Non Performing Loans
NON-PERFORMING LOANS – Big bane on the financial system.
Lending and Recovery functions are amongst the most challenging functions in Banking and Finance. The Lending function of Banking and Finance is a key focus area of banking regulator, i.e Reserve Bank of India. Money lent through this organized system of lending, propels economy. At the same time, it is absolutely critical that the money that is lent out is recovered. Loans going bad are a strong indicator of worsening performance of not just the Banking and Finance industry, but also of the entire economy.
World over and particularly so in India, the number and quantum of bad loans has been significantly on the increase. As per an ASSOCHAM paper released, the net Non-Performing (potentially bad) assets (NPAs) could cross to Rs.1,50,000 Crores (press release dated 31st Dec 2013) in the Indian Banking system, by the end of 2014. The corresponding figure as on March 13 was approximately Rs. 93000 crs.
These numbers are large enough to be taken seriously.
There are many reasons attributed to the NPAs. But the most critical ones are related to things that are very much within the control of the lending organizations.
Sub-Standard evaluation of loan proposals
This by far is the single most important reason for an account to become an NPA. As a practice, lending institutions, in their urge to grow the loan book, at times do not pay as much attention as is required in the credit evaluation of the loan proposal. This could be a result of process or skilled resources.
Succumbing to the market and competitive pressure:
There have been instances in the recent years where the lending markets, riding a wave of populism with respect to a particular sector of the economy or a particular customer segment or a particular industry, resorted to lending practices that fundamentally were questionable. So when a few lenders in the market do it, others believe that to be the right thing to do and follow the path. It is always critical that each lending institution does its own due diligence before it decides to lend to a potential borrower.
Lack of an efficient recovery and follow up infrastructure
Many organizations lack the infrastructure to do timely tracking of loans that are going bad. Or for that matter to pick up the early warning signals and foresee the loans that could go bad. The systems may not be available that can clearly flag and automatically generate the list of borrowers who need to be called on a particular day.
Not recognizing early warning signals
A timely legal action against the borrower is absolutely necessary in the loan recovery process. It is important to foresee problem accounts very much in advance and prepare for initiation of legal action in time. For e.g. First Payment defaults, customer becoming non-contactable require immediate action.
Inadequate skilled resources for underwriting and credit evaluation
Given the potential for growth of the Indian economy, that has banking and financial services sector as its backbone, there is a need for creating sufficient number of qualified, skilled and knowledgeable manpower, who can run the ‘Lending and Recovery’ functions of Banking and Financial institutions in a skillful & organized manner.
The systems and processes implemented in the banking industry in India, to translate the data in physical files into automated systems and also analyze them later, are generally not effective, in many cases, barring a few exceptions. Along with the right data, it is also important to have the skills in place to analyze the data. A good analysis of the static and dynamic data of the loan portfolio, can go a long way in helping reigning in the growth of NPAs.
Non-Performing Assets (or at least arresting an astronomical growth in NPAs) is a matter of urgency. It can be controlled and arrested with proper discipline in implementation of rules, creation of supportive system infrastructure for data capture and analysis, training and skill development to create sufficient skilled manpower who can support large scale lending operations in the economy and above all prudent lending.