BackWhose performance is it going to be anyway?
There are signs of a crisis that lies ahead with the Indian banking industry
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The man came home forlorn. I knew that the appraisal season has been tough for him. As he poured himself a drink, he revealed how he had to let one of his employees go that evening. This particular employee, I knew had been given many chances in the past by the management, who seem to have been convinced that he needed those chances to survive in the corporate world. Yet there had been no improvement in his performance.
“Why do you blame yourself?" I told him. “You cannot make it big with a non-performing asset (NPA) in your team." “In fact, I’m glad that you didn’t act the way Indian banks do and sat on his non-performance," chirped in the cousin who was overhearing our conversation.
As smiles broke out on that comment, the atmosphere in the room eased and we turned our attention to graver issues of the first world—sudden disappearance of our cook and research on take-away options.
Though we did smile and smirk over my cousin’s comment that evening, a second thought to it and one would realize the gravity of reference and the grimness of the Indian economy that was indicated through those few words. Ever since the start of the current year, the Indian media has been abuzz reporting about the growing NPA trends in the banking system. Studies, reports, projections—they all show signs of a crisis that lies ahead with the Indian banking industry being unable to recover its dues from large bad debts.
If one were to wonder what are the major reasons for such a rising trend of NPAs, it would surprise to know that often the reasons are as simple as providing credit facilities without doing a thorough check or lending under political pressure. It is not that the situation is sans borrowers who are in genuine distress. However, the percentage of such cases is so minuscule and the bad loan portfolio so large that it makes us wonder about the robustness of the credit-appraisal process before disbursement and during renewal or extension.
A study of the sector-wise analysis through 2013 revealed that infrastructure, power, iron and steel, textiles and aviation industries accounted for approximately 60% of the NPA or restructured assets in the Indian banking regime.
Such statistics are alarming, especially when we wish to open the gates for foreign direct investment (FDI), for it would not only deter foreign investors from entering into joint ventures but would also affect future availing of credit facilities owing to bad precedence.
The worst sufferers, however, are the common employees, who join these organizations with big dreams in their eyes, attracted by the liquidity available from the credit facilities on offer, and then a few months down the line find themselves striving to make ends meet with salaries being put on hold, lock-outs looming large and the fate of the company suddenly gone bust.
The situation is indeed alarming. But if you ask me what is more alarming is the reluctance of various financial institutions to act on the proposed solutions, which, if implemented properly, can indeed go a long way in curbing the NPA menace.
In recent times, the Reserve Bank of India (RBI) has spoken in clear terms about how banks should consider using external credit appraisals in addition to their own internal assessments and take proactive measures to prevent disbursement of bad loans. The 2013 Report of the Financial Sector Legislative Reforms Commission backs the recent recommendations of the Reserve Bank of India deputy governor and recommends “professional diligence" to be conducted on the borrower that takes into account important parameters pertaining to honest market practice, the principle of good faith, business expertise and analysis of the risk involved in the borrower’s project.
However, in reality, the credit appraisal process that is actually put to practice makes one wonder who is actually to be blamed—the criminal who is siphoning off public money or the institution which, owing to its own process laxities, is abetting such a crime?
I am no Gandhian; I do believe in an eye-for-an-eye. However, I do believe in karma. I stand by the theory that an uninformed decision can only bring good surprises in those fiction books that lie on the bed stand. If today the banks are appraising the borrowers to be wilful defaulters, maybe it is time to take a pause, appraise their own systems that comprise of weak due diligence, over-reliance on credit rating mechanisms and untrained account managers, and then opt for a revised approach?
For those of you who are still concerned about the man who was asked to leave, don’t worry, he is fine. He cares about relationships, but knows his green paper from his blues. Wish they made banking systems too on lines of his psyche? Yes, I wish the same, too.
Sagarika Chakraborty is associate director-western region, Pinkerton India.
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