NPA Feature: Excess Non-Productive Investments

While we continue to advise the clients who are in trouble and passing through serious stress , there are certain common features, noticed by us, which lead to stress. Although most of them are mentioned in my earlier posts, still wish to share my views on one more common reason of stress. It is most commonly noticed that the Balance Sheet or may be off Balance Sheet , disproportionate investment is made in to non productive fixed assets (i.e. Land and Buildings mainly)which are nowhere related to the Business and sole motive is to encash the valuation at later date. It is human nature to invest in real estate but excess investment  made out of the business funds can be disastrous . Such investment is done only for future valuation without any other logic. Though these investments look quite good but they take away the business funds and can not be termed as intelligent investment. These investments should be made only from the surplus own funds.

Once these non core investments are made the working capital dries out and thus path of stress is begins. Liquidity crunch wipes out profitability and account becomes irregular. In fact any undesirable investment can be dangerous. Liquidity has to be maintained in any case irrespective to the opportunities available to avail higher valuation. Lenders need to look into such issues seriously as this can be the beginning of dark days ahead. However some times lenders promote such investment as this increases asset coverage but the loss is much higher than the security.

We noticed that higher the undesirable investment , sooner the stress. Such investments made for safeguarding the future of the business is in fact poison for the enterprise. It should be avoided in any case specially if made from the borrowed funds.