MONITORING OF ADVANCES: KEYISSoES Present scenario in Banking System Maintenance of Asset quality has become important aspect for survival of Banks. Increasing competition results in a situation where banks compete with each or for better customers. It is becoming tougher for banks to generate consistent profits. Though banks have developed alternative methods for generation of non interest income, income from loans and advances is basic revenue generator for bank. Among banks in India, those in Public Sector particularly face challenges in this aspect. After withdrawal of regulatory forbearance on restructuring of assets, banks are About author B. Sreenivasa Rao B.Com, CAIIB Chief Manager (Faculty) Union Bank of India Staff College Bengaluru now in process of adjusting to a realistic process of recognizing stress. However, RBI has recently voiced concern at proportion of stressed assets (those accounts with irregularities, and likely to slip to NPA category) already comprising a major portion of standard advances in Public sector Banks. Importance of maintaining Asset Quality Increase in business is an imperative need for Banks. But whole success of such growth is measured by asset quality. Paradoxically, asset quality position of banks is looking better than real situation since most of time irregular advances are measured in percentage terms. As advances portfolio of banks is growing continuously, percentage increase in NPAs and stressed assets remains low as a percentage. But absolute figures reflect a really alarming situation (Refer to Table I). Maintaining perfect asset quality is only option for banks to do well and improve bottomline. This is survival mantra. ~ BANKING FINANCE 1 AUGUST 12016137 ~
The percentage NPAs also reflects an equally grim picture: Table I 5.69% of total advances. Many of public sector banks have ir Gross GNPAs of SCBs: June 2015 Amount in Rs. Crore Banks Based on figures, Gross NPA of all public sectors has risen to overall Gross Gross NPAs Advances Gross NPAs To Gross Advances % NPA percentage above 5%, which is indeed a very alarming picture. Reasons for existence of huge number of stressed Allahabad Bank 7902 146920 5.38 Andhra Bank 7238 125846 5.75 Bank of Baroda 14937 284315 5.25 Bank of India 24402 280987 8.68 7575 96365 7.86,0 395 0.00 Impracticable and unrealistic repayment schedules: For Banks, Canara Bank 14069 309094 4.55 while sanctioning loans, in many Central Bank of India 12931 193132 6.70 cases, it may not be possible to Corporation Bank 7765 143107 5.43 Dena Bank 4841 78034 6.20 13942 188277 7.41 as to when borrowal units it 5513 118727 4.64 will actually take off, break even 14638 158961 9.21 and start generating profits. The 8577 146549 5.85 project report submitted Bank ofmaharashtra Bharatiya Mahila Bank Ltd. IDBI Bank limited Indian Bank Indian Overseas Bank Oriental Bank of Commerce assets A study of present scenario gives us an idea about some factors causing this trend..:. make a very accurate and realistic assessment of project. This is true especially on study of fact by prospective borrower to bank 3300 63799 5.17 25032 336814 7.43 6678 162437 4.11 generate income for borrower UCO Bank 10400 134422 7.74 unit. Union Bank of India 13765 232072 5.93 Moreover, re is no system of 6533 68299 9.57 midterm 2871 84800 3.39 Punjab & Sind Bank Punjab National Bank Syndicate Bank United Bank of India, Vijaya Bank Nationalised Banks should be subject to analysis, before deciding when it will actually assessment of project during take off stage, to know wher business is go 212907 3353352 6.35 State Bank of Bikaner & Jaipur 3133 70436 4.45 State Bank of Hyderabad 5482 106704 5.14 53788 1062785 5.06 borrowal units during take off State Bank of Mysore 2214 52612 4.21 stage are not properly State Bank of Patiala 5091 79705 6.39 As a result, repayment State Bank of India State Bank 'of Travancore SBI Group TOTAL PUBLIC SECTOR (Source: RBI statistics, key indicators) ~ 38120161 AUGUST 2759 68411 4.03 72467 1440654 5.03 357842 6234660 5.69 ing well with projections and expectations. As a result, most of problems faced by handled. be comes due, before unit actually generates surplus. This will result in stress in account, as due amounts are not realized in time. 1 BANKING FINANCE ~
.:. Economic cycles turning worse: The winds of taken based on this data. As re is no proper basis economy are not always favorable, y keep on fluc for se decisions, it may land m in trouble. Par tuating. The general trend or recession in economy ticularly in big ticket loans, this will prove disastrous. affects entire economy. All economic entities, wher big or small will be under influence. The units financed by Banks are no exception..:. Compromising on vital parameters while appraising loans due to severe competition to acquire big borrowers: In present day banking, stiff competition.:. Compulsion in financing certain activities mandated by Government: Public sector Banks have taken Sometimes banks are compelled to take risks to acquire up cause of upliftment of downtrodden, and people who are lying below poverty line. Govern and retain customers ignoring some vital parameters of lending. The deviations that crop up are mismatch ment looks up to banks for this cause, as banks are well ing with compliance guidelines. During this process, banks are exposed to great risks. equipped and most suitable tools to bring about economic development from grass root level. For identification of beneficiaries, various government agencies are involved. The activities of se agencies are overlapping. These agencies often identify activities which may not go well in area. And also sometime, financing to such activity will result in stiff competition. For example, many beneficiaries are selected and recommended to banks for Auto Rickshaw finance in same area, despite fact that area is flooded with such auto rickshaws. Many a time it happens that same activity is forced through more than one bank in a particular area, resulting in competition in market. Ultimately it affects income generation of borrower. :. Presence of borrowers in remote and inaccessible area: Bank finance reaches to all corners and among bankers exists to acquire good customers. Comparison of banks If we take a comparison of Banks' NPA position, present situation makes it amply evident that banks are losing much because of one parameter, i.e., slippages to NPA. Even if banks gain profit on many or aspects, slippages to NPA category nullify all positive gain factors of banks, putting great strain on' balance sheet at end. If we analyze Gross NPAsof Public Sector banks for last 10 years, as per RBI statistics, from a level of 476.22 billion, Gross NPAs have reached to a level of 2784.68 billion. An increase of 585% or more than 5 times bad loans position as on 31.3.2005. If we take a look at picture of slippages in banks, it reflects furr worsening scenario. (PI. refer to Table 11) remote areas. The intention is to bring about development in se areas. However, recovery of loans given in such areas becomes difficult as borrowers are not easily accessible. Some of areas are inaccessible. Borrowing units financed in such areas demand a lot of effort and time from Bank Staff. INTERNET BANKING _(_ t~... (t l ].:. Difficulty in understanding accuracy and veracity of data submitted by borrowing units at a given point of time Banks are facing difficulty to a great extent, in verifying accuracy of data submitted by borrowing units. The data submitted by borrowers on day to day basis and final data for financial year (Audited) is likely to have a wide variation. Till such audited data is received, banks have to rely on provisional data and many decisions are ~ BANKING FINANCE I AUGUST I 2016139 ~
MOVEMENT OF NPA OF ALL PUBLIC SECTOR BANKS AS ON 31.3.2015: Table 11 As on March 31,2015 (inmillions) Gross NPAs SI. No. Bank 1 STATE BANK OF BIKANER & JAIPUR 2 STATE BANK OF HYDERABAD 3 STATE BANK OF INDIA 4 STATE BANK OF MYSORE 5 STATE BANK OF PATIALA "i" 6 STATE BANK OF TRAVANCORE STATE BANK OF INDIA & ITSASSOCIATES 1 ALLAHABAD BANK ANDHRA BANK 2 3 BANK OF BARODA 4 BANK OF INDIA 5 BANK OF MAHARASHTRA 6 7 8 9 10 BHARATIYA MAHILA BANK LTD. CANARA BANK CENTRAL BANK OF INDIA CORPORATION BANK DENA BANK 11, lobibank LIMITED 12'.INDIANBANK 13 INDIAN OVERSEAS BANK 14 ORIENTAL BANK OF COMMERCE 15 PUNJAB AND SIND BANK 16 PUNJAB NATIONAL BANK 17 SYNDICATE BANK 18 UCO BANK 19 UNION BANK OF INDIA 20 UNITED BANK OF INDIA 21 VIJAYABANK NATIONALISED BANKS TotalforPublicSector Net NPAs As on Addition ReductionWriteoff As on As on As on March 31 during during during March 31 March 31 March 31 (previous (Current (previous (Current.Year Year Year 18377 33520 41404 269871 29923 12812 25512 50690 8278 (5) 29451 49848 567253 21364 43597 23571 735085 83580 68765 162614 221932 64021 (6) 17709 29849 310961 16303 24045 19285 418151 57218 33425 60348 76795 18073 17692 23485 275906 11216 30492 13987 372777 59789 36886 80695 137747 41266 108695 65790 37389 36740 61008 33389 120160 45143 12424 166596 55000 75513 56663 40872 39276 48200 5900 13817 14722 13860 7791 130400 59655 66490 31806 18189 49023 27637 56581 39044 19186 99170 87401 68070 44650 30143 59925 31470 98133 48162 22660 153965 27206 35564 53403 38437 63306 69190 (2) 16875 30493 294350 (3) 11120 35334 130116 28189 37584 30769 798165 80680 58576 118759 18955 47085 44749 452507 50213 34243 85153 166515 46336 118686 28599 0 75702 115000 47368 26160 99602 45622 90205 56179 25535 188801 46111 66214 95637 71180 (7) (4) 3631 3553 213035 7403 7551 10544 245716 17391 11241 15786 12578 2637 (1) 27328 58242 616054 19859 28269 1474474 1326109 2272639 1778615 17671 16809 40271 15410 4505 39251 26142 25065 12684 38916 15783 486914 756785 5153 16089 5497 20869 9249 2633 59197 10545 14011 9307 7607 7912 264074 509790 118730 71067 43930 126850 56704 149225 76662 30822 256949 64424 102651 130309 65529 46641 40814 24432 16597 12624 2049595 888076 1229305 2784679 1306227 1602082 (Source: RBf statistics, key indicators) ~ 40 120161 AUGUST 1 BANKING FINANCE ~
The fresh gross slippages during financial year 201415 for all Public sector banks stands at 1,77,861 crores (without netting). However, at end of financial year, after affecting recoveries, NPAsstood at 2,78,467 crores. These figures indicate really alarming situation in asset quality of banks. The way out of situation: The strategy for tackling irregular/stressed around mitigating assets revolves risk factors or reasons as cited earlier in article..:. Multi layer due diligence is ta be canducted to accept any borrower: Proper operational guidelines should be put in place for multi layer screening well before accepting (borrower) customer. Presently, most of banks rely on one or two officials who are mostly branch officials of concerned branch. However, it will be prudent for banks to conduct a second layer of due diligence independent of one which is already done by branch officials concerned. For this, officials from nearest branches/administrative engaged. offices can be The second layer should once again verify credentials of borrower from independent sources of its own. A summarization of facts can be done at a later stage before accepting proposal for sanction. For implementing this, Banks must devise specialized mechanism to deal with appraisal and pre sanction due diligence which involves physical aspects of unit, borrower, and papers (financials)..:. Restructuring, wherever possible and necessary, based on viability: Needless to mention, restructuring should be driven by genuine need and viability aspect. Realistic appraisal of situation is a must. In same manner, a borrower who needs to be assisted must be given helping hand through restructuring, wherever situation warrants...:. Do not withdraw support once account turns NPA: An account may become NPA due to numerous reasons. Field functionaries should be well trained to identify actual cause of account slipping to NPA,and extend support if needed, so that unit can.:. be tapped back to health. In fact, a culture is to be developed to identify real causes wherever accounts are stressed, when first signals of irregularities crop up. This will give a realistic view of unit. Banks in this situation have to recognize borrowers wher y are willful defaulters/non cooperative, and n decide wher to extend help or to adopt or preventive measures..:. Economic viability of unit is to be preserved for overall good of economy: As stated in earlier point, real objective of banks should be preserving economic viability, and reby economic value of units. NPAclassification is meant only for giving a true picture of balance sheet of Banks. The ultimate objective of all financial institutions, including banks, is to preserve value of units; in which huge amount of investments are made. Any action taken by banks looking from this angle will ultimately win win situation for both Banks and borrowers. have a Ensuring progress of units both on financial and physical terms: Once finance is extended, banks become partners of borrower with a considerable stake in activity. Sufficient support and hand holding is to be extended to units/borrowers on both financial and physical matters. A sort of ownership is to be assumed and felt. A monitoring culture developed through a sense of ownership, will really work for benefit of both bank and borrower..:. A proper internal Loan review mechanism supported by a timely Risk Rating evaluation: The internal review mechanism of banks need to be more realistic. For review/ renewal and rating of accounts, banks will generally rely on unaudited/provisional figures to complete process within stipulated time. The audited financials, which are actual reflection of financial strength of unit, will be provided at a later date on completion by borrowers of all formalities and y are generally received during month of September/October every year. As per present practice, Banks are merely conducting a fresh rating of account when audited financials are received as account is already reviewed with provisional financials without looking at audited financials in entirety. Great risk is involved in this aspect..~ BANKING FINANCE 1 AUGUST 12016141 ~
Alternatively, banks can standardize renewal system to synchronize uniformly for all accounts during a particular period, say spread over three months, when audited financials are generally received. A suitable period like September/October/November can be chosen for this. Instead of relying on provisional data each year at time of renewal of account, banks can time first renewal of each account falling due at time of receipt of audited financials. Thereafter y can enjoy benefit of actual renewal with audited financials every year reafter. Besides giving banks a good control on units/borrowers, system may enable banks to follow regulate review/renewal Similarly, risk rating conducted this up, plan and system more effectively. at time of actual renewal will also be more tenable with audited financials each time..:. Separate and more intensified review mechanism for accounts under stress: This can be planned with more focus on causes leading to stress. Review or renewal of stressed accounts should not be a routine renewal. Wherever re is stress, review mechanism should be focusing on some more aspects, for example cau~esfor irregularities, wher y can be rectified and unit can work normally as per expectations of original sanction. A separate proposal! renewal note should be devised for such accounts. Banks can also prepare check list of borrower/industrywise to list problems and find out solution to specific problems, instead of conducting a routine renewal of accounts..:. Constant upgradation of credit appraisal skills: Banks also need to update appraisal skills of its employees on a continuous basis. The present appraisal skills of an average advances officer do not commensurate with challenges faced by industry. Repeated trainings on appraisal skills for updating.skills are required. be incorporated in proposal. These aspects may include details of getting power connection, approvals from government authorities, etc. Borrowers' ability to get se things cleared becomes more important..:. Sufficiency of Loan documentation: The field functionaries attending documentation be thoroughly for documentation aspect needs to trained. Banks may think of special cells (some banks have already implemented this aspect) for big accounts, where few experts on documentation documentation will be sitting and y attend aspects more systematically. This will ensure ultimate recovery of Banks' money. A thorough documentation process before disbursement of loans can be a litmus test for borrower, and sometimes banks can get important signals about borrower, during this stage..:. Standby credit facility to take care of cost over run: While financing any new unit, banks have to sufficiently take care to assess wher any cost overrun is likely to occur, if so, what is remedy available with borrower. Follow up of implementation schedule in large project loans assumes great importance. Correlating disbursements with sanction schedule and checking progress as per projected schedule is a very important aspect that is to be monitored during currency of entire disbursement schedule..:. Maintaining quality advances have to be one of important parameters in appraisal system: Wherever officers are involved in processing and sanctioning of loan proposals, special care can be taken to incorporate positive aspects of asset quality in performance appraisal systems. This will generate a motivation for maintaining quality"advances. :. More and more penetration in to all aspects of loan proposals during appraisal stage: This will help banks to have control or information of a major por {ion of activity. Minute details regarding each aspect of project, at time of initial sanction may ~ 42120161 AUGUST 1 BANKING FINANCE ~
.:. Temporary measures for upgradation of accounts should be avoided: For example, erosion of liquid collaterals to reduce over dues and keep accounts stan.:. dard: Whenever banks find accounts under stress, first reaction of field functionaries liquid assets. Such temporary avoided to postpone slippages. will be to liquidate measures have to be.:. Role of middlemen is to be discouraged in process of loan sanctions: This aspect is to be taken care at appraisal level. Instead of relying on middlemen, banks have to select ir own borrowers based on merits of case. Regulatory support by Reserve Bank of India As banks are severely under stress, RBI also has come up with few new guidelines to help banking system and reby preserving economic value of assets created out of bank finance: :. RBlsframework on revitalizing distressed assets in economy, giving de~ailed guidelines for identifying stress in accounts particularly large borrowal accounts. This gives banks proper direction for monitoring of large borrowal accounts and action plan to be followed..:. Strategic Debt Restructuring Scheme giving leverage to banks for acquiring or transferring ownership of ailing companies, where management is not competent. This enables banks to change management or having a better say in affairs of defaulting companies. Ultimately banks have liberty to change management of unit to preserve economic value of unit and also preserve investment value, for overall good of economy..:. Flexible restructuring with periodical refinancing option for every 5 years: This give banks leverage in case of big projects having long moratorium period. This helps banks to reassess and regulate furr funding for projects with a large gestation. This will also protect banks against asset liability mismatches..:. Reporting borrowers as Willful Defaulters: This ini. tiative by Reserve Bank maintains pool of information about willful defaulters where banks can verify particular internet site before accepting any borrower. The system of identifying Red flagged accounts where any signal is emitted where fraud may be suspected. Supportive measures by Government: Government is bringing about many measures to strengn hands of Banks. However, a few more initiatives in following lines are need of hour:.:. Wherever government officials are involved in process of bank loans, strict accountability on government officials should be brought about. For example, any property coming for registration with Revenue Authorities, bank clearance on such property should be made compulsory. The transfer should be allowed only on producing enough proof that no bank loan is existing on property..:. Bank loan clearance certificate/nil certificate from Banks should be made compulsory for any person applying for a passport..:. There should be regulation for immediate action against fraudsters without delay. Willful default of bank loan without proper reason should be treated as a crime against nation. Conclusion To safeguard against perils of slippages, banks need to furr strengn mechanism for monitoring of advances at all levels. There should be a focused approach giving due importance on this aspect. Particularly, banks need to intensify focus more on big ticket which account for a large portion loans, of stressed assets. For such loans, more specialization and more involvement at appraisal stage is desired. Monitoring during maintenance of accounts also needs more focused and specialized approach. Furr, as it is understood that income from Loans is life saver for banks, training and specialization of staff in this aspect is a must. Such overall improvement only can safeguard banks from perils of slippages. It is high time that some changes in Banks' operational guidelines are initiated in this direction. 0 ~ BANKING FINANCE 1 AUGUST 12016143 ~