A well-built Banking sector is of utmost importance, for a prosperous economy. The crash of the banking sector has an unfavourable blow on other sectors and hence, affects the economy as a whole. A banker will have to be extremely cautious while lending, because banker is not lending money out of his own capital. A major part of the Credit facility granted, comes from the deposits received from the general Public, Government and Other deposits received. At present Non Performing Assets in the banking sector is a highly debateable topic because Non Performing Assets are increasing year after year particularly in Public Sector banks. Non Performing assets can be defined as ‘Those loans and advances extended to the individuals, institutions, organizations etc which stops generating income (i.e. by way of interest income). Interest calculated on these assets is not recognized to be income, as per Reserve Bank of India (RBI) norms.’
In plain words an NPA is characterized as a loan asset, which has ceased to generate any income for a bank whether in the form of interest or principal repayment
The Gross Non-Performing Assets (GNPAs) of Public Sector/ Nationalized Banks as on Dec 2015 were Rs 296321 Crore.The Total of NPA and Stressed Assets of PSBs on 31/12/2015 is reported to be around Rs 4.93 Lakhs Crores. If all the other financial Organizations such as NBFCs, Housing companies etc are taken, the amount is reported to be a whopping Rs 8.53 Lakhs Crores. As a percentage, NPA has increased from 5.47% in of Gross Advances in March 2015 to 7.53% of gross Advances as on 31/12/2015.
Such huge amount which is blocked in the banking system requires the relevant provisioning from the profits. This means that the provision so provided cannot be redeployed anywhere else severely impacting Credit Off take. Thus rising incidents of Non Performing Assets can be attributed to the economic slowdown of the country leading to fall in GDP. This is the burning issue of the country today. Therefore NPA needs to be managed on time. This is exactly what was echoed by the Apex Court of the Country on a PIL filed by Mr Prashant Bhushan in Last week of April 2016, where in the Supreme Court instructed the Finance Ministry/RBI to come out with a Mechanism to contain NPA.
The factors causing the incidents of rising NPAs in Banks are attributed grossly to: a) Business Environment, b) Borrowers’ inefficiency to implement the Planned Project and c) Bankers’ inability to diagnose the incipient sickness signals from the start or in the middle.
Public sector banks continue to be under the problem of NPA and now severely stressed on account of their past lending
The banking system as a whole has been plagued with higher level of non-performing assets (NPA). With even the restructured loans turning bad, the problems of the industry have only worsened/ compounded.
In 2015, the annual review meeting of the Union Finance Minister with the CEOs of banks (including private banks), insurance companies and financial institutions (FIs) were held on June 12, 2015, in New Delhi concerns were raised over the increase in non-performing assets which were adversely effecting the credit growth of banks. And now a new revelations has been made in the case of King Fisher Airlines, currently hogging the Head Lines for all the wrong reasons..
After the King Fisher Airlines fiasco, all the banks in the Country, Public Sector or Otherwise, has become extremely jittery about lending in general. After all no Banker would like to get interrogated by CBI or other Agencies to explain that why they permitted Banking Facility to a Borrower or later enhanced the limit for Scaling up. Though the RBI Governor cautions the CBI and the Govt against witch hunting of bankers, the fear psychosis remains.
The CAs and Management Accountants normally prepare the project Reports/Proposals for Bank Loans on behalf of the Borrowers. Such financial data are based on Industry averages and certain standard premises and conceptual theoretical conditions. In reality, after the first year or so, the Theory clashes with the Practical uncertainties associated with any project. The result is mismatch between what was projected for, and what was the end result obtained after a year or so. The resultant failure impacts the financial position of the borrower as well as the Bank.
This creates a trust deficit among Bankers, in so far as Proposals by the Borrowers are concerned. But does it mean, the bankers will stop giving loans/advances??? The very raison-d-etre of the bank will come into question. Can any sensible Authority look away from this aspect??
In 2002, The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Actwas passed by the Parliament of India. It provided teeth to Indian banks to attach the Assets of willful defaulters who were not co operating with the banks. The primary idea was to contain and halt the avalanche of NPA.
But even then the ground reality is somewhat different. It is reported that there are 33 DRTs in India. They have a large number of Securitization Cases pending. There are numerous cases pending before the tribunal for a long time. The defaulters get actually encouraged by such inaction, since their advocates encourage them to continue the litigation year after year.
As a result, the DRT Proceedings drag on for several years, wherein, the banks have to helplessly wait and watch and pray for an early settlement.
INDRADHANUSH, a string of measures taken by the union Govt in September 2015 to help Public sector Banks to tide over the impact of NPA and Stressed Assets. However, none of them addresses the above issues.
Banking system is the backbone of any nation’s economy and this a well accepted fact, the world over. For an economy to remain healthy and going, it is important that the banking system grows fast and yet be stable.
Here lies the biggest dilemma of policymakers. How to achieve both these objectives simultaneously at the same time?
Success of different small sub projects culminates in realization of the main Projection. One needs to understand the science involved behind every single small project, so that the prime Project is successful.
Banks are more interested in having a control over loans & advances extended to different borrower categories. This industry deals with Public Fund and all results of lending are subjected to scrutiny by the Regulatory Authorities, whether it be an account statement or whether it be Schedules of EMIs and other debits to the account. It must be rightly justified and it must exhibit aperfect audit trail. Banks are more interested in ensuring that the borrowers are able to repay the loans within a proper time schedule.
In order to do so, the borrower’s projects need to be completed / executed properly. Delay in the same would result in loss and subsequent chances of NPA. Banks cannot, therefore, merely restrict themselves to financial audit of the borrowers’ cash and fund flows. They need to go beyond the traditional mindset and proactively ensure that the phase wise deliverables of the borrowers are being delivered through their respective projects. In order to audit the projects, banks need to understand how projects are planned, smart targets are set, executions happen, deviations from the original plan are measured and consequently mid-course corrective actions are taken. The focus has to shift from monitoring project expenditure to project implementation per se.
In any loan, a borrower’s stake is a maximum of 25%(Minority Stakeholder) . In order to protect the Bank’s stake ie 75% (Majority Stakeholder), it’s imperative that the borrower’s projects are completed as per plan and banks should be able to forecast delays and failures in their own interest. In order to forecast the same, the banks, if empowered with the science of project management can successfully monitor and evaluate if the projects are on course and on target.
Most often than not it is revealed that there is a marked difference between the Planned Value of the sub projects and the related Earned Value of the same. This is because, the Bankers do not, and really can not oversee the Granular Level day to day withdrawal of the finance and implementation of the plan over the period for which the sum was withdrawn. This is due to the fact, that the bankers are already overburdened and they simply loath the idea of running other peoples’ (Read- the borrowers’) business. Here the Bankers miss the moot point, that they are the Majority Stake Holder in the Project and its failure will hurt them most.
The Bankers may argue that the regular Audit team of the Controlling /Head Office do check the Ledgers at the Banks’ end at regular intervals. But in reality what they do is only conducting the Audit of the Financial Expenditure of the Borrower and checks his Cash and Funds Flows and whether regular Credits at regular intervals ie EMIs are deposited in to the banks. They do not conduct the Project Implementation Audit. Thus they miss out on the broader picture of Variance between the Earned Value and the Planned Value of the Disbursals of funds by the bank. Left to continue over a long period this becomes the ideal situation for NPA.
On the contrary if the bankers are armed with a mechanism of Project Governance Frame work, wherein, they are able to check the Project Implementation on a day to day basis, sitting in their own office every morning for 10 minutes in their dash board, they will know which areas of the project are showing Red, Yellow and Green Signals. Thus the Bankers will be able to understand on a daily basis at granular level, as to what is happening in the project where they are Majority Stake Holder and at the same time convey the message to the borrower, that the big brother is watching every step the borrower takes.
The creation of a pool of qualified Project Management Professionals within the bank will immensely enable better monitoring of projects financed by the bank, whether Term Loans Or Working capital (OCC/OD etc). The creation of a Governance Framework, by using Information Technology, will help the Bankers at the Branch Level, Circle Level and HO level, to follow what the Borrower is up to on a daily basis.
Imagine, if this science is spread across the Banking spectrum, where they have to mandatorily provide loans to the SME sectors (which contributes the largest quantum to NPAs fold), how both the Borrowers as well as the Banks will be in win-win situation and spur the economic growth of the country. However for this to happen, the Borrowers also have to learn the science of Project Management to give the proper inputs and be in the same page as that of the bankers. Only then the NPAs will be contained to a minimum level and the country can witness exemplary economic growth.