MONITORINGOFADVANCES:KEYISSoES

Present scenario in the Banking SystemMaintenance of Asset quality has become the importantaspect for survival of Banks. Increasing competition resultsin a situation where banks compete with each other forbetter customers. It is becoming tougher for banks to gen-erate consistent profits. Though banks have developed al-ternative methods for generation of non interest income,the income from loans and advances is the basic revenuegenerator for the bank.

Among the banks in India, those in Public Sector particu-larly face challenges in this aspect. After withdrawal ofregulatory forbearance on restructuring of assets, banks are

About the author

B. Sreenivasa RaoB.Com, CAIIBChief Manager (Faculty)Union Bank of India Staff CollegeBengaluru

now in the process of adjusting to a realistic process of rec-ognizing stress. However, RBI has recently voiced concernat the proportion of stressed assets (those accounts withirregularities, and likely to slip to NPA category) alreadycomprising a major portion of standard advances in Publicsector Banks.

Importance of maintaining Asset QualityIncrease in business is an imperative need for Banks. Butthe whole success of such growth is measured by assetquality. Paradoxically, the asset quality position of banks islooking better than the real situation since most of thetime the irregular advances are measured in percentageterms.

As the advances portfolio of banks is growing continuously,the percentage increase in NPAs and stressed assets re-mains low as a percentage. But the absolute figures reflecta really alarming situation (Refer to Table - I). Maintainingperfect asset quality is the only option for the banks to dowell and improve the bottom-line. This is the survivalmantra.

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The percentage NPAs also reflects an equally grimpicture: Table - I

GNPAs of SCBs: June 2015

Amount in Rs. Crore

Banks Gross Gross Gross NPAsNPAs Advances To Gross

Advances %

Allahabad Bank 7902 146920 5.38Andhra Bank 7238 125846 5.75Bank of Baroda 14937 284315 5.25Bank of India 24402 280987 8.68Bank ofMaharashtra 7575 96365 7.86Bharatiya Mahila Bank Ltd. ,0 395 0.00Canara Bank 14069 309094 4.55Central Bank of India 12931 193132 6.70Corporation Bank 7765 143107 5.43Dena Bank 4841 78034 6.20IDBI Bank limited 13942 188277 7.41Indian Bank 5513 118727 4.64Indian Overseas Bank 14638 158961 9.21Oriental Bank of Commerce 8577 146549 5.85Punjab & Sind Bank 3300 63799 5.17Punjab National Bank 25032 336814 7.43Syndicate Bank 6678 162437 4.11UCO Bank 10400 134422 7.74Union Bank of India 13765 232072 5.93United Bank of India , 6533 68299 9.57Vijaya Bank 2871 84800 3.39Nationalised Banks 212907 3353352 6.35State Bank of Bikaner & Jaipur 3133 70436 4.45State Bank of Hyderabad 5482 106704 5.14State Bank of India 53788 1062785 5.06State Bank of Mysore 2214 52612 4.21State Bank of Patiala 5091 79705 6.39State Bank 'of Travancore 2759 68411 4.03SBI Group 72467 1440654 5.03

TOTAL PUBLIC SECTOR 357842 6234660 5.69

(Source: RBI statistics, key indicators)

Based on the figures, the Gross NPAofall public sectors has risen to overall5.69% of the total advances. Many ofthe public sector banks have their GrossNPApercentage above 5%, which is in-deed a very alarming picture.

Reasons for existence ofhuge number of stressedassetsA study of present scenario gives us anidea about some factors causing thistrend..:. Impracticable and unrealistic

repayment schedules: For Banks,while sanctioning loans, in manycases, it may not be possible tomake a very accurate and realisticassessment of the project. This istrue especially on study of the factas to when the borrowal units itwill actually take off, break evenand start generating profits. Theproject report submitted by theprospective borrower to the bankshould be subject to analysis, be-fore deciding when it will actuallygenerate income for the borrowerunit.

Moreover, there is no system ofmidterm assessment of theproject during take off stage, toknow whether the business is go-ing well with the projections andexpectations. As a result, most ofthe problems faced by theborrowal units during the take offstage are not properly handled.As a result, the repayment be-comes due, before the unit actu-ally generates surplus.

This will result in stress in the ac-count, as the due amounts are notrealized in time.

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.:. Economic cycles turning worse: The winds ofeconomy are not always favorable, they keep on fluc-tuating. The general trend or recession in the economyaffects the entire economy. All the economic entities,whether big or small will be under the influence. Theunits financed by Banks are no exception.

.:. Compulsion in financing certain activities man-dated by Government: Public sector Banks have takenup the cause of upliftment of the downtrodden, andpeople who are lying below the poverty line. Govern-ment looks up to banks for this cause, as banks are wellequipped and most suitable tools to bring about eco-nomic development from the grass root level. For iden-tification of beneficiaries, various government agenciesare involved. The activities of these agencies are over-lapping. These agencies often identify activities whichmay not go well in the area. And also sometime, fi-nancing to such activity will result in stiff competition.For example, many beneficiaries are selected and rec-ommended to banks for Auto Rickshaw finance in thesame area, despite the fact that the area is floodedwith such auto rickshaws. Many a time it happens thatthe same activity is forced through more than one bankin a particular area, resulting in competition in themarket. Ultimately it affects the income generation ofthe borrower.

•:. Presence of the borrowers in remote and inacces-sible area: Bank finance reaches to all corners andremote areas. The intention is to bring about develop-ment in these areas. However, recovery of loans givenin such areas becomes difficult as the borrowers arenot easily accessible. Some of the areas are inacces-sible. Borrowing units financed in such areas demanda lot of effort and time from the Bank Staff.

.:. Difficulty in understanding the accuracy and verac-ity of the data submitted by borrowing units at agiven point of time - Banks are facing difficulty to agreat extent, in verifying the accuracy of the data sub-mitted by the borrowing units. The data submitted bythe borrowers on day to day basis and the final datafor the financial year (Audited) is likely to have a widevariation. Till such audited data is received, banks haveto rely on provisional data and many decisions are

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taken based on this data. As there is no proper basisfor these decisions, it may land them in trouble. Par-ticularly in big ticket loans, this will prove disastrous.

.:. Compromising on vital parameters while apprais-ing loans due to severe competition to acquire bigborrowers: In present day banking, stiff competitionamong bankers exists to acquire good customers.Sometimes banks are compelled to take risks to acquireand retain customers ignoring some vital parametersof lending. The deviations that crop up are mismatch-ing with the compliance guidelines. During this process,banks are exposed to great risks.

Comparison of banksIf we take a comparison of Banks' NPA position, the presentsituation makes it amply evident that banks are losing muchbecause of one parameter, i.e., slippages to NPA. Even ifbanks gain profit on many other aspects, slippages to NPAcategory nullify all the positive gain factors of banks, put-ting great strain on' the balance sheet at the end.

If we analyze the Gross NPAsof Public Sector banks for thelast 10 years, as per RBI statistics, from a level of 476.22billion, the Gross NPAs have reached to a level of 2784.68billion. An increase of 585% or more than 5 times the badloans position as on 31.3.2005 .

If we take a look at the picture of slippages in banks, itreflects further worsening scenario. (PI. refer to Table 11)

INTERNET BANKING_(- l_ (t ••t~... ]

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MOVEMENT OF NPA OF ALL PUBLIC SECTOR BANKS AS ON 31.3.2015: Table 11As on March 31,2015 (inmillions)

Gross NPAs Net NPAsSI. Bank As on AdditionReductionWrite-off As on As on As onNo. March 31 during during during March 31 March 31 March 31

(previous the the the (Current (previous(Currentyear) Year .Year Year year) year) year)(1) (2) (3) (4) (5) (6) (7)

1 STATE BANK OF BIKANER & JAIPUR 27328 16875 11120 3631 29451 17709 176922 STATE BANK OF HYDERABAD 58242 30493 35334 3553 49848 29849 234853 STATE BANK OF INDIA 616054 294350 130116 213035 567253 310961 2759064 STATE BANK OF MYSORE 28189 18955 18377 7403 21364 16303 112165 STATE BANK OF PATIALA 37584 47085 33520 7551 43597 24045 304926 STATE BANK OF TRAVANCORE ·"i" 30769 44749 41404 10544 23571 19285 13987STATE BANK OF INDIA & ITSASSOCIATES 798165 452507 269871 245716 735085 418151 3727771 ALLAHABAD BANK 80680 50213 29923 17391 83580 57218 597892 ANDHRA BANK 58576 34243 12812 11241 68765 33425 368863 BANK OF BARODA 118759 85153 25512 15786 162614 60348 806954 BANK OF INDIA 118686 166515 50690 12578 221932 76795 1377475 BANK OF MAHARASHTRA 28599 46336 8278 2637 64021 18073 412666 BHARATIYA MAHILA BANK LTD. 0 - - - - - -7 CANARA BANK 75702 108695 39276 14722 130400 59655 874018 CENTRAL BANK OF INDIA 115000 65790 48200 13860 118730 66490 680709 CORPORATION BANK 47368 37389 5900 7791 71067 31806 4465010 DENA BANK 26160 36740 13817 5153 43930 18189 3014311, lOBIBANK LIMITED 99602 61008 17671 16089 126850 49023 5992512' .INDIANBANK 45622 33389 16809 5497 56704 27637 3147013 INDIAN OVERSEAS BANK 90205 120160 40271 20869 149225 56581 9813314 ORIENTAL BANK OF COMMERCE 56179 45143 15410 9249 76662 39044 4816215 PUNJAB AND SIND BANK 25535 12424 4505 2633 30822 19186 2266016 PUNJAB NATIONAL BANK 188801 166596 39251 59197 256949 99170 15396517 SYNDICATE BANK 46111 55000 26142 10545 64424 27206 3843718 UCO BANK 66214 75513 25065 14011 102651 35564 6330619 UNION BANK OF INDIA 95637 56663 12684 9307 130309 53403 6919020 UNITED BANK OF INDIA 71180 40872 38916 7607 65529 46641 4081421 VIJAYABANK 19859 28269 15783 7912 24432 12624 16597NATIONALISED BANKS 1474474 1326109 486914 264074 2049595 888076 1229305TotalforPublicSector 2272639 1778615 756785 509790 2784679 1306227 1602082

(Source: RBf statistics, key indicators)

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The fresh gross slippages during the financial year 2014-15for all Public sector banks stands at 1,77,861 crores (with-out netting). However, at the end of the financial year, afteraffecting recoveries, the NPAsstood at 2,78,467 crores.

These figures indicate the really alarming situation in as-set quality of banks.

The way out of the situation:The strategy for tackling irregular/stressed assets revolvesaround mitigating the risk factors or reasons as cited ear-lier in the article..:. Multi layer due diligence is ta be canducted to ac-

cept any borrower: Proper operational guidelinesshould be put in place for multi layer screening well be-fore accepting the (borrower) customer. Presently, mostof the banks rely on one or two officials who are mostlythe branch officials of the concerned branch. However,it will be prudent for banks to conduct a second layerof due diligence independent of the one which is already .:.done by the branch officials concerned. For this, officialsfrom nearest branches/administrative offices can beengaged.

The second layer should once again verify the creden-tials of the borrower from independent sources of itsown. A summarization of the facts can be done at a laterstage before accepting the proposal for sanction. Forimplementing this, Banks must devise specializedmechanism to deal with appraisal and pre sanction duediligence which involves the physical aspects of the unit,the borrower, and the papers (financials).

.:. Restructuring, wherever possible and necessary,based on viability: Needless to mention, restructur-ing should be driven by genuine need and the viabilityaspect. Realistic appraisal of the situation is a must. Inthe same manner, a borrower who needs to be assistedmust be given the helping hand through restructuring,wherever the situation warrants ..

.:. Do not withdraw support once the account turnsNPA: An account may become NPA due to numerousreasons. Field functionaries should be well trained toidentify the actual cause of the account slipping toNPA,and extend support if needed, so that-the unit canbe tapped back to health. In fact, a culture is to be de-

veloped to identify the real causes wherever the ac-counts are stressed, when the first signals of irregulari-ties crop up. This will give a realistic view of the unit.Banks in this situation have to recognize the borrow-ers whether they are willful defaulters/non coopera-tive, and then decide whether to extend help or toadopt other preventive measures.

.:. Economicviability of the unit is to be preserved forthe overall good of the economy: As stated in theearlier point, the real objective of banks should be pre-serving the economic viability, and thereby the eco-nomic value of the units. NPAclassification is meant onlyfor giving a true picture of the balance sheet of Banks.The ultimate objective of all financial institutions, includ-ing banks, is to preserve the value of the units; in whichhuge amount of investments are made. Any action takenby banks looking from this angle will ultimately have awin - win situation for both Banks and borrowers.

Ensuring the progress of the units both on finan-cial and physical terms: Once finance is extended,banks become the partners of the borrower with a con-siderable stake in the activity. Sufficient support andhand holding is to be extended to the units/borrowerson both financial and physical matters. A sort of own-ership is to be assumed and felt. A monitoring culturedeveloped through a sense of ownership, will reallywork for the benefit of both the bank and borrower.

.:. A proper internal Loan review mechanism sup-ported by a timely Risk Rating evaluation: The in-ternal review mechanism of banks need to be morerealistic. For review/ renewal and rating of accounts,banks will generally rely on unaudited/provisional fig-ures to complete the process within the stipulatedtime. The audited financials, which are actual reflec-tion of the financial strength of the unit, will be pro-vided at a later date on completion of all formalitiesby borrowers and they are generally received duringthe month of September/October every year. As perthe present practice, Banks are merely conducting afresh rating of the account when the audited financialsare received as the account is already reviewed withprovisional financials without looking at the auditedfinancials in entirety. Great risk is involved in this as-pect.

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Alternatively, banks can standardize the renewal sys-tem to synchronize uniformly for all accounts during aparticular period, say spread over three months, whenthe audited financials are generally received. A suitableperiod like September/October/November can be cho-sen for this. Instead of relying on provisional data eachyear at the time of renewal of the account, banks cantime the first renewal of each account falling due atthe time of the receipt of audited financials. Thereaf-ter they can enjoy the benefit of actual renewal withaudited financials every year thereafter. Besides giv-ing banks a good control on the units/borrowers, thissystem may enable the banks to follow up, plan andregulate the review/renewal system more effectively.

Similarly, the risk rating conducted at the time of ac-tual renewal will also be more tenable with auditedfinancials each time.

.:. Separate and more intensified review mechanismfor accounts under stress: This can be planned withmore focus on the causes leading to stress. Review orrenewal of stressed accounts should not be a routinerenewal. Wherever there is stress, the review mecha-nism should be focusing on some more aspects, forexample the cau~esfor the irregularities, whether theycan be rectified and the unit can work normally as perexpectations of original sanction. A separate proposal!renewal note should be devised for such accounts.Banks can also prepare check list of borrower/indus-try-wise to list the problems and find out the solutionto specific problems, instead of conducting a routinerenewal of the accounts.

.:. Constant up-gradation of credit appraisal skills:Banks also need to update the appraisal skills of its em-ployees on a continuous basis. The present appraisalskills of an average advances officer do not commen-surate with the challenges faced by the industry. Re-peated trainings on appraisal skills for updating the

.skills are required .

•:. More and more penetration in to all aspects of theloan proposals during appraisal stage: This will helpthe banks to have control or information of a major por-{ion of the activity. Minute details regarding each as-pect of the project, at the time of initial sanction may

be incorporated in the proposal. These aspects may in-clude details of getting power connection, approvalsfrom government authorities, etc. Borrowers' ability toget these things cleared becomes more important.

.:. Sufficiency of Loan documentation: The field func-tionaries attending the documentation aspect needs tobe thoroughly trained. Banks may think of special cellsfor documentation (some banks have already imple-mented this aspect) for big accounts, where few ex-perts on documentation will be sitting and they attendthe documentation aspects more systematically. Thiswill ensure ultimate recovery of Banks' money. A thor-ough documentation process before disbursement ofloans can be a litmus test for the borrower, and some-times banks can get important signals about the bor-rower, during this stage.

.:. Standby credit facility to take care of cost over run:While financing any new unit, banks have to sufficientlytake care to assess whether any cost overrun is likelyto occur, if so, what is the remedy available with theborrower. Follow up of implementation schedule inlarge project loans assumes great importance. Corre-lating disbursements with the sanction schedule andchecking the progress as per the projected schedule isa very important aspect that is to be monitored dur-ing the currency of entire disbursement schedule.

.:. Maintaining quality advances have to be one of theimportant parameters in appraisal system: Wher-ever officers are involved in processing and sanction-ing of loan proposals, special care can be taken to in-corporate positive aspects of asset quality in perfor-mance appraisal systems. This will generate a motiva-tion for maintaining quality"advances.

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.:. Temporary measures for up-gradation of accountsshould be avoided: For example, erosion of liquidcollaterals to reduce over dues and keep accounts stan- .:.dard: Whenever banks find accounts under stress, thefirst reaction of field functionaries will be to liquidatethe liquid assets. Such temporary measures have to beavoided to postpone slippages.

.:. Role of middlemen is to be discouraged in the processof loan sanctions: This aspect is to be taken care at ap-praisal level. Instead of relying on middlemen, bankshave to select their own borrowers based on merits ofthe case.

Regulatory support by Reserve Bank ofIndiaAs banks are severely under stress, RBI also has come upwith few new guidelines to help the banking system andthereby preserving the economic value of the assets cre-ated out of bank finance:

•:. RBlsframework on revitalizing distressed assets inthe economy, giving de~ailed guidelines for identi-fying stress in the accounts particularly large borrowalaccounts. This gives banks proper direction for moni-toring of large borrowal accounts and action plan tobe followed.

.:. Strategic Debt Restructuring Scheme giving leverageto banks for acquiring or transferring the ownership ofthe ailing companies, where the management is notcompetent. This enables banks to change the manage-ment or having a better say in the affairs of the default-ing companies. Ultimately banks have the liberty tochange the management of the unit to preserve theeconomic value of the unit and also preserve the in-vestment value, for the overall good of the economy.

.:. Flexible restructuring with periodical refinancingoption for every 5 years: This give banks leverage incase of big projects having long moratorium period.This helps banks to re-assess and regulate the furtherfunding for projects with a large gestation. This will alsoprotect the 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 theparticular internet site before accepting any borrower.

The system of identifying Red flagged accountswhere any signal is emitted where fraud may besuspected.

Supportive measures by Government:Government is bringing about many measures tostrengthen the hands of the Banks. However, a few moreinitiatives in the following lines are the need of the hour:.:. Wherever government officials are involved in the pro-

cessof bank loans, strict accountability on governmentofficials should be brought about. For example, anyproperty coming for registration with the RevenueAuthorities, bank clearance on such property should bemade compulsory. The transfer should be allowed onlyon producing enough proof that no bank loan is exist-ing on the property.

.:. Bank loan clearance certificate/NIL certificate fromBanks should be made compulsory for any person ap-plying for a passport .

.:. There should be regulation for immediate actionagainst fraudsters without delay. Willful default of bankloan without proper reason should be treated as acrime against the nation.

ConclusionTo safeguard against the perils of slippages, banks need tofurther strengthen the mechanism for monitoring of ad-vances at all levels. There should be a focused approachgiving due importance on this aspect. Particularly, banksneed to intensify the focus more on the big ticket loans,which account for a large portion of the stressed assets.

For such loans, more specialization and more involvementat appraisal stage is desired. Monitoring during mainte-nance of the accounts also needs more focused and spe-cialized approach.

Further, as it is understood that income from Loans is thelife saver for banks, training and specialization of staff inthis aspect is a must. Such overall improvement only cansafeguard banks from the perils of slippages. It is high timethat some changes in Banks' operational guidelines are ini-tiated in this direction. 0

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