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April 11, 2013

Real reasons for NPA’s and Reality/ugly side of Bank Lending

Ever since his senior colleague got letter for departmental inquiry, Aakash Sharma, 24 year old recently joined loan officer, has unsettled bug in his mind for not catching any error in financial statements submitted to him by the borrower.

Little does he is aware that how small he is in this whole process of lending by Banks.

Loan Officer the soft target
You may run into a lumpy loan officer who might process your loan without being fully aware of Bank guidelines or even being ignorant to mistakes evident from record. However if you run into smart loan officer who catches the errors there is nothing to worry off, he can’t make difference in the big game. If you have links/satisfied the higher management they will lend a bigger ear to your grievances and remind the junior officer of the negativity he has been showing, his misbehaving with the customer and verbally (yes I mean verbally only) instructing to cut down the negativity (Hard hitting real facts) and bring in some positivity (Lots of blah blah English) slowly persuading them to sanction the loan.

Lending decision to me depends more upon the person in whose power the loan sanction lies
Rather than the laid guidelines or what is made to look the decision to lend is not recommended by junior officer to senior for acceptance, it is the other way around with senior finalizing the whole things and asking the junior officer to put up the report which best suits him. Mind it no negativity and only goody goody things to enable the higher management to sanction the loan.
Hardly will you find the person in higher management who permits free and fair recommendation and have guts to sanction the loan despite the risk highlighted in the recommendation letter.

Uncomfortable things remain under the carpet
Affcourse no banker would like/dare to lend to person with problems. The person/loan proposal has to be clear and clean of all the known formalities and if it is not, higher management makes sure that the uncomfortable things are not brought to their notice officially.  


1) Corruption
It’s not their hard earned money which banker lend, nor will bad debt affect them in any way. So what do they earn out of it? We all know the answers/reasons for funding undeserving borrowers. The corruption now days need not be direct and can also be in form of employing the bank officer after retirement/Job to son/daughter etc

2) Fear of blast while you are on seat
NPA’s do affect your appraisal.  So the top and only priority of the banker is that the account should not turn NPA during his tenor, however it may turn NPA next day after his transfer. For this he will keep things under carpet and fight with all ends to make you see borrower’s good intentions in his most corrupt/obvious practice.

What Actually happens
What Banker make it look like
Diversion of funds
Promoters invested/explored new business venture which did not went well.
Non infusion of promoter’s fund
Promoters are in deep financial stress and have shown their commitment to bring in the funds in next year.
Weak Financials
Financial are now weak but they were good in past and will improve in future
Appearing in Defaulter list
It was not promoters fault, xyz bank is already considering to withdraw the promoter’s name from the list.
Adverse feature in audit reports
Not serious in nature, Observation are being rectified and complied.
Providing of wrong financials
The company has now submitted the revised/updated financials.
Non receipt of statutory clearances
In advances stage will be received before start of project.
Promoter Ran away with money
Promoter is on Foreign trip and will be back soon. (Ok I know that was a bit of exaggeration, pun intended)

Unnecessary extension/restructurings are given to prolong the default till the bank manger tenor on that seat is safely over.

Tools used to make things go your way

Ø  Putting up fresher’s/inexperienced people: Before they could understand how to analyze they would have already committed number of mistakes.

Ø  Putting up spineless/flattery people in loans department ensures that loan department functions to the whims and fancies of the HoD.

Ø  Annual/Performance appraisals is another tool by which the recommending officers are made to bow down to higher ups.

Ø  Transfers: If a person stand up for something or has started to know about the account he can be simply transferred under BANKS laid down guidelines.

Ø  Not giving sufficient time to appraising Officers : Not even the best officer would be able to catch the errors if the same are pressurized to put up the proposal in two days. The whole lot of documentation/basic paper formalities are enough to take 3-4 days even if nothing else is to be analyzed.

Ø  Instead of judicially/independently using the role of third parties like valuer’s/lawyers/ auditors/viability reporters, the persons are selected which can give the desired reports. Even borrowers are given the list of empanelled valuer’s/lawyers/ auditors to ensure delivery of desired clean chit.  

Ø  Confident/careless borrowers knowing they will get away with things.
Ø  Surging NPA’s in the books of Banks.
Ø  Conferences and media statements that NPA’s will be reduced.
Ø  Restricting/low cost packages to defaulting borrowers at the cost of Bank’s profitability.
Ø  Departmental enquiry on scapegoat, I mean junior loan officer.

Reasons that are recorded officially
Ø  Promoters were unable to achieve their commitments due to
Global downturn,
Depressed economic conditions,
Bottlenecks in productions,
Sudden increase in competition.
Timely release of funds by Bank
Interest cost being paid to Bank,s
Ø  If the proposed concessions/restructuring are not offered to borrowers there is no scope of recovery/revival for the borrower.
Ø  The loan officer on junior level failed to conduct meaningful survey, market inquiries and independent verification of documents. Loan instruction via para no… not complied with.

Ø  Keeping your ears open/conduct enquires on the basis of market reports of borrower rather than waiting for the borrower to come with raised/empty hands.
Ø  Ensuring rotation of sanctioning officer and recommending officer every year for the loan account to bring undiscovered/ignored facts in the account.
Ø  Invariably obtaining the statutory returns of income tax/sales tax/service tax/ excise to tally the same with the reported financials.
Ø  Bringing in technology/online reporting in use to record what was originally recommended by the junior officer and what changes was made by the higher ups.
Ø  Maintaining database of the third party valuers/lawyers/ auditors/viability reporters to check their effectiveness and report to their concerned institute in case found guilty of professional misconduct.
Ø  Identifying willful default and going quick/hard on recovery (rather than restructuring) to set up as an detrimental/example for other borrowers.

You may call me negative but I prefer staying close to ground realities.

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