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.