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.