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.