BANK’S BUSINESS; Few Suggestions. Part…..3.

In part 1(BANK’S BUSINESS; Few Suggestions. PART….1) and 2(BANK’S BUSINESS; Few Suggestions. Part….2) of the blog, different suggestions were put forth for the banks for improving the health of their institutions. Three remaining suggestions are discussed here under:-

  • Creating different layers of income

Banks shouldn’t depend on only one type of income i.e from interest on loans and advances. They have now many other fields available for creating different layers of income such as (1) Bank insurance (2) Selling of mutual funds (3) Trading of shares          (4) Providing Depository services to clients(financial services for clients) (5) Making treasury operations more efficient (6) Better cash management (7) Providing fee-based services to various Govt. departments, institutions and Corporates for collection taxes, fees or their bills (9) Providing cash management services to big religious trusts, Corporates, railways, airlines, and metros etc.(10) Providing consultancy services for different activities (11) Providing non-fund based facilities such as letter of credits and bank guarantees (12) Acting as bankers to The Issue and underwriting the Issue of shares etc. etc.

Earning income is important but plugging its leakages by exercising effective control over all types of capital and revenue expenditures too is very important. ‘Spend where necessary but strictly avoid wastage’ is a mantra for an efficient control system on revenues.

All these services are very lucrative but require properly trained and dedicated manpower to handle these portfolios.

  • Training and upgrading of knowledge.  

Providing proper training and upgrading of knowledge of the staff at the operational levels is very necessary. It is generally observed that the staff doesn’t take the training seriously and consider deputation to training as a pleasure tour on paid holidays. This concept/notion is very dangerous. Providing training to staff is a very expensive exercise and in addition to heavy expenses, it takes a toll on the quality of services which get affected during the absence of the concerned staff from their active duties. We all know that it is only the men in the armed forces who take their training very seriously because they are aware of the fact that they would be the first to suffer the consequences of not taking the training seriously.

Both these aspects of heavy expenses and non serious attitude towards training can be taken care of by following the ‘DEEP SE DEEP’ model of providing training. There is no dearth of prime training institutions in the country and abroad. A few intelligent officers from the senior scales can be deputed for training to a particular institute for training in a particular field with a clear understanding and instructions that they will follow the schedule of training very seriously, have discussions with the experts who provide training in order to remove doubt if any and come well prepared to impart the same training to other fellows in the bank on their return. These officers so trained be required to impart training to other staff members in batches at the bank’s own offices/Premise/training centres in the evening for a few hours. The staff so trained will have to follow the same routine of providing training to other staff and so on. This model will save expenses, make the trainees accountable and experts, and create in-house expertise in many fields of activities. This will also create a lasting bonding amongst various cadres of staff as well as a sense of belonging for the institution. Bank’s training centres can be made self-sustaining and income generation  units by providing training to staff of other banks in specialised fields at a suitable cost/fees.

  • Customer meets with higher level executives.

A good leader is a good listener. People want to be listened to. They feel relieved and delighted once they are listened to. They feel that they are cared for and are important. Bank’s top brass should therefore not ignore this aspect of public feeling at any cost and shouldn’t feel shy of holding customer meets and face criticism if any with a good spirit. This creates long lasting bonds with clients as they feel that they are important. Any cutoff from the masses is suicidal for the banks. Banks, therefore, need to remain in touch with their customers, listen to them and implement the good suggestion forwarded by them.

BANK’S BUSINESS; Few Suggestions. Part….2

In part one of the blog suggestions regarding resource mobilization were discussed (BANK’S BUSINESS; Few Suggestions. PART….1). In this part, few suggestions are offered for an effective and healthy credit dispensation. A healthy credit dispensation requires:-

  1. Selection of a developing and long lasting sector/a viable economic activity for credit dispensation.
  2. Selection of the right prospective borrower/group of borrowers.
  3. Proper and scientific evaluation of the proposed activity/ proposal of the prospective borrower.
  4. Proper evaluation of the risk factors involved and mitigation of the same.
  5. Availability of adequate tangible and purposeful security as well as ensuring the availability of proper margin( Borrower’s part of the investment in the proposed project/activity).
  6.  A proper evaluation of the proposal at all levels and disbursement of the same by the dedicated, sincere, honest, and well trained and qualified staff.
  7. Need-based disbursement of the loan after proper execution of the required legal documents and after meeting all the terms and conditions prescribed in the sanction letter.
  8. A regular post disbursement followup to ensure that the funds disbursed are actually utilized for the purpose for which the same have been disbursed.
  9. Regular spot inspections of the unit in order to ensure that the same is running properly and the inventory level is not depleting.
  10. Timely renewal of the facilities allowed/DP note and periodical valuation of the property mortgaged to ensure that its distress sale value is sufficient to cover the amount outstanding at any given time.
  11. A regular follow up of the loan portfolio.
  12. Any concession in the rate of interest in any sector shouldn’t be upfront, rather it should be a backend offer on the timely repayment of the loans. This would encourage timely repayment of loans and prevent them from slipping to the NPA category.
  13. A timely action for regularization of any account showing signs of sickness is always a better option. (Bank’s NPAs. Causes and Remedies.
  14. Very effective and robust recovery management. (Management of NPAs -Some recovery techniques. )
  15. Settlement of NPA account by negotiation should never be less than the value of all the available securities including the personal as well as third-party guarantee available, and the same should cover the amount due in full with up to date interest including all legal or other costs. Concession if any should not be encouraged and be given only in very deserving cases on the merits of each case.

Although absolute freedom is not available for exercising  the choice for selection of a sector for credit dispensation in view of the social responsibilities on the shoulders of the banks, yet they should after meeting their responsibility of financing the social sector/priority and the neglected sector, make a firm choice for deployment of their funds in the sectors of their choice where they have trust, experience, and confidence. Niche banking is always preferable unless the staff is well trained to handle all other sectors. Many banks have suffered a lot by fishing in the troubled waters in absence of experience to swim across the tides.

Selection of the borrower should be independent. Undue laxity, influence, or any pressure is sure to bring bad results. There should be no compromise in the selection, appraisal, sanction, and disbursement of the loan. BANKERS MUST BEAR IN MIND THE FACT THAT ONCE THEY COMPROMISE IN THE SELECTION, APPRAISAL, SANCTION, AND DISBURSEMENT  OF ANY LOAN DUE TO ANY CONSIDERATIONS, BE IT POLITICAL PRESSURE OR OTHERWISE, THEY WOULD AT THE END HAVE TO COMPROMISE A LOT WHILE RECOVERING SUCH LOAN. There is no dearth of live examples of such cases, especially in the very recent past.

There should never be any haste in the sanctioning the loan and nor should there be any undue delay. Evaluation of a proposal has to take some justifiable time. After all, it pertains to the parting with the public money which the public has kept with us with extreme confidence and trust. Unless we maintain that trust, we can’t expect to attract good resources.

Every activity has an element of risk attached to it. This has to be honestly identified and properly provided for. Suitable legal and tangible securities which are properly identified are to be obtained in addition to getting the same along with all inventories properly insured against all risks. All risk mitigation factors as advised by the risk management departments of the respective banks be adequately taken care of. Banks these days are offering margin free loans i.e 100% financing and which is not a healthy proposition. The borrower must have some stake in the activity financed to him or otherwise, he would have no pains/interest in carrying out the activity judiciously as he has nothing to lose in case of a failure.

Four qualities/attributes of the staff; Honesty, Sincerity, Dedication, and a deep Sense of Belonging for the institution are the basic necessity for building a strong financial institution. Any lacking in these basic convictions in the staff is bound to dupe the banking sector. There is no dearth of allurements to staff and once they swallow the bait, the hook is sure to get entangled in the throat of the staff as well as the bank resulting into very heavy losses. Therefore staff in the bank and especially in the credit department should be honest, dedicated, sincere and well trained and their knowledge should be got periodically updated so as to keep them abreast with the day to day changes in their field of activity. There should never be square pegs in the round holes in the credit department because of the sensitivity of this very vital portfolio in the banking sector.

Once the loan is sanctioned, both the proposed borrower as well as the branch staff are relieved and excited. This is the time when most of the mistakes are made. Even a single penny shouldn’t be released unless all legal documents are properly executed, got vetted, and all terms and conditions of the sanction letter have properly been complied with.

The sanctioned amount is to be released in need-based installments and utilization of the disbursed amount must be ensured by conducting on-site physical verification as well as from the bills produced/GST paid vouchers etc. Every loan disbursed needs regular follow up till it is fully repaid with interest. You ignore this and you will lose sight of the same and land in trouble. Giving loan and its regular follow-up are similar to sowing a crop and taking care for its growth by regular visits to the field, ensuring proper watering, hoeing, proper manuring, de watering where required, spraying of pesticides/insecticides and timely harvesting. Unless this is not done, the crop is bound to fail. Same applies to the loans disbursed.

Handling the credit portfolio is a highly technical job so needs to be handled by well experienced staff with utmost care. The changing economic situation and its exposure beyond the national and international borders makes lending more vulnerable to various risks. An inept handling of this sector therefore is a risky proposition and therefore needs to be handled by men of integrity, experience, and knowledge of the concerned subject………..To be continue as part 3.

 

 

 

 

 

 

DWINDLING TRUST IN BANKS- 20 Steps/ Remedial measures Suggested

The deteriorating health of banks during the past couple of years has shaken the public confidence in the banking systems. The ever-increasing NPAs which at present are estimated to have touched a whopping figure of about Nine lakhs crores sends shivers down the spine of the stakeholders. Every year a fresh and heavy dose is added to the portfolio of bad loans and the trend doesn’t seem to have an end. This volcanic effect if not arrested, will wipe out the important agent of economy i.e. banking from the scene.

Another monster endangering the industry is the increasing incidences of big frauds in the banking sector in the recent years. It appears as if the bankers have surrendered before the fraudsters and the defaulters. The causes have already been discussed in earlier blogs Defects in bank audits and inspections and Bank’s NPAs. The faith and trust of the public in the banking sector is shaken badly. BANK IS THE OTHER NAME OF TRUST. PEOPLE KEEP MONEY WITH BANKS ON THE TRUST THAT THEY WILL GET GOOD RETURNS AND THEIR FUNDS WOULD REMAIN SAFE. However, with all said and done, the following 20 measures are suggested to regain public confidence in the banking sector:-

  1. Remove uncertainty in the banking operations once for all. Clean up the balance sheet and don’t keep any NPAs under the lid. Any evergreening or hiding of NPAs may be a short time solution but its effects are dangerous. BRING COMPLETE TRANSPARENCY IN THE OPERATIONS.
  2. Once done, you can start afresh and can put the progress on track and by moving slowly and cautiously you can regain the lost speed by putting in more vigor, experience, honesty, and hard work.
  3. With speed, you need to avoid accidents by choosing the right tracks and extra vigilance. Make internal inspection and controls more effective and purposeful rather than a mere formality. The concurrent audit is a very effective tool for inspections as it nips the evil in the bud. Make it more effective by allocating the job to experienced and hard working people. More stress should be on spot rectification rather than just pointing out and reporting. Any mistake or an irregularity if allowed to stay for some time takes roots and destroys the system, so spot rectification is need of the hour to stop the spread of the weed.
  4. At present, there seem to be too many inspections by different departments and controlling heads and some of which are an overlapping on one and the other. Too much of everything is bad including the number of inspections. The number doesn’t matter, it is the quality which counts. It is generally seen that inexperienced people and not so good performers are placed in the audit and inspection wings in the bank. This attitude needs to be totally changed, and efficient, knowledgeable and hardworking people should be allocated this job. Unless a serious thought is given to this issue and the inspection/audit deptt. is not strengthened, the chances of intrusions into the systems would continue, thereby adversely affecting the health of the banks.
  5. Specially trained staff should handle credit appraisals, sanctions, and disbursement of loans. Follow up of credit disbursed should be done on time and in a very effective manner. Inexperienced and untrained staff is prone to make mistakes, mishandle, and ultimately land the bank in trouble. Don’t jump into the fields about which you have no experience. Many banks went into trouble especially in the consortium financing because of their lack of adequate experience and blindly following the leader of the consortium.
  6. Controlling offices to be more vibrant and vigilant. Every tier through which the credit proposal moves including the board of directors, must add value to the proposal and share responsibility. No one can shirk responsibility on the pretext of being nontechnical in the respective field. This is a very dangerous attitude. People at the helm should be more serious, accountable and responsible.
  7. Banks should have experts as directors on the boards of the bank who could provide better guidance and direction based on their rich expertise and experience in their respective fields. Persons with political leanings/connections should as far as possible be not appointed as directors on the boards of the banks.
  8. A periodic rotation/shifting of people in the credit wing be done regularly as well as proper training and refresher courses be conducted for the persons handling credit in order to keep them abreast with day to day changes in the credit market, its procedures, and emerging risks.
  9. No proposal should be handled in a hurry. It may be processed expeditiously but not in a hurry. The prospective borrower is always in hurry, make him appreciate that even hurry takes some time. There have been instances when the highest body of the bank i.e. board of directors have complained that sufficient time was not provided for evaluating the agenda of the board meeting and some proposals were introduced as a supplementary agenda item on the day of the board meeting. How can one expect any value addition by any expert to such an item on the agenda?
  10. With the digital and online banking have taken roots, the interface interaction with the customers seem to have taken the back seat. Although the banks have effective complaint redressal systems yet face to face interaction is very important. Banks must conduct periodic customer meets at all levels and listen to the point of view and suggestions of customers and redress their grievances if any. The customer is the working capital of the bank. His suggestions must be evaluated and acted upon on merits of each case.
  11. Interaction with the staff by the executives at different levels helps in knowing their expectations from the bank as well as sharing the expectations of the management with the staff. This needs to be done periodically wherein individual staff targets can be set and evaluated. The concerns and policies of the bank must be shared with the staff as a family and they should be involved in the overall development of the institution and encouraged to meet individual targets. This can help banks to build good teams and induce a sense of responsibility, understanding, and a deep sense of belonging to the institution.
  12. The policy decisions of the board as well as of the regulators must be strictly followed in letter and spirit.
  13. Banks must learn from the past experience and avoid entering into waters whose depth and force of the flow is not known.
  14. Avoid wasteful and avoidable expenditure as you are under the constant public glare. This creates a lot of negative publicity for the institution.
  15. The seniors at all levels have to be a role model for others in the field of dedication, devotion, hard work, honesty, transparency, simplicity, no favoritism, and expenditure control.
  16. Banks should not spare the rod where ever required without any prejudice or bias. They should also be not miser in encouraging and promoting people to achieve the given targets.
  17. Banks must have a workable and sound whistleblower policy. People at the top need to be sensitive to even minor and feeble signals of misdeeds by anyone in the institution. They should read between the lines and make independent investigations where ever required.
  18. Banks should create and strengthen other layers of income from para-banking activities and also try to increase income from fee-based and non-fund based business.
  19. Banks, till date, had been enjoying the luxury of managing comfortable NIM (Net interest margin) which is a ratio of the difference in interest earned on assets and interest paid on deposits to the assets. Since there are a number of well-organized trade and industry association both at the local and national level who manage to get the interest on trade and industrial loans reduced, but unfortunately there is hardly any organized body representing the depositors who can watch their interests. The result is that depositors have no option than to accept whatever is offered to them. The consumers of the credit manage a good deal, banks manage a comfortable NIM, and all this adversely affects the returns for the depositors. This situation is fast changing with more awareness especially through the internet and the depositors are searching for the better green pastures in the shape of mutual funds and other instruments with better security and returns. The shift of capital to cryptocurrencies is a matter of concern for the banks. In such circumstances, the banks may find it a bit hard to mobilize funds except after sacrificing a good part of their NIM.
  20. In view of above banks need to make long-term strategies for managing funds and lay more stress on non-fund based and fee-based income. A more scientific asset liability management and better risk management strategy will go along way in increasing incomes of the banks. The funds locked in bad debts need a special focus of the top management. The recently passed insolvency and bankruptcy act is a boon for the secured creditors though with a cost yet very useful for recovery and cleaning the balance sheets of the banks. The suggestions put forth are not exclusive and the banks can take any other measure to improve its working and image in the overall interests of all the stakeholders and also in order to regain the lost ground.