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.  

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.