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How banks create their own NPAs

Handholding of a new borrower increases business possibility for future. Banks can be strict as a lender at right time but should be ready to act as friend and guide of the borrower, when required

I have always believed that banks need to do handholding, especially of those entrepreneurs who are new and need counselling about running their business. They need to closely monitor the account once they sanction a loan and make sure that the money is utilised ONLY for the purpose for which it is lent. Any mis-use must be spotted quickly. This will help them in managing difficult accounts that may turn into non-performing assets (NPAs) at later stage. Banks seem to think that the borrower needs them more than they need him. This is wrong thinking. They both need each other equally. Having a good borrower is in the interest of the bank and also having a friendly bank that tries to understand the business of the borrower and help him establish, is in the interest of both of them. And when I say friendly, I am not suggesting a bank that gives in to every wish of the borrower!
 

I have come across a case recently where the bank seems to be terrorising borrower for some reason. I must confess here that I only know the borrower’s story. The borrower imported some machinery. The machinery took two months of installation. Even after that some problems arose and the production commenced only after about nine months. The bank should have actually offered moratorium to the borrower, but strangely insisted on repayment right from the beginning. I suspect that the instalments were paid from the cash credit account, which was allowed be used for this by the bank. Working capital is for the operation of business and if no activity was taking place why was it disbursed at all?
 

As the production stabilised, the company realized that it lacked working capital. The company also made the mistake of supplying goods and ignored receivables. The receivables became bad after some time.
 

The bank then invoked the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI Act) and sent a legal notice to the borrower asking him to clear his cash credit account. The borrower somehow managed to raise some money from distributors and offered to clear the account by 31st March. As per the agreement, he started paying up. However, the bank kept threatening him with seizure of assets. The company wrote to the bank giving details of repayment schedule. Curiously and completely illegally, the bank refused to accept the letter. Bank has no right to refuse for accepting a communication by its client. The client panicked.  They should have sent the letter by registered AD and also should have mailed it to the bank. He should have taken up the matter with the branch as well as the Banking Ombudsman. But the power of the bank is so much he was plainly afraid to do this.
 

This bank has also appointed an agency to deal with clients who owe money to them. So the concerned officers probably have no say in the matter. The matter should be handled by the branch, which made the loan, but it was being handled by a third party and bank’s office in Pune/ Mumbai.
 

It is my understanding that the borrower has not done things in a way he should have. The bank did not monitor the account at all. They seem to have visited the factory only once. When there was the prospect of the account becoming bad, it became apparent that the bank panicked and started using strong arm tactics basically to save itself.
 

The point is the bank should have taken more interest in the account. This is small scale industries (SSI) unit as the total investment is under Rs3 crore. They should have made sure that a reasonable moratorium on term loan was given. The borrower had no idea about this. Bank should have made sure that working capital was not disbursed in one go and should have monitored the usage of the limit closely. Bank seemed to be happy that the borrower was paying instalments of the term loan without being bothered about the source of the money. Had they monitored the account things would not have come to this stage.
 

The company has now stabilised production and marketing activities. They will now need the working capital. It is at this juncture they find they will have no working capital! This will adversely impact their cash flows from which alone they can regularly pay the instalments of their term loan!
 

From my experience as a banker and in the field of non-banking financial companies (NBFCs), I have learnt that it pays to be in constant touch with a borrower. The borrower must be encouraged to tell you the truth. He would do that only if you are able to convince him that it is also in lender’s interest that the borrower does well. Handholding of a new borrower increases business possibility for future. Be strict with the borrower at the right time. Be his friend and guide when required.
 

I have always maintained that banks create their own NPAs. This is one example of it. Once bank has accepted a proposal as bankable, it must strive to see that it remains bankable.
 

In many private sector banks, the training required in this area appears to be pathetic. The loan marketing (I hate that word) and sanctioning is done by someone who has no role in monitoring the loan! This is a systematic system risk that the banks seem to be glad to accept!
 

I am sure there are numerous such stories in every bank. I get to hear some sordid things that are happening in the nationalized banks as well.
 

Banking has to cautious only. I am an orthodox banker who believes that we must start suspecting every borrower and see how he can cheat us and then plug all those possibilities. Sanction a loan only after this. And once it is sanctioned, closely monitor new accounts for first few years. This is the time when many new entrepreneurs fail.  And many fail because their banks are unprofessional and fail them!
 

(Prof Anil Agashe teaches at Symbiosis and other management schools in Pune).

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COMMENTS

Dayananda Kamath k

1 year ago

You havr given the golden rule for bankers which they hsve abandoned. That is the crux of problem for todays banking crisis

S.S.A.Zaidi

1 year ago

I totally agree with Prof Atul Agashe's assertion
Problems Arise From,Not knowing enough.
Not asking relevant questions. Failing to analyse all the relevant data.This culminates in POOR CREDIT DECISIONS that lead to,Approving unsound loans.and Rejecting perfectly sound credit.

Simple Indian

3 years ago

For quite sometime Banks have been falling over each other to woo businessmen and private enterprises for big-ticket investments or loans, ignoring the more disciplined and safer individual investors. This has led to higher NPAs, as Banks sanction loans to businesses at a consideration, hoping for higher stakes in future. This has come to light in various scams involving unscrupulous businessmen and Bank staff being hand-in-glove. Banking is all about trust, and PSU Banks have gone from bad to worse, particularly since private Banks have come up.
Sadly, even RBI and other regulatory mechanisms haven't helped curb the delinquent behavior of many of the Banks known for repeatedly breaking RBI's and their own rules.

Hemlata Mohan

3 years ago

Almost 50% of NPAs are created by banks themselves by not understanding the transactions/ the credit requirements and TIMELY as well as ADEQUATE dispensation of credit.
The understaffing in banks and the reluctance of employees and/ or lack of skill only compounds the problem . Credit monitoring and supervision , which are so critical are given the go by for maintaining day to day routines. Staffing and right staffing, to be precise, has not been commensurate with the growth in business. This sorry state of affairs is going to be more acute as many of the old , experienced staff are retiring in the next 4 years!

Yerram Raju Behara

3 years ago

A development banker never ignores the health of either the enterprise or entrepreneur. Unfortunately, these are countable few. I cited a large number of cases in my book co-authored with R.R. Pujari: 'the Small Entrepreneur - Starting and growing (2009). Unfortunately, bank supervisors that can't get entry into a corporate without appointment twist the arms of the hapless small entrepreneurs with the aid of SARAESI Act. But there are bankers and banks and progressive bankers take correct view and also help the borrowers rehabilitate, though exceptionally.
This happens because there is no legal exit route for the small entrepreneurs. Second, banks though tied up with the CGTMSE, still do not lend without collateral up to the designated threshold limits only to behave in the manner described by Prof Anil Agashe.

Gopalakrishnan T V

3 years ago

Banks do create NPAs because of the NOn performance by its Directors, management and other human resources. Directors sanction loans based on their personal preferences, whims and fancies,management ignores the dissatisfactory performance by the indisciplined borrowers, other human resources themselves do not perform nor allow the auditors to perform their duties.Smart borrowers know all these, they exploit by looting the banks. RBI has only very limited say and they only identify the NPAs after it comes to light in their won way. Government knows the entire game and it keeps mum as it has a stake in the formation of NPAs.

Ramesh Jaradhara

3 years ago

I agree with Prof Anil Agashe that banks create their own NPAs. To a large extent it is true in PSBs because the staff handling lending activities are not professional in their outlook and attitude.As an officer in PSB I understand that while considering a loan proposal much of the emphasis has been given on aspects like collateral security, third party guarantee, etc., instead of analysis of future prospects, adding value to bank's client base, friendly relations with the customer.Staff efficiency is the essence of good business in banking. Mediocrity is the rule not an exception in PSBs.The recent happenings in UBI proves it.

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