Monday, February 22, 2016

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. 

Friday, February 19, 2016

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. 

Revival of Stressed Account: Employee Participation

In last some of my posts I had shared my views on one of the most sensitive issue of banking sector currently i.e. Stressed/ NPA accounts. There are lot of discussions, analysis and suggestions in this regard. Infact, this issue has in last three years surpassed all the other issues in banking industry affecting the new businesses severely. As mentioned by me only one side is not to blame for this situation. Lenders are equally responsible for this which they should accept, correct and move forward. Just reprimanding the borrowers and branding them fraudsters will not serve any purpose. Rather this will cause huge financial losses to the lending fraternity along with the unemployment of large number of lower class people . The situation deteriorates when there is panicness to use all the tools available in the rule book. The race to prove intelligency, honesty and dedication by employees from the lending side is proving quite costly to the whole system . Although it is a tough task to revive a unit which is failed and that too if that has happened due to manipulative tactics of the borrowers, but such cases can be segregated and handled in different way . Whereas genuine cases, which are much more in number, shall be handled with care which will not only help the lenders in realising their money in long run but also save  the life of many poor families who are dependent on such units. As per data available more than 4 lac units have become sick causing unemployment to more than 100 lac employees . 


To revive the units lenders should take positive view as they had appraised the units in past. There may be some miscalculations or situations beyond the control of the borrowers which led to sickness. Also, the revival can be with stringent conditions like severe monitoring, management interference , takeover of management if required and pledging full equity. In addition to this the employee participation in management and equity sharing with the employees can prove to be a good idea. The assessment shall be genuine and practical with long term perspective . In my view the revival should be given try to the maximum possible before resorting to the killing of the unit. Let the poor labour / employees who have become job less earn their bread from families and also participate in the ownership of such units. With better participation, no one can stop the sick units from revival.  Also, the period of revival should be sufficient enough based on proper appraisal of the project and situation so that it is not repeated. We have noticed in many cases, particularly infra sector, where the actual cash flow can service the debt in 15 years but to make the proposal attractive, the projections have been manipulated and ultimately debt could not be serviced in time. 

NPA / Stress : Disease but Not the End

Bankers/ Lenders behave differently and rather rudely once the account becomes NPA  it seems they simply want to use all the tools laid down in the rule book. They would Fire, insult and pressurize the borrower to repay loan. They are not wrong but the use of all these tactics is not appreciable. Probably lenders believe that business is without risk and full of certainty. In their view, the business can not go wrong and if goes, it is because of malafide intentions of the borrower. Hence in the process of using all the tools available with them, they forget that the business was properly analysed by themselves only and any drastic action will hurt the poor people most.  They use every tactic of recovery at any cost.


Lenders who  till recently were boasting their lending capabilities by referring the successful borrower, suddenly start distancing themselves from the borrower as if he is swine flu patient. Top to bottom banking officials , politicians , investigative agencies and so on try to reprimand him . They behave as if they don't know him, nobody wants to tell the world that the same borrower was their most sought after golden goose well kept secret . Till recently they were boosting of knowing this high profile borrower and now ???!!! What happened , what went wrong, don't you know business is full of uncertainty . Bankers only appraised the proposal, recommended at various level and sanctioned . If everything is transparent , no need to hide the fact. Help him, take care of him and try to make him stand again. No doubt if the  intentions of the borrower are wrong, fund is diverted, he deserves to be punished . Lenders have no right to sit on securities and take the life of hundreds of people for granted . There should make every effort to revive the unit so the life of thousands of poor people  can be saved. There should not be one sided blame on the borrower only , if we share the earning in good time why not take responsibility in tough time . CIBIL reports should be used for better judgment , it should not be an obstacle. I firmly believe if the lenders behave in matured way and help the NPA borrower, they can recover substantial money which is infact public money.  

Thursday, February 18, 2016

Effect of Federal Rate, RBI Actions and Chinese Impact on NPA in India

Recent developments across the world are showing signs of further stress in the economy. China has already devalued its’ currency by almost 5% which has burnt the cream of share market in India by almost 10%. This has also made the USD against INR costlier by almost 5%. Rupee has already crossed Rs. 66.00 barrier recently. Meanwhile there was a tension in Indian economy of US federal rate hike. Had it been, it would have further affected the FDI in the country.

Since long things are not very favourable for the country. This could have been handled by positive support to the domestic industry and better interest rates but it seems the analysis at the highest level is not in sync with the ground realities.  We are deeply affected by the happenings in China and US as a part of global economy but the strategies are not in place to face these situations which are quite frequent now.  China may further devalue the currency by 5%-10% which would throw great challenge to Indian economy. Further the interest rates in our country are too high to sustain. Indian industry without proper support will not be in the position to combat the global challenges and this will further deteriorate the NPA situation of our country. In current year 2014-15, we could not come across to any exciting steps by the government which can help the NPA accounts to improve. Major capital intensive sectors like Infrastructure (Road, power, port, bridges etc.), Steel, Cement, real estate,  automobiles, mining are passing through a serious surviving challenges and something concrete is not done, there will be sea of stressed accounts in the banking sector.


Last three years have seen huge jump in NPA accounts bleeding almost all the banks. This trend is not yet stopped rather the events unfolding in Indian corporate sector and global challenges will further strengthen this jump of NPA accounts. 

Mounting NPAs: What Went Wrong (WWW)? Part-5: Over ambitions/Greed of Entrepreneurs

To conclude my views over mounting NPAs , last but not the least key factor lies with the borrowers. The golden opportunity for Indian entrepreneurs in liberalised economy post 1991 was unprecedented. Suddenly many new sectors particularly with high capital intensive like telecom, finance, infrastructure, global trading, logistics and engineering opened up. The domestic players were further pushed by overseas players and thus the economy started growing day and night. Those who could perform were more greedy to grow faster  and those who were left behind did anything required to manipulate. Lot of borrowers defaulted due to over ambitious planning and miscalculation. Greed of the borrowers sabotaged the  banking system. They were aware of the prevailing legal system which acts as shield for the borrowers. Easy availability of funds, lethargic legal process, manipulative practices of the borrowers, corruption, growing economy and uncontrolled banking growth were the key factors for ever mounting NPAs. 

Unfortunately, we have not yet learned the lesson from this and continue to ignore these facts. We believe in short term vision where infusion of funds in phases to take care of survival of banks is made by the respective governments. 

A detailed Corrective Action Plan (CAP) is required at the highest level to avoid any future growth in NPA which is possible only with honest and intelligent actions. In our country top 20 borrowers have exposure to the extent of 20% of total lending portfolio which in itself very sensitive issue and needs to be handled very judiciously.


I will share my views on various suggestions to control NPAs in next posts.

Mounting NPAs: What Went Wrong (WWW)? Part-4: Political Compulsions & Corruption

In addition to the factors analysed in previous posts responsible for disaster in the Banks in the form of NPAs and Stressed accounts i.e. a)Fast development of Banking industry; and b) Sudden Growth in Indian Economy, I would like share my views on one more major cause that led to huge losses to the Banks. This important factor was “Political Compulsions and Corruption”. Congress Government under the leadership of Mr. P.V. Narsimha Rao introduced liberalization to the economy. It was major turning point for the country and helped a lot to this party in ruling the country. They were encashing this very meticulously by branding other parties either communist or dumb in economics.
Under new environment of liberalization, the economy was taking new shape and offering lot of opportunities to the domestic and overseas players. The volume of money was too much and luring the people from all walks. Political parties had started looking at economics as intelligent and smart players. They understood their importance in policy framing, decision making, appointments and fund raising. They started interfering in banking systems, guiding and helping the business community in sourcing finance. These activities were root cause for rampant corruption in the system.

Then in 1999, NDA Govt. came under the leadership of Mr. Vajpayee who inherited the fast growing economy and huge opportunities to develop. Infrastructure was the focus and huge investment was required in Infra, Power and Telecom, which would not have been possible without government support. These developments somewhere not only forced the banks to lend aggressively but also liberally. It was the beginning of corruption and defaults too. The surprise exit of NDA made the new UPA government overconfident. The power to new group was for next 10 years. The failure of opposition parties to control the ruling parties (may be some nexus, I don’t know) was quite visible. It was the public at last who threw away this group from power and again gave opportunity to NDA under Mr. Modi.

Thus developments from 1999-2013, Interference of political parties in lending money, appointments and policy making resulted into sharp increase of lending. This was not done judiciously and hence huge chunk of lending became non performing. Bureaucrats and politicians for their personal benefits put the banks in big problem. Corruption was rampant, we can’t deny its existence today even, which to a great extent is the major factor responsible for NPAs. Compulsion of moving fast and feed the requirement of funds to the economy also lured for lending very liberally.


Government should give serious thought before giving money to the Banks and ensure that necessary precautions are taken as this is poor public’s money which has been given in past too. In fact, large part of such infusion drains out in due course and again the demand for more infusion is raised by the Banks. It gives me the memories of Ram Leela where in Kumbhkaran demands continuously huge quantity of food after waking up. Better the Government wakes up at least now and control this drainage of funds.

Mounting NPAs: What Went Wrong (WWW)? Part-3: Sudden Growth in Economy

Post liberalization, the economy started vibrating tremendously and this led to freeing various sectors of the Economy particularly Finance , Infrastructure and Industry. Without sufficient Funds, it was not possible to move forward. Funds started flowing from overseas markets, Share Markets witnessed sharp increase in volumes and every penny brought in as Equity was used to raise debt more than 3 times. This made the debt market blast like anything. Now this led to the sharp increase in lending business .  Infrastructure development,  Industrialisation,  Power, Mining, healthcare, hospitality all segments were like hungry demons out to suck the money . The cascading effect was on equity market which boomed like anything and this resulted into more and more need of debt money to the system. Infact it was like a vibrating ring effecting each other to vibrate further.

With new liberalized environment, political parties started demanding more and more growth. They started  taking more and more interest in GDP growth, IIP numbers and Sensex. This probably also ignited the level of corruption in all segments.

We witnessed a decade with highest investment in infrastructure like Port, Power, Road, Buildings, Bridges between 1998 to 2008. This also made our country manufacturing hub and put the country ahead of many countries in Many industrial segments. Obviously, it was not without any flaws, it took away lot of capital from the system. 

Probably, the respective governments were quite confident about the capability of Indian banks to handle this sudden spurt in demand of money. Though governments and institutions were delivering their best, but the good time was not alone, it brought higher level of corruption, high expectations, chaos in the system and mis-management . In the process, politicians took over the reigns of finance and started over ruling the bankers. The situation in banking system was already on fire due to severe competition, this tendency of forcing the bankers to lend more and more further worsened the situation. Even appointments were not free from any allegations. The pressure of performance with in limited time frame caused the deterioration in quality.

To sum up, Both factors i.e. Growth in banking sector and Economic growth resulted into very high defaults at later date. 


Other factors responsible for current level of NPA needs detailed analysis before pumping money into banking system continuously. This is public’s hard earned money and should be used judiciously. Lending institutions should not be allowed to remain corruption breeding stations forever. 

Mounting NPAs: What Went Wrong (WWW)? Part-2: Development in Banking System

Carrying forward the discussion on four major issues responsible for mounting NPAs, let us dig these issues further. One of the major issue was “Development in Banking System only ” . As mentioned in my previous article, post liberalization, focus on building up capability was meant only adding new employees, new branches and adding new borrowers.  Bankers/lenders never bothered to first build up capacity and then add the business. In fact, it was other way round where aggressive approach to increase business followed by building up capability. To be true, still very least investment is made by the bankers on education and training despite so much hit on the balance sheet. The visible change is due to computerization or digitalization and not due to knowledge development. The appraisal system of loans, funding products, Client due diligence and Project viability studies are still going on the same old pattern.  Prescribed norms of classifying NPA are too rigid and impractical. Same set of standards being applied on all kinds of loan despite huge variations in their characters. Lenders should consider the economic scenario, monsoon situation, too to apply the NPA norms. The norms should be flexible enough to help the genuine borrowers.  Senior employees of Banks presume 100% knowledge of the finance sector which blocks the knowledge inflow. The Ego of officers is another serious factor which needs to be handled properly.

As mentioned by me earlier, the performance parameters should be more quality focused than quantity. Short term view of business growth has caused lot of damages to the Indian banking system. As is well known the pressure of achieving targets is too much on the team and this leads to compromise in the quality of account. Lending banks have to build up capacity of global standard to sustain in the current market. Unreasonable target setting by the authorities should be avoided if banks are really serious to control the NBPAs. It has been widely known fact that every one wanted to reach the height and to achieve this target are key issues. One team does business without proper appraisal and poor monitoring to get the promotions and other teams gets promotion by achieving recovery targets. Most of the business has been achieved by misusing the office or conflict of interest. Banks themselves became consultants and  advisors too and started achieving the set targets in all those segments. The expansions are good but equally dangerous if not handled properly.

In my view there are lot many gaps and weaknesses are still exists in the banking system which will continue to generate more and more NPAs. These issues should be addressed properly before infusion of funds by the Government.  Without building capability, the growth in the banking system will be prone to all kind of drawbacks. However, I agree that only this factor of development in Banking system is not the sole reason for mounting NPAs as other reasons are equally responsible for disastrous situation of NPAs in India.


I shall ponder on the other issues in my next articles.

Tuesday, February 16, 2016

Mounting NPAs: What Went Wrong (WWW)?

In last 15 years, Indian Banks have tasted huge jump in non- performing assets. This has grown with the growth in advances which is quite convincing. Currently, NPA are more than Rs. 5.00 Lac Crs. or about 75 billion USD.  Actual figures of NPA and stressed accounts are estimated to cross Rs. 10 Lac Crores, almost 11% of total loan portfolio. 
What went wrong? Why it was not monitored properly? Is it matter of skill or something else? The answer to all these questions can be find out within the problem itself. A critical and unbiased analysis can not only help in understanding the facts but also help in controlling this for future.
    A)   Development in Banking system: In the beginning of this millennium, the competition was growing and private banks were just attending the age of adolescence. These banks were flushed with funds, aggressive team and to some extent knowledge. These banks were infact born out of frustration of the public sector banks who were dead slow and politically infected. We can’t deny this even today.  Also these banks were run by the cream of  bankers who were very sharp, intelligent and aggressive but were frustrated in the PSU Banks. These banks with thin organization structure and fast decision making process soon overtake many PSU banks who were just surviving on government support and had become political shop.  Thus the frustration of Bankers who could not perform in the dull atmosphere of PSU Banks and Exciting plans of the new banks joined hands together and exploded the market. Every Bank invented new products to lure the customers to borrow. Very soon private banks accumulated huge business from the market and this hit to the bottom of the PSU Banks. Now the turn was of just awakened PSU banks who not only lost the business but precious manpower too, to grab the market. The PSU Banks joined the rat race of increasing business without considering the GDP growth of the country. Every Bank was out to give Year-On- Year Growth of more than 20%, the pressure mounted at every level and thus the whole system of conservative appraisal, due diligence, Non-deviation from the set rules and strict adherence to end use principles got damaged.

Banks started rewarding Officers i) who could garner more and more business irrespective to the quality; ii)  Who could register better recovery from the stressed accounts ignoring the fact that certain units could have been revived; iii) who could earn more and more fees for the organization even if it was through business executed under conflict of interest; and iv)  who could expand the business left, right and centre without any focused approach.

      B)      Sudden Growth in the Economy: Beginning of the millennium also witnessed sudden jump in the economy. Existing set up was not well equipped to handle the sharp growth of the globalised Indian economy. All they could understand was to lend money in the proportion of 3:1 where Equity was only one third of the total loan and that too in many cases on paper only. No body was ready to listen and understand the hard fact that lending can not be influenced by emotional or political pressures. Systems and Procedures were not in place and by the time one could understand, there was a mountain of NPA before the banks.
    C)  Political Compulsions and Corruption: When NDA regained power in 1999, it was very hard earned by these non congress parties and hence they were aggressive to fuel the growth. Most of the parliament speeches were wrapped into GDP growth and hence the large funding was forced upon the bankers. This process further speed up post 2004 under UPA government. Rampant corruption in appointments and lending resulted into poor decisions. There was no hope for prudent decisions. In this situation, the mistakes of wrong funding was quite obvious and hence huge increase in NPA.
      D)  Over Ambitious Entrepreneurs: This is most crucial analysis, either the entrepreneurs were over ambitious and hence asked money or may be vice versa, but the result was same. Easy availability of funds or over confidence of lenders in entrepreneurs too fueled the fire. The cascading effect was in poor appraisal, fast decision making, poor monitoring and competition to surpass the other lenders.

  Indian bankers were never equipped to handle the sharp growth as nothing was system driven. It was more people driven minus poor systems and procedures. Human Resource too responsible as there was not sufficient training to the lending employees. Personal habits like Ego, ignorance, over confidence too ignited the process of high NPA.


    Detailed analysis of all the above major factors will be discussed soon.

PSBs- Oxygen of Rs. 70 K Crores : Serious Flaw in Banking Structure

Indian Economy in last 68 years has seen substantial growth post independence. The Economy got boost in 1991 by way of liberalization. This growth was further fuelled by various political and economical steps taken by Government India under different political parties. 
Public Sector Banks have played very crucial role in this growth . The trust and patience displayed by banking authorities in Indian Entrepreneurs has been remarkable. Government has continuously supported PSBs by way of infusion of capital from time to time.  Without this support, Indian banking would not have been in such a healthy position.

Recently GOI announced infusion of Rs. 70 K Crs. in next 4 years. In past GOI has infused huge money into Banking system to keep them live and flourishing. There is nothing wrong to support the Banks owned by GOI but it should also look into certain issues which may be real causes of concern and may be strategic fault lines. In my view GOI should seriously look into these issues:
1. Subsidiary Companies: Most of the PSBs are having one or more wholly owned subsidiaries in the field of advisory services, ARCs, housing finance, Insurance, Asset Management, Factoring, Broking etc. Some of the Banks are having key share in rating agencies too. Most of the Rating agencies and Asset Reconstruction Companies are owned by the Banks only. These subsidiaries are surviving on mostly fees from the assignments created by parent company. In my view this is serious issue of conflict of interest. 
 Let me explain the issue: ‘A’ Bank who is a major Bank of the country has advisory firm engaged in  capital  market, Restructuring, Debt Syndication, CDR, TEV Study etc.  This advisory firm will take the assignment for loan syndication. Generally assignments are given out of pressure. Being a subsidiary company parent bank will be soft in lending to the client sourced by it.  In my view this activity falls into conflict of interest and probability of wrong decision in lending becomes very high. Similarly, when an account gets stressed and need restructuring, parent bank will give this assignment to this advisory firm. Again this firm will charge heftily to liaise with parent bank on behalf of the client.  Again this is conflict of interest and right decision may severely get affected as there is conflict of interest. In the greed of earning fees, the chance of mistake becomes very high. Other side, if some one does not give the assignment to this subsidiary, parent bank may not appreciate and take wrong decision . In both the cases parent bank and client are sufferer.  Same principle applies for Insurance and Mutual Fund activities.  Further there is frequent transfers from parent to subsidiary and vice versa. 
    2. Investment in ARCs and Rating Agencies: Most of the PSBs are shareholders/promoters of Asset Reconstruction companies and Rating agencies. As it is well known that ARCs play major role in case of stressed accounts, the conflict of interest is quite apparent. If the stressed accounts are being assigned to an ARC, irrespective to whatever level of transparency, the role of a company promoted by a Bank is highly objectionable. Same bank lending and post NPA, being assigned to own company can not be justified and the chances of injustice to either Bank or the Client can not be ruled out.

Suggestions: To make the Banks sustainable and stronger for long time, GOI should look into following suggestions:
1.     PSBs should not be allowed to enter into various different activities mainly those of conflicting  interest i.e. Capital Advisory Services, Syndication Services, Restructuring Advisory, Insurance ,  ARCs and Rating Agencies. Those already into these activities should be instructed to scrap these  business in near future;
2.      Fund utilisation by Banks should be monitored by a separate committee of experts, other than  RBI, regularly;
3.     Transfer from parent bank to subsidiary and vice versa should be immediately stopped as this        makes the institution vulnerable to losses;
4.     Till the PSBs are out of these subsidiaries, Same Bank should not do any business with    subsidiaries to bring in better decisions and transparency.
5.     Subsidiary Companies should be immediately headed by GOI nominees and designated team.


6.     Any business generated by Subsidiaries by way of using the office of parent bank or pressure      should be treated as misuse of office.