge losses.

7. Banks should be better used for their infrastructure. They are generating deposits, carrying out business operations and hence why they should be allowed to lend the money they collected against the sovereign guarantee of the GOI. Is it not funny that the banks using the sovereign guarantee of the GOI become owner of the public funds and then deploy on their own.

8. No banker can be expert in lending to all the sectors at a time. There is urgent need of segregating the sectors. It is surprising to see that one banker manages all the sectors on his own and tries to prove himself expert of all.

9. Most of the NPAs are towards the loans sanctioned between 2008-12. What different was done during this period so the loan got bad to this extent.

10. Strategic Debt Restructuring (SDR) policy is good but needs to be revised urgently. The SDR policy should not fix the time of exit with in 18 months. There should be minimum 60 months’ time limit.

11. In case of closed units/sick units, the efforts should be made to revive with the help of employees. Employees shall be offered equity in the units at the cost of promoters to revive the units. This will give employments and ownership.

12. Loan Settlement process should be smooth and short.

13. Credit Information Bureau Ltd. (CIBIL) has helped a lot in grading the borrower but it has also acted as big hurdle for lending. The banks should be flexible enough in regard to CIBIL particularly for NPA cases.

14. Accounts passing through the stress and currently falling under SMA-1 or SMA-2 should be extended immediate support so they can be saved from falling under NPA.

15. So far the consultants are blamed for huge NPA and corruption but the fact is that consultants can help in revival too. Bankers generally lend funds with the support of consultants but settlement or revival are done without any consultant. This is fueling corruption and covering the accountability. If , an advocate can represent the client in court of law why a consultant can not represent to the bankers? A panel of consultant shall be made by RBI to take the services.

Sir there are many such suggestion which need immediate attention to handle the NPA issues. 

C P Jain

BAD LOAN ASSET BANK

Currently hottest topic in Banking industry is NPA.  Lot of discussions are going on about why this happened, How this happened and What should be further course of Action.

One thing is crystal clear that the Banking sector in India is passing thru a very crucial phase and need to do a lot to come out of this situation. Another fact is that the amount of such default account is very high. Considering both the facts in  mind let us discuss about the ways to handle this mammoth issue. Typically such accounts are written off and recovery is very less. The route to assign such loans to Asset Reconstruction Companies (ARCs) has proved more disastrous for the Banks and the Economy of the country.

One of the suggestion to handle this chaos is to create a separate bank off such bad accounts so each and every account can be looked into cautiously and revive if possible. Also such Bad Bank will have experts of settlement, Revival and Recovery. Another suggestion almost related to this can be creation of Asset Bank which owns and monetise each and every part of the Asset of NPA accounts like Land, Building, Plant & Machinery , Brands, IPRs, Technology Expertise and above all Human Resource. Such Bank can not only prove a good deal in long run but also help in retaining the expertise and invisible assets. If this idea is really put into place there can be a good possibility of recovering the dues. If such assets are managed by the banks directly in long run they would definitely be able to revive or recover the dues. Asset disposal if done properly and slowly without getting panic, will generate substantial recoveries. It is similar to creating a separate bad bank where the assets can be Parked and serious efforts are made to solve the issues. Government should seriously give thought to this idea, after it is question of public money. To extract better monetisation, separate divisions for visible and non-visible assets can be created. Asset Bank having technology, brands and IPRs can prove to be a great venture in long run if handled properly.

C P Jain, FCA

SECTOR SPECIFIC BANKS ; NEED OF THE HOUR IN INDIA

It is very important to understand the current banking industry’s way of working. Major banks in the country are under the ownership of the Government post nationalisation. These are public sector Banks having highest exposure to lending and sourcing. Such Public Sector Banks are around 28 and some financial institutions too which are all placed in a ring of fighting with each other to grab the business. Then there are some private and foreign banks giving tough competition to the PSBs. Like this in a basket of around Rs. 90-100 lac crores there are approx. 60 players who source money by way of deposits and lend to the entrepreneurs.

These 28 PSBs fighting with each other to grab more and more business just to prove oneself better than other. There is severe competition due to continuous flow of money in their kitty by way deposits from public and government. With huge infrastructure, large army of bankers, luxurious and respectable life, these bankers carry huge money power all at the cost of the public money. Although they are trustees of the public and government money but this is only theoretical principle nothing really visible in practice. The fierce competition to prove one up and move further in the career has pushed the banks in bad lending. These bankers lent  money left right and centre without proper analysis and viability checking. Now suddenly all fall down. One of the key reason is that they were not expert enough to lend like this into all sectors. Out of large number of borrowers some about 5-10% defaulted. These bankers were presuming that they are expert in lending to every sector as they understand the sector better than any body else. 

Had there been skill development sector wise and the focus approach, the competition would have been very healthy and such huge loss of billions of rupees could have been avoided. Since all the banks are government organizations the basic structure need to be modified. Lending and sourcing of funds should be segregated. After all the banks are trustee of public money. Even lending can be further divided into two segments I.e. a) Sanctioning & monitoring of loans; and b) disbursement of loans. This way the banks can play active role in sourcing of funds by way of accepting deposits, operating the banking accounts and also in disbursement of funds. The other segment of sanctioning of loans and monitoring may be handled by sector specific arms of the government who will have better focus and knowledge of specific sector. 

The fund allotment to various sectors can be monitored by government under the guidance of experts from various sectors, Government policies, Planning and priorities. This way the banking scenario can not only be changed drastically but we can have strong and vibrant banking system in the country.

CP Jain

Most Popular Loan Default: King Fisher Airlines

One of the most popular NPA issue these days is of Kingfisher owned by Mr Vijay Mallya. In fact it has become brand of all NPAs. Whatever be the reason for this episode of NPA but it has touched the general public too who feels that businessmen have cheated the banks and siphoned off money. It may be right  to some extent but in my view not all the NPA are same. KFA issue is different where the funding was done considering the brand valueas major security, which is invisible. Bankers were well aware of the assets they are considering to secure the loan to this company. KFA matter is also victim of the market situation to some extent as all the airlines were in loss when this company got defaulters. Bankers were not worried considering the other flourishing businesses of the group. It was only of late that the bankers felt need to act but by that time it was all over. This episode has left many teachings behind i.e.:

1. Circumstances change every day , if some thing is powerful today it may not remain same tomorrow;

2. Intangible assets are intangible and most risky when in need as these vapour or build as per the situation of the company. It can't be otherwise. I have not seen any incidence where the company is going down but the brand or goodwill is going up. When taking it as security, we think reverse which is not practical;

3. The core principle of the lending should be business viability not the other verticals of the group. If the business is not profitable, be cautious. Other group businesses are going to make the matter complicated when needed. Also, the lending seems to be substantially affected by the political connections otherwise no banker would lend money to stressed account.

4. The monitoring has to be improved. For the large borrowers, even if they are highly reputed, cautious approach should be followed. They may feel offended but money is money. Bankers should not mix the personal relationship with the business. After all it is not your money.

5. Last but not least, recovery actions should be prompt and not delayed otherwise it will be too late to recover money. If lenders are hand in glove with the borrower, who will save the institution. “Jab Manjhi hi Kashti Duboyega, kaun bachayega.”

There should be thorough inquiries in the matter and honest actions should be taken otherwise we will continue to experience many such episodes.

Such cases are being projected as if only one side is in fault and other side is pity who does not know what to do. In my view for quite long time in almost all the parties and functions, the lenders were also participating, they knew the usage of funds, they were aware of the stress in the company and still sanctioning new funds just to keep the books in good shape. There may be various other angles of the case, reasons for entertaining to this extent, loose monitoring, poor appraisal and extra ordinary favour to this group, but it is of no use now. Fact remains that once again lenders have been exposed about their way of working, favouritism, poor knowledge, stubborn approach, egoist attitude and so on. Legal system is again being burdened to act and help the lenders to recover the money. Are not they equally responsible for this situation. They can't hide behind any curtain of ignorance. They deserve equal punishment. After all, they are the trustees of the public money. They are being paid handsomely and they enjoy lot of luxury and privilege.

C P Jain

Overhauling Public Sector Banks in India

The Government of India is mulling various ideas to clean up the mess in Banking Sector. Although is not new or unique in our country. NPA are prevalent across the world. China is facing huge NPAs, USA  Banks have to write off huge amounts every year for bad accounts. NPAs are integral part of the banking sector. Uniqueness in our country is handling of such issues. Media trial, government actions on wake up, public perception, Legal angles and social factors make bank defaults unique subject in our country. The compulsion of action in such cases once it comes into limelight forces the authorities to act in hasty manner and mostly in wrong and undesirable manner.

Suddenly authorities wake up and decide one fine day to clean up the books. Was it known that books are not clean? If the books are really not clean since decades then give it some time and clean up in such a manner that banks do not loose further. Banks decide to propagate the defaulters, black list them, publish their names and photos, behaving arrogantly with the borrower mainly to small borrower who is genuinely defaulter, Abusing in meetings and threatening the borrower like a street gunda will not help the banks in recovering the dues. Please keep in mind that you, the bankers, are also not clean and honest. Your greed to become the Chairman, Executive Directors, Directors, various promotions were not without any self interest. If Pandora box is opened, these bankers may also face the heat. If recovery methods are not improved, public money will go in drain.

There was a serious talk going on about creating a new Bad Bank to take care of the NPA accounts, but still nothing has come out and may take some more time. Recently, the news is about merging These PSBs into 8-10 Banks. I am strongly against merging in this manner. Reducing the number of PSBs without any change will only be a window dressing. Nothing else will change. We should rather thing on different lines. We desperately need sector specific banks. There is no need to have 10 jack of all banks instead of 10 specialised banks. Sector specific banks will be better equipped with knowledge of market scenario, macro and micro developments, focussed approach and sector specific requirement. Presently we use same stick and parameters for all the sectors which has caused huge damage to banking sector. Also we need Banks for start-ups, Bad accounts, Equity support, long term investments etc. Simply merging or demerging will not at all help.

CP Jain, FCA 

Public Sector Banks in India : On the Cross Roads

PSBs in India are passing through a  very typical situation right now. On one side their health is serious due to mounting NPAs and on the other side they are instructed by their guardians and owners to look sexy and beautiful irrespective to the fact that this will not be possible even with heaviest make up. In the race they were made to believe that whatever needed will be given to them but they should look beautiful at any cost. Their clothes had torn off badly , spines are broken and blood haemoglobin is too low. Cholesterol in the form of bad management and NPAs have chocked the heart arteries.

In this situation, they have been asked to do whatever needed but look clean. What they can do at this stage where even they don’t know where they are standing today. Diagnosis is not perfect, they dig into one issue and end up to ten other issues. Budget of 2016-17 was expected to take care of their misdeeds and infuse huge sums but this too seems distant possibilities.

It is known to all now that despite rebutting by them, all the PSU banks are passing through a very bad phase and pulling on through window dressing in one way or the other. This window dressing or make-up has been earlier allowed by the same authorities who now forcing banks to show the real face without make up. what has prompted the authorities to suddenly pull the plug? Was it more advisable to go in phases ? what was hurry? Why suddenly a patient walking with the help of crutches  is asked to throw away and walk without any support and show as if they can run too. This may create huge image loss to the Indian banks and also the global rating. Banks if show the real picture will not be able to withstand amongst global banks. The repercussion may be too dangerous for international business.,

It can not be disputed that banks should clean up the books but suddenly doing so can put them from crutches to stretcher. It needs to be done in phases so the damage can be controlled., Also there is dire need of skill development, internal controls, systems and procedures, improved methods of appraisal etc which will take their own time.

The number of PSU banks in India are too many which is creating competition and thus run for business . Some of the banks are looking healthy just because huge government funds are lying with them. It does not mean they are healthy. If we look at such banks after removing the government business and funds, their health is more alarming. Banking system should be overhauled. Merging  of banks and reducing to maximum five banks will lead to better results. In fact we need PSU Banks sector specific which can better understand the business and help country to grow. 

CP Jain

BAD BANK: Will It Work in India ?

India, our country, is currently having NPA/Bad loans of more than 4.50 lac Crs. Which is only a guess. It may go much higher if really the books are cleaned by the Banks. To combat this situation of reporting the truth, there are various options flying in the year. Some of the popular suggestions to the GOI by the high profile finance advisors are :

a)      To avoid to clean the books completely in one go. It may damage the books of the banks to such an extent that they will not be able to stand again;

b)      To sale the assets to ARCs at liberal terms so at least some assets can be shown in the books;

c)      To create a separate bank called Bad Bank for NPA assets and transfer all such loan accounts to this bank;

d)     To liberal the parameters of classifying an account NPA for some time so the economy can be revived;

In past lot of loan accounts have been assigned to Asset Reconstruction Companies (ARCs) but this was done mainly to:

a)      Avoid the accountability and save the skin of the lenders;

b)      Benefit the selected cartels; or

c)      To show the books much better than reality.

Hence the purpose was not served as far as the banking institution or the borrower is concerned. In this situation, it would be difficult for the lending banks to convince about the option of assigning more and more loan accounts to ARCs. One day it may become a major finance scam of the country.Another option of getting liberal or slow in cleaning the books may not be official but practical decision which will be never known to the public. Banks never accepted that their books are not showing true picture. The loan accounts were window dressed and to the maximum possible extent reported as performing asset. I surprise why this word of “cleaning of Books” came into news suddenly. Does it mean that the PSU Banks now admit that so far the books were not clean?

So, the only option left to exercise is the creation of a special bank to handle NPAs/bad loans of all the PSU banks. This bank is being called as ‘Bad Bank” which will be flooded with all the NPAs . The concept of bad bank is not new globally but in India this can be a new experiment. RBI Governor has expressed doubts about the efficacy of such a bank. In my view the establishment of Bad Bank can be a good idea if handled properly. Just imagine a bank with all the stressed accounts having expert team of managing , reviving or recovering the loans. Such bank can help a lot in revival of the NPA accounts and save the livelihood of millions of people. Recovery should not be the only focus otherwise it would become another ground of corruption. Such banks should also have experts from all the sectors, positive attitude people with a zeal to help in revival of the bad loan accounts. One of the major reason of getting loans bad is slow decision making, lack of field expertise, highest level of EGO, Greed, Corruption, Political nexus etc…etc… However, creation of such bank should not be taken as shield for fixing accountability of the lenders.

I strongly believe that there is no harm in experimenting this idea of creating a Bad Bank. I am sure GOI will serious give thought to this and save the public money going into drains. Also it may save the jobs of millions of poor people. 

Poor Loosing PSU Banks: Way Forward (Part-II)

In continuity of my earlier post, I would like to take the discussion further in the matter of ongoing mayhem in the public sector banks. In the third quarter Banks are estimated to show the losses upto Rs. 25K crs. This is after registering incomes from various verticals. Although the banks have supported Indian economy to grow and sustain post-independence, but this can’t be the argument to give clean chit to the bankers. Bankers should be made accountable for such huge amount of losses. By the way this is not the end, rather it is beginning of swachhta abhiyan and we may see more such losses in next 3-4 quarters at least.  The accountability issue is a very serious which if taken seriously, it will affect the confidence of the bankers to do the business. This does not mean that bankers should be allowed to go scot free. If the lending in last decade mainly from 2008-2012 is investigated properly, it may open Pandora box.  Bankers have allowed themselves to be affected by the worms of greed, corruption, political pressures and power hunger.

Bankers, mainly at higher level, always behave like bureaucrats. They are not easily accessible,  never entertain small entrepreneur and never be on ground. They rarely try to listen form the outsiders (It hurts their ego in most of the cases) and information sharing is almost nil. Market reference from the closed door can never be authenticated. It is beyond their level to seek information from the unorganised sources. Bankers depend on a very selective source of information which may be biased too. The appraisal system is poor and outdated, lack of training, frequent transfers and promotions, lack of accountability policies and lot many other factors have contributed to these huge losses. Bankers in the race of promotions take short term view of serious issues of the clients and pass on the bucks to the incoming officer. It is almost impossible to catch hold a banker once he reaches to GM level (even DGM level in many cases).

In this situation when the house of lenders is not in order, what is the logic of giving them more and more public money. The impact of losses in the banks is on other PSUs also like LIC who have invested (by choice or pressure whatever) heavily into these banks.

There is urgent need to relook in the manner of lending by the PSU banks otherwise, hard earned public money will continue to go in drain and we will be cursing the borrowers only. We should find out :

    a)    How much money has GOI given to the bankers so far to keep them going after nationalisation?

       b)    How much NPA has been written off by all the PSU banks so far? 

       c)     How many senior officers have been made accountable for these losses?

      d)    How many NPA accounts have been revived by ARCs in last 10 years, if not then who is benefited ultimately?

      e)    How banks can assure that no new loans will get bad ? If they can not guarantee why they need money just to throw in drainage?

       f)     Whether banks have improved their capabilities now, if so what steps they have taken?

More in next post.

Poor Losing PSU Banks: Way Forward

In my one of the post shared on 6th November, 2015 , I had expressed my views about the banking industry registering huge losses in the coming months. This has been proved right currently when almost all the banks including big banks like SBI, PNB , BOB etc. are reporting huge losses in the third quarter of the current financial year. Bigger the Bank, higher the loss.  In my view all the Public sector banks taken together will report loss of around Rs. 25000 crores in this quarter. Real picture will be cleared by the end of current financial year after closing of the books.

Although this is not a new development to the people connecting to Indian finance world that the banks were reeling under huge losses, what is really commendable is the steps taken by the new Government led by Mr. Modi and RBI Governor to clean up the books of the banks and bring them to the reality. The banks may have to bear further hits in coming some more quarters. It is always good to have clean books showing real picture, what is unfortunate is the way this was pulled on for such a long time.

Ultimately PSU banks will be adversely affected and so their capabilities too. A lot has been said about the reasons for this situation but to move forward, the GOI should take drastic painful steps which can not only help them in reviving but also ensure that no such repetition happens in at least near future.

In my view there is no need to get panic but the need of the hour is to take 360 degree view of the situation. The banks will blame the errant borrowers , poor economic situation and everybody else except themselves this situation. They will continue to remain holy cow cursing the borrowers, politicians etc. There is need of honest introspection too as the bankers are equally responsible for this situation. I don’t mean that borrowers are not responsible. I would like to share my views in regard to the future corrective action plan :

1.   GOI should not infuse a single penny anymore as this will further drain out. The problem is not in economy or borrower or banker to some extent, it is more with the appraisal system, knowledge built up and attitude of the bankers;

      2. Bankers have to get themselves well equipped in appraisal of loans, shed their highest level of  EGO and ready to listen the others;

      3.  Till they are well equipped, accountability fixed and customer friendly, lending should be fully controlled;

      4. Banks are in business of lending and accepting deposits but they are asset heavy carrying huge assets on their shoulders which may be disposed off so that the liquidity is retained;     

       5. Loss  making banks may be re-privatised again as this is the harsh truth that lending is not the baby of bureaucrats too;

6      6.  Private players shall not be given any assets of the bank as these have been created by hard earned public money but the business of lending may be definitely outsourced;  

       7.  Banks should gradually exit from the direct lending  as this has caused huge holes in the pocket.

More views in next post.

Forensic Audit of Stressed Accounts: Why So Late?

Forensic audit is one of the tool with the lenders to use against the borrower once the account gets into the default territory. This is one of the most sought after procedural tool with the lenders which is more blunt than sharp in the current banking procedural system.

Forensic audit is an assignment given to the trained auditors to opine if anything was intentional, fraudulent, manipulative or illegal which resulted into the stress of the account. This is also required to decide if the account can be restructured and revive.

The decision of assigning the forensic audit itself sends shivers to the borrower irrespective to the fact if there is anything wrong or unjustifiable. The signal of appointing forensic auditor divides the borrower and lender because the borrower feels offensive . The mistrust leads to the further deterioration in relationship . In many cases borrower resists such audits as there is definitely something uncomfortable in the past business operations.

Forensic audit is based on various segments of business unit covering all the sectors be it internal or external, visible and non-visible, accounting and non-accounting, numerical and non-numerical. It is in fact much beyond the normal audit without any specific time frame and year limitation. Forensic audit can result into serious expose of the borrower and make him liable for further actions but this is one sided as it focuses only on the borrower entity and its promoters.

Although  the need of forensic audit can not be discarded, the real issues lies in the timings of the audit . By the time account becomes stressed, there are least options to help in revival. The account may have come into stress due to various reasons and fraud can be one of the key factor, but there can not be one side to blame for NPA. I am sure lenders also carry out their own investigation to fix the accountability of the concerned officers who may have favoured the borrower in illegal manner. Such investigations are never known to the outsiders as there are lot of favouritism for the employees responsible for such situations. No fraud can take place unless there is some involvement from both the sides. Even ignoring or avoiding the actions is also part of support.

Forensic audit or Special investigative audits may lead to find the wrongdoings but very difficult to recover the money as these actions are taken too late to cover up the past deeds. Best solution is that lenders should get the forensic audit or Special investigative audit regularly even if the accounts are good. This can be a precautionary tool to help in containing the account to move to NPA. It is beyond my understanding why such tools can not be used as a regular precaution method may be in different name. There should be a threshold limit beyond which such tools should be used compulsorily. 

NPA Treatment by Banks : Cleaning of Books

This fourth and last quarter of financial year 2015-16 is going to be one of the most crucial period for Indian banking industry due to clear cut instructions by the authorities to clean up the balance sheet. Indian banks are passing through a very sensitive phase of cleaning the balance sheet. Restructuring or Revival has become too difficult after scrapping of the CDR Cell. Banks are now free to take decisions individually nd individualistic now. Every bank has to take the call independently. Post scrapping of CDR mechanism, the joint decision making process is done away. In this situation the decision will be based on the security and realisable value held by each lender separately. Every bank will take its own call irrespective to the situation of other banks' decision. Revival efforts to save the company from going into liquidation will not be considered at all. This situation will be most impractical for the stake holders particularly employees and unsecured creditors. Legal battles will take their own course and ultimately good units will also die. 

It seems the banks particularly public sector banks will be tough enough to clear the balance sheet without giving proper thoughts to revive. This may result into more and more unemployment in ge country. Also small entrepreneurs who are passing through the stress will not be able to sustain such situation and large corporates will be benefited more and more. The situation is really very alarming and needs immediate review by all the concerned parties.

If NaMo government is pushing for a special institution to handle stress accounts, proper mechanism to keep stressed companies live is more desirable. Bad bank ( bank for stressed and default borrowers) is a good idea provided such decisions are taken on urgent basis as Indian banks are sitting on a time bomb of huge NPA accounts. Good to support new start ups but equally important to hold on the existing organizations. Millions of people have already lost jobs in last two years, non action may lead to further unemployment.

LOAN APPRAISAL AND SANCTION SYSTEM

In our country one of the major reason for high defaults in borrowing is “faulty appraisal and sanction system”. Although other reasons may be lack of monitoring, faulty disbursements, lack lustre legal process, laid back approach of lenders etc., but as mentioned by me earlier, the beginning of any exposure is mainly happens at the stage of approval of the loans. In my view the system of sanctioning needs to be overhauled urgently if lenders are rally serious in improving the asset quality, else the mounting NPA can have tremendous growth in years to come. Some of the fault lines are :

1.     As noticed many times the lending is always dominated by the personal factors of sanctioning authority, relationship with the borrowers, connections of the borrowers, track record of the borrowers in the past and asset coverage. Many of the parameters are compromised during the process. There should be honest appraisal irrespective to the factors mentioned above.

2.     Focus on proposed business is not as desired instead the security and net worth ( on papers) are given more weight age while deciding the lending. No lender can jump into disposal of security to recover money instead of improving the lending quality. Further the valuations are always disputed and managed depending upon the purpose. Valuation of a security for borrowing is always exaggerated whereas the valuation of same property by Same valuers at the time of disposal goes down substantially. I don't understand how can such valuers continue to associate with the lenders for long. There should be strict appraisal norms on the proposed business / requirement instead of security side.

3.     Exaggerated Future projections are another key factors in faulty appraisal. Every projections are made so rosy as if every thing in this world will change and no challenge will be faced in future. The tendency to see the rosy picture by lenders pose threat to themselves only . The approach towards projections should be more conservative. Infact, to convince the higher authorities, the projections are made so good that all the parameters are immediately met up and there remains no negativity about the future of the business. How it is possible that no challenge in future is taken care in the business plan. It seems that current appraisal system is based on paper horses where every thing mentioned on paper is considered as final for decision making. 

4.     Administrative set up like hierarchy of officers, low commitment to the PSU employers, slow legal process, Delayed decisions also affect the quality of loans. Ego of the officers also plays major role in lending. Once the ego is satisfied, the decision making turns into emotional decisions instead of professional view. 

Due diligence and Credit appraisal system of banks and financial institutions in India

Lot of views are expressed on mounting NPAs in the country in last 3 years. We blame lenders for their poor monitoring system or borrowers for their malpractices. Have we ever thought where else can be a problem? Monitoring and investigations come at later stage when the loan is already sanctioned and disbursed. In fact we can narrate the whole process of financing as under:

a) submission of Loan proposal;
b) appraisal and sanction of loans;
c) disbursement of loans;
d) monitoring and evaluating the loans already given;
e) recovery of the loans along with interest;
f) investigations, settlement, restructuring, if not repaid in scheduled time; and
g) concluding the chapter or litigations. 

Generally we discuss about the issue from monitoring onwards by which time, money is already disbursed and lenders are left with no option but to submerge with the plans of the borrower.

In fact, the most crucial decision is to accept the proposal of the borrower and disburse the same in planned way. Generally the proposal when submitted contains lot of information, analysis and viability support. It mostly has rosy picture prepared solely to impress the lenders to lend money and earn a lot with fully secured module. There may be some hidden or unwritten agenda which also push to lend money. The proposal travels to various layers and moves upward with strong recommendations by each concerned authority at every level. It means every mid size proposal pass through the hawk eyes of many experienced bankers. Not only this it is also scanned by outside agencies like rating agencies, TEV studies, marketing reports, government statistics etc. Then how come there is so much jump in defaults. 

Real fault lies with the appraisal system of the proposal received for financing. Indian banks have age old system where each application is submitted fitted with lot of ratio analysis and lending methods. These formats are analysed by the people working on that who are also given instructions verbally in most of the cases as to how it should be directed.  This is where the cases are manipulated. Due diligence and analysis system in our country is quite old. Except the up gradation in mode of presentation (from typewriting to computerized), the core is not yet changed. The system of due diligence and appraisal need lot of amendments mainly to sync with the economy, macro and micro factors, government policies and the expertise of the borrower. Current system is based on the security, reputation or net worth of the promoter and general business trend. There is assumption that if something going good for long it will remain as it is. No provision for the sudden 

Why the Genuine Stressed Account should be Punished by Higher ROI & Penalties?

My views may not be acceptable to banking people but I fail to understand why a stressed account (not in position to stand properly & needing immediate support) should be punished in this manner. We have noticed that the moment a borrower defaults, he is classified to Special Mention Account (SMA)-1, then SMA-2 and finally NPA. This is the stage where such units who have paid huge amount of interest and other income (LC/BG charges, Processing fees and other banking charges) during their long good days to their lenders. Is it not unfair on the part of lenders to instantly punish them with penal interests, higher rate of interest, higher margins on working capital funds, higher charges towards various inspections, audits, due-diligence  and so on?  Is it not criminal to push the stressed accounts further into stress from where they can’t even think of coming out?

I don’t agree that defaulting accounts should be treated with iron hands with the sole objective of recovery and killing them. This way even recovery will be adversely affected. In many cases we have noticed that the stake holders are not the borrower only. There are large number of other stake holders like employees, laborers, suppliers, small agencies providing various services etc. All these stake holders are the worst hit by the improper actions of the lenders. These poor service providers should be given due priority over the secured lenders. Such attitude or policy for the established long standing clients is not justified as these banks are mainly surviving on the small depositors’ money. Secured lenders should not behave in such manner that interest of all other stake holders get into flames.

In good times if a borrower had been cash cow, it should not be slaughtered so mercilessly immediately after finding difficulty in giving milk.  

There should be proper mechanism  of dealing with the stressed accounts. Theoretically, lot of steps have been taken by the authorities but mostly are either impractical or diverted for personal benefits. The concept of Asset Reconstruction Companies   has also miserably failed due to the commercialization  and huge entry barrier.

There should be detailed study as to how the lenders behaved post stress, how many units were revived and how the hand holding happened. At least for the well established borrowers, the rehabilitation and concessions should be automatically extended. In recent past millions of people have been thrown out of job due to mishandling of stressed/defaulting accounts by the lenders in our country. Similarly millions of other people who were involved indirectly by providing goods and services to these units have suffered badly.  

Handling of Defaulting / Stressed Accounts by Lenders: Serious Faults

Stressed accounts who have defaulted are given almost same treatment irrespective of the issues involved. It is just like giving electric shock of same volts and frequency to every patient visiting mental hospital without judging the level of disease , intensity and age. Here is how they are treated and the effect thereof:

    1.  Stage  I -Lenders: Flooding  of notices related to irregularity, warnings, threatening.  The moment panic button of stress is pressed lenders run for recovering their money forgetting that they are major financial partners. To prove their capability, lenders flood the borrower lot many letters, notices, warnings etc. Instead they should try to find the reason behind this.

Effect of the Action:  The borrower first tries to convince the lenders humbly. Then becomes defensive and in final stage after convincing self that now he may be thrown out of the business, and loose every penny , starts avoiding the lenders. Lenders start calling them so often that the borrower gets scared and resorts to avoid.

   2. Stage II-Lenders : Further pressurize the borrower by giving warnings, threatening and levying penalties, higher rate of interests and non cooperation with the borrower. Lenders  Never discuss why it happened, only concern is pay money even if you lost every thing. They never show any interest in knowing the facts.

Effect of Action:  The borrower starts hiding the facts as he feels , lenders are not interested  in helping to revive but only in their money. He starts avoiding the lenders, and simultaneously try to safeguard his own interest. Thus the unit becomes orphan and gradually moved towards sinking.

     3. Legal Actions by Lenders:  Still lenders feel that their actions of recovery were right. They further burden him with legal notices. Here, the lenders feels that if they threaten the borrower with stringent actions, money will come. They forget, this theory is suicidal and will result in huge losses but the lenders in the race of proving themselves honest and shrewd (which is very rare) they virtually kill all the hopes of revival.

Effect of Action: Gradually the issue between lender and borrower turns into lawyer and lawyer. Result can be immediately expected as two lawyers are more interested in winning the fight not in win-win situation.

      4. Settlement, write-off and  provisioning by Lenders: Lenders by this time believe that the borrower is cheater, mafia, dishonest, criminal, non professional and so on. He has siphoned off money and now enjoying life . Also that their seniors or predecessor  were not capable enough and they did mistake. So the lending institution has to suffer the loss. They have tried their best and nothing can be done.

Effect of Action: Borrower and Lenders settle the account on the basis of the security available as the business by now is dead. In most cases Lenders loose money. 

5. Conclusion: Finally the fight between layers does not lead anywhere and behind the curtain, negotiation starts to settle the dues and disputes. No body wins and poor stake holders loose heavily.

In my view this set trend of handling the account is absolutely ridiculous as it does not help any one. Lenders and borrowers behave differently depending  on the loan amount, security pledged and  mistakes done in handling the accounts. An urgent attention is required to look into the strategy and methods of handling the defaulting /stressed accounts, particularly at the initial stage. The action should be to help in bringing back the stressed accounts to normal and revive instead of just killing to recover the money.

On one side the borrower is in problem . The strategy of pushing the borrower to corner with sole objective of recovery is not only dangerous but pathetic too. How can an unit where the major financing partner is the bank suddenly become untouchable. Sometime we feel pity of such policy. Pushing, punishing, criticising , reprimanding the borrower is in no case going to serve the purpose. This strategy is no where can be termed as intelligent. Do we punish our body when it is getting in stress? Do we punish our kids when they do not perform as per our wish or they fail in something? Even in private sector whenever some borrower gets into stress the lender tries to save him so the money can be recovered. 

Current situation of NPA in banks in our country is mainly due to this reason  where no Banker could think other way of handling the stressed accounts. Mistrust between the lender and borrower causes the maximum loss and that too to the lender. By punishing the borrower or trying to Finnish him or throwing in dust may give some satisfaction of revenge but not money. 

NPA: How to Turn Failure into Success

It is not a welcome situation to turn into NPA where you default in all the commitments and face the legal issues. At stake is the complete career, wealth and reputation of the borrowers. In a situation of stress or default, there would be very few options left to move forward and that too at very dear cost. 

It is not easy to survive once you default in making payments. I fact, this is the beginning of the dark future ahead where your capabilities, achievements are put to question. No one believes that once you were the achiever, fighter, survivor and visionary. A single situation washes out the image built up in decades. In most of the cases the borrower surrenders and starts withdrawing himself from the stage. Instead of focusing on business he moves towards legal and finance angles. It is necessary too but the thought process should not be fully concentrated on these. One must not forget that it is the business which is real domain of the borrower which need to sharpen again. It is only the business which can bring back the lost shine. 

The speed with which the situation deteriorates and actions are initiated against the borrowers, it becomes imperative to face and fight with full force. Equally important is the zeal to bounce back. 

I wish to share my views how this situation can be turned into opportunity. A situation of stress can be really turned into a lifetime opportunity if properly handled. The accounts become NPA and the credibility of the borrower is in negative zone. What we forget is the fact that the borrower knows his Business very well and has climbed to the top due to his expertise, hard work and vision. Only certain decisions went wrong and he fell down. Since he had the guts to climb on top , means he is expert, hard working and visionary. This can not be debated unless the success was with manipulation so or other objectionable methods. May be certain decisions went wrong or mismanaged the business or overconfidence or may be certain factors beyond his control resulted into this situation. 

But, in new phase, if opportunity is given again, he is not going to repeat the same mistakes. Also, he will work with more concentration and hard work as he has seen the life nearing to death. Without any emotions to the failed business if he decides to restart from scratch and rebuild., believe me, it would not take even 25% of the time invested in building up earlier. This is because the entrepreneur has learned a lot in stress. He would be more successful. Particularly first generation entrepreneurs have better chance to rebuild.  

Upcoming NPA Scenario: Are Banks going to be Hit Harder again?

This is the question which banking / lenders segment asking itself. This is the question which has very simple answer but very few would admit in public. Bankers want to live in dream still and not accept the factual position.

Most of the loans getting  NPA currently since last 4 years were advanced during the period from 2008 to 2011 to boost the economy or whatever other compulsions including corruption. These loans were defaulted during 2012-14 and then restructured under CDR mechanism. Most of the CDR cases have got failed due to various reasons discussed in my various posts. Hence these advances are now going to be a fit case for second restructuring or settlement. Since April, 2015, CDR mechanism has been scrapped for the reasons better known to the bankers only.  Infact, CDR mechanism was invented to facilitate smooth restructuring but probably the smoothness has cost them dearly or there is no consensus. Whatever be the reason, now there is no CDR mechanism and hence, bankers/lenders have to take the call jointly or severally. So the cover under which the loans were reported as restructured or standard has torn off  completely. As per rough estimates more than Rs. 6.00 lac crores worth loans are on the verge of getting NPA in the near term which will have no cover or excuse for reporting as standard. Bankers will have no choice but to make provision for them.

90% CDR have failed due to wrong restructuring and hence now no one can stop them from reporting as NPA . This is the reason that NPA will increase substantially during the current year. 

Further, due to long recession in the country, fund raising options through equity market may not be easy. Cost escalation due to over leverage of the Balance Sheet is further going to make life difficult.

As per the latest data released by the Government agencies, NPA has gone down in first half but this is one of the cruel joke. NPA can’t be reported properly every quarter, real provisioning is done only at the end of the year and hence this can’t be the reality. The mindset of misreporting of NPA or showing the real facts has not yet developed in our country and hence the figures give misleading conclusions.

It is becoming very difficult for the bankers to avoid NPA reporting and poor economic situation of the country may make it more challenging. Dull equity market and weak rupee may stay for some more time causing further NPAs in the banking system.

Challenges in Running a NPA unit

It is a very tough job to revive an unit once it falls into the trap of Stress. Financially, such units become NPA and the owners are classified as defaulters in the CIBIL record. Ultimately it has very few avenues open for raising  finance . Thus few hopes of revival amid severe challenges from all the sides. These few hopes need lot of hard work, honesty, patience, focused approach and  tough decisions if the unit has to see itself revived. 

An Stressed/NPA unit has typical characteristic of exhausted  options for raising finance, huge losses,  small and semi-expert management team, low credibility with the suppliers, ongoing legal issues with the lenders, high cost of business operations due to liquidity crunch coupled with long overdue statutory liabilities and labour dues. Overall the life of a stressed unit becomes so tough that for every step there are end number of challenges . 

In this situation what are the ways to not only continue the business operations but also come out of the stress. As per my experience very few units ( not more than 20%) bounce back, rest go into oblivion. Reviving a unit under the tight noose of the lenders, government scrutiny and paucity of funds needs lot of courage and sound strategy. Some of the following suggestions may help in revival process:

    1. The unit can be switched over to job work : this will help in scaling up the operations and also generate revenues without much investment;

      2. Credit period needs to be reduced to the maximum even if it causing some margin hit;

     3. Non core asset, if any, should be immediately disposed off. However this takes some time as proper pricing may not be offered. While disposing of such assets ‘ liquidity’should be preferred than the ‘value of sale’ as the need of the hour is liquidity. It is to some extent emotional issue too but when there is fire at home, one can not be selective in saving the life. However, this step is possible only with the permission of the Lenders if assets are mortgaged.

     4. Change in management team: cost saving is the need of the hour and shall be strictly adhered , this need small team with lowest possible cost. Such units can not afford very high cost team but the talent Can not be compromised . Outsourcing the talent can be good  option to fill the gap .  

    5. Any additional funding into the form of debt should be avoided thought it may not be available too. The cost saving is the earning too. Equity is the most suitable way of raising funds. Management should be always open to the strategic investment even if it transpires into the change in management for the benefit of the unit . There is no better option than reviving the unit. 

     6.  Above all, self confidence of the owner is the key to revive the unit as he is the one who created it and has the guts to revive too . Poor market support , tough legal battles and tight financial position are only temporary obstacles need to be addressed with hard and quick  decisions, patience and positive attitude.

It may take 2-3 years to revive  an unit but once the revival happens, promoter can regain the lost image and money.