Bank’s NPAs. Causes and Remedies.

NPAs are a challenge for the survival of banking industry across the globe, and especially for the banks in the developing countries. The cause of concern for these nations is the rising trend in NPAs which is spreading like an epidemic. Unless this trend is contained and curtailed, the fear is, failing or slowing down of economies of the affected nations.

NPAs adversely affect the health of banks and the economy in many ways.

  1. They stop creating any income for the banks, that is why such assets are called non-performing assets.
  2. They eat away a portion of income the good advances i.e. from performing assets and other sources of income because of the provisioning to be made against the NPAs, thus reducing the overall profits of the banks.
  3. They tell upon the reputation of the bank. The value of stocks comes down thus adversely affecting the investors which ultimately is a cause of discouragement for the public to contribute to such a bank’s  deposits and resources.
  4. It badly affects the morale of the employees because any reduction in profits deprives the staff of expecting any incentives and career growth.This trend if sets, is a very serious matter and a big cause for losing a battle.
  5. The economy of the nation suffers because the banks cant support the economic activity due to the shortage of loanable funds as the resources get blocked in the NPAs.
  6. The capital adequacy ratio falls below the required standards and in order to meet this shortfall, the banks go for capital raising through the public issue which in such depressed condition and loss of reputation becomes difficult to be fully subscribed because of poor response from the market. This forces banks to manage capital at discounts rather than premium. The cost on account of managing public issue is huge, and another cut in the profits of the bank. However, in case of public sector banks, the central govt inducts capital out of its own sources to bail out banks. The recent case is the induction of more than two lac crores of rupees by Indian govt in the capital of public sector banks to bail them out of the crisis.

THE INSTITUTIONS WHICH ARE CONSIDERED AS THE AGENTS OF DEVELOPMENT AND SOURCE OF RESOURCES FOR THE EXCHEQUER ARE BECOMING A BURDEN ON THE GOVT.

This amount could have been used for the uplifting the economy but instead, it has affected the growth of it.  How long this can be allowed to go on. Can any economy afford to have such a state of affairs where the institutions meant for its development become a burden on it? They have to stand on their own legs and support the economy instead. This serious issue needs the focused attention of the management of respective banks as well as of the govt.

CAUSES OF NPA’s

Bank’s assets turn NPA for genuine as well as for bad reasons. These need to be timely identified and remedial steps taken to avoid them. Once an asset becomes NPA it becomes difficult to upgrade or recover it. This puts an additional burden on the resources of the bank as well as on the workload on the employees whose maximum energy and attention get consumed on such cumbersome work rather than on the development of the main business. The genuine and unavoidable causes for NPAs are (A) change in govt. policy. For example ban on plastic bags affected the plastic bag industry and loans in such industries went bad. (B)change in the lifestyle of consumers effects the industry whose products go out of fashion. (C)Fall of natural calamities. (D)Wars and prolonged public disturbances. These cant be avoided, and assets becoming NPA because of such circumstances need to be dealt with by the concerned Govt. and banks with compassion.  The BAD CAUSES are:

(A) Defective and poor appraisals of loan proposals.

(B) Political pressure/other considerations for sanctioning of loans.

(C) A mad rush/run to meet the loan targets unreasonably set by the management.

(D) Handling the proposals both at appraisal, sanction as well as at disbursement level by inexperienced and untrained staff.

(E) Diversion of funds to projects other than the ones for whom the loan actually sanctioned.

(F) Poor pre and post disbursement followup.

(G) Compromising with the quality of security and its realizable value in white money.

(H) Avoiding actionable steps at the early stages of indication of slippage to NPA category.

(I) Lack of proper accountability of staff at different levels associated with the appraisal, sanction, and disbursal and follow up of loan cases.

(J) AND above all is the wilful default by the loanee especially in case of big advances.

(K) It has been observed that proposals, especially large ones having multiple banking arrangements or consortium financing, are not appraised at individual bank’s level with much care as should have been applied. Generally, member banks copy paste the proposal of the leader bank. Something suiting a certain bank may not fit well into the systems of any other bank. Every shoe does not fit every foot and may pinch at the end causing a trouble, So banks should individually make their own assessments about the suitability of proposal. An account in such an arrangement going NPA in one of the member banks infects all banks. Every tier in the sanctioning process from branch to the board level must add value to the proposal.

REMEDIES

  • Political interference can be neutralized by effective appraisal without compromising the quality of proposal and security. The only weight-age to be given to such pressures should be limited to early and smooth sanctioning of the loan.
  • Targets for advances be set in a scientific manner and properly trained staff need to be put on appraisals. Creation of specially trained staff requires proper planning and sustained efforts need to be made to upgrade their skills. There should not be square pegs in the round holes or otherwise things will end up in failures.
  • Proper legal documentation and creation of legal charge be got done before releasing even a single paisa of the sanctioned loan. Disbursal should be need-based and in phases. Post disbursement inspection must be conducted on and after every phase of disbursement in order to check any diversion of funds.
  • All assets charged to banks must be got properly insured and diarised to be renewed on due dates. Value of securities be got assessed at suitable intervals of time. Disbursing authorities necessarily need to follow installation and the timely start of a project as any delay may result in cost overruns thus making the project unviable. This may result in a loan into going to NPA in the beginning itself.
  •  All statutory/necessary permissions, clearances, licenses must be in place before disbursal of loan.
  • THE CONTROLLING AUTHORITIES MUST KEEP AN EAGLE’S EYE over the big loans and LARGE PORTFOLIOS and guide the operating levels at every stage. Pre and post inspection and controlling authority’s guidance should not be only on paper but on the ground. These are not the only safeguards as there may be many others depending on each case.

Author: Kuldeep Kumar Sharma

I am an Ex-banker having 38 years of experience in different fields and capacities in banking and social life. I started the career at a very humble position and ended at a senior position of President of the bank.

2 thoughts on “Bank’s NPAs. Causes and Remedies.”

  1. a very good write up, and experience, that has been translated. Only remedy left out is the performance pay of top brass, meeting fee of decision making authorities, their appointment and a fraud of conducting audit/ their fee & expense needs a review

    Liked by 1 person

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