The Indian banking system, badly fighting with non-performing assets (NPAs) and these are not coming out of crisis despite support from the Ministry of Finance and the Reserve Bank of India. There are many reasons for increase in NPAs like delays in project execution, lower visionary of promoters, unavailability of adequate promoters’ contribution, loss of raw material/supply linkage, high real interest rates, slowdown economic, uncertain clement, political interference and many more. NPAs not only affecting profitability of the bank but also weakening the capital structure and degrading its rating. As a result, we observe stagnation in credit expansion.
Types of defaulters:
Either there could only be two reasons for NPA, the willful defaulters who do not want to pay the loan dues or the borrower is not able to pay the dues.
Willful Defaulters are those who default even when they have the ability to pay the dues. There could be several reasons for this like ‘Weak legal and contract enforcement’ and ‘Deteriorating credit discipline’. To identify such defaulters the process of identification is objective and rule-based rather than discretionary.
Where as in case non-willful defaulters, the macro-economic determinants and bank-specific determinants must be analyzed and redressed promptly.
Role of Credit Management :
The basic reasons for increase in NPA are degradation of quality of credit assets due to poor assessment, project evaluation, deficiencies in credit rating management, due diligence, improper post-sanction compliance, and irregular inspection of activity & monitoring of progress.
Guidelines for consortium discipline need to be redefined to improve the individual & joint credit appraisal, monitoring the implementation, progress after execution and health of account on regular basis.
Besides, Banks may take help of external agencies engaged in Market Survey, Debt Management, TEV study and Credit rating, to have a second opinion on bigger size of project besides appraisal by their internal division for project evaluation.
End use of bank’s funds and promoters’ margin must be verified in view of Debt Equity Ratio by regular inspection and not merely focus on papers and books.
Stock Auditors, besides calculation of drawing power, must also check the holding levels of inventory, debtors & creditors, proportionate projected sales, purchases, whether these are in line with sanction note.
There is need to develop more tools to check early signs of incipient sickness to correct at the earliest, as no unit can be sick overnight.
Role of Credit Appraisal Team:
Most banks have centralized the loan processing, the latest innovation being the applicants submitting loan applications online. It helps in improving transparency and in expeditious disposal of proposals, but the process provides for quantitative information but qualitative aspects do not find a place. Inputs from the branch, on the borrowers’ background and other relevant ground realities, which are crucial in assessing the risks, are not given due weightage. The central processing team should also investigate & crosscheck all key information before credit appraisal.
