The Monk Who Sold His Ferrari

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for increasing NPA’s-

1. Banking system has largely been misused for the political gains or political reasons. Many times there is a political pressure for disbursing the loans and hence a broader part of the bad debts are due to this misuse. Various poverty elevation programs started by the government like IRDP, JRY, and PMRY etc failed on various aspects in meeting the objectives and the huge amount of loan given under these schemes becomes totally unrecoverable by the banks mainly due to non reliability of the target segment or misuse of the funds or due to some manipulations.

2. There can be industrial recession or business failures which are also one of the major reason behind NPA’s, Proper precautions and steps needs to be taken in this regards.

3. Sometimes the viability of the project is not properly evaluated or loan is over provided then actually had been given to the project so it also results in NPA’s.

4. There is intense competition primarily in private sector and foreign banks and some public sector banks and that too in the small segment of the market; hence they are taking excessive risk and chances of NPA’s increases.

5. One of the biggest reason for NPA’s in the banking sector is that there is Directed loans system under this system commercial banks has to lend at least 40% of their total credit to the priority sectors.

Effective ways to control NPA’s.

There are various steps taken by RBI and Government of India to reduce NPA’s. These can be subdivided broadly into 2 strategies-

1. Preventive Management

2. Curative Management

PREVENTIVE MANAGEMENT

Preventive measures are to prevent the asset from becoming a non performing asset. Banks has to concentrate on the following to minimize the level of NPAs.

A) EARLY CAUTIONING SIGNALS

By the time banks start their efforts to get involved in a revival process, it’s too late to retrieve the situation- both in terms of rehabilitation of the project and recovery of bank’s dues. Recognizable proof of shortcoming in the earliest reference point, (that is the point at which the record begins hinting at first shortcoming paying little heed to the way that it might not have gotten to be NPA) is basic. In respect of totally unviable units as decided by the bank, it is better to facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible through legitimate means before the security position turns out to be more terrible.

Early cautioning signs can be characterized into five general classes viz.,

(a) Financial

Financial related cautioning signals by and large radiate from the borrowers’ balance sheet, income expenditure statement, statement of cash flows, statement of receivables etc.

(b) Operational

Frequent labor problems, emergence of new technology, emergence of new competition etc.

(c) Banking

• Declining bank balances/declining operations in the account

• Opening of account with other bank

• Return of outward bills/dishonored cheques

• Sales transactions not routed through the account

• Frequent requests for loan

(d) Management

• Lack of co-operation from key personnel

• Change in management, ownership, or key personnel

• Desire to take undue risks

• Family disputes

• Poor financial controls

(e) External elements

B) TIMELINESS AND ADEQUACY OF RESPONSE

Longer the delay in response, grater shall be the injury to the account and the asset. Time is a critical component in any rebuilding or recovery movement. The response decided on the basis of techno-economic study and promoter’s commitment, has to be adequate in terms of extend of additional funding and relaxations etc. under the restructuring exercise. The package of assistance may be flexible and bank may look at the exit option.

C) FOCUS ON CASH FLOWS

While financing, at the time of restructuring the banks may not be guided by the conventional fund flow analysis only, which could yield a potentially misleading picture. Examination for new credit necessities might be finished by breaking down assets stream in conjunction with the Cash Flow as opposed to just on the premise of Funds Flow.

A bank, which is not part of the consortium, may not be permitted to offer credit offices to such defaulting customers. Current record offices may likewise be denied at non-consortium banks to such customers and infringement may draw in correctional activity. The Credit Information Bureau of India Ltd.(CIBIL) might be extremely helpful for significant data trade on defaulting borrowers once the setup turns out to be completely operational.

D) MANAGEMENT EFFECTIVENESS

The general discernment among borrower is that it is absence of fund that prompts to infection and NPAs. Be that as it may, this may not be the situation constantly. Management effectiveness in tackling adverse business conditions is a very important aspect that affects borrowing unit’s fortunes. A bank may commit additional finance to an ailing unit only after basic viability of the enterprise also in the context of quality of management is examined and confirmed. Where the default is due to deeper malady, viability study or investigative audit should be done – it will be useful to have consultant appointed as early as possible to examine this aspect. A proper techno- economic viability study must thus become the basis on which any future action can be considered.

E) IDENTIFYING BORROWERS WITH GENUINE INTENT

Identifying borrowers with genuine intent from those who are non- serious with no commitment or stake in revival is a challenge confronting bankers. Here the part of cutting edge authorities at the branch level is vital as they are the ones who have keen information sources with respect to promoters‟ earnestness, and ability to accomplish turnaround.