The woes of the Banking system in its current state are apparent and visible to anyone who delves in the subject even superficially. What is less apparent is the right approach to tackle the problem in an effective manner.
At this juncture, due care should also be taken to ensure that the problem does not surface again in the future. Bailing out the banks at regular intervals with taxpayer’s money is something we can ill-afford. But not all categories of banks can be painted with the same brush as it is evident that Private Banks are in a much better state than the Public Sector Banks (PSB’s).
The reasons for the performance gap are manifold and it goes without saying that PSB’s have a lot of catching up to do. There are specific areas within the Banking Process that the PSB’s are especially lagging behind when compared to their peers in private banking.
One area where the gap is magnified is the critical area of credit lending. Typically, there are seven steps in the lending process that all banks have to undertake:
- 1. Credit Appraisal
- 2. Loan Disbursement
- 3. Monitoring and Evaluation of Credit Performance
- 4. Repayment of loan
- 5. Recognition and Classification of stressed loans (NPA, restructured loans etc)
6. Provisioning for stressed loans - 7. Loan Recovery
The most important step within the lending process is the initial step of assessing and appraising the loan candidate.
If this step is implemented correctly, all the other steps have a high chance of working out. But if the credit appraisal framework itself is faulty, rest assured that banks have a lot of hard work in store as each of the successive steps become more and more challenging.
Private Banks have an innate understanding of this and it is reflected in their financial performance as Private Banks have significantly less bad loans than PSB’s.
According to RBI (1), ratio of stressed loans for the March quarter stands at 14.5% for PSB’s compared to 4.5% for Private Banks. This leads to a virtuous cycle for Private Banks as Management bandwidth is focussed on important areas like Strategy and Service Delivery while PSB’s are constantly grappling with the after-effects of handing out loans which should not have been disbursed in the first place.
The bottom-line is that Private Banks undertake lending in a measured and careful manner. Credit lending is not pure science. Judgement has a key role to play in credit decisions.
The credit appraisal teams of Private Banks are equipped with tools to analyse the data of the loan candidate in an objective manner. To augment the appraisal process, objective data analysis is backed up with a proper understanding of industry landscapes and business cycles.
Business trends and insights are gleaned through continuous research and analysis. Of course, this kind of professional approach is not representative of all Private Banks but it does highlight the processes that are employed in top private banks like HDFC Bank.
On the other hand, PSB’s do not have the wherewithal to approach the credit appraisal process in a constructive manner. The process is short-changed as credit teams at PSB’s resort to indiscriminate lending so as to meet targets for each quarter set by superiors.
Many a times, personal relationships and connections are given more importance than credit analysis techniques. The Government has taken steps through the Indradhanush program to reform the PSB’s but unless the credit appraisal approach is revamped, future crises in banking system cannot be ruled out.
To solve the existing Non Performing Asset (NPA) crisis, all related parties have to act together in a concerted way. Banks, over-leveraged corporates, RBI and Government have to come up with an integrated and comprehensive solution so as to engineer an effective path towards cleaning up of the banking system.
This is easier said than done but it is in the greater interest of our economy that the clean-up is undertaken as swiftly as possible. Managing an economy with a stressed banking system is akin to sprinting continuously on one leg. It is highly inconvenient and inefficient.
Since current RBI Governor Raghuram Rajan is due to retire on September 4th, it is imperative that his successor be extremely clued in to the ongoing banking problem. Otherwise, valuable time would be wasted in getting acquainted with the nuances of the NPA issue.
The extent of the problem provides good reason to believe that time is of essence. In this regard, there are two possible successors who would fit the bill in terms of handling the issue from the start.
Deputy Governor of RBI S.S Mundra is well equipped to take Governor Rajan’s cleaning up initiatives to its logical conclusion as he is involved in the nitty-gritty of co-ordinating with banks in recognising and provisioning of bad loans through the Asset Quality Review (AQR).
Another potential candidate is Arundhati Bhattacharya, the current Chairperson of SBI. As an experienced insider of the Banking system, she would be very aware of the specific intricacies of the problem at hand.
From the Government’s end, the most impactful contribution has been through the capitalization of banks that are facing the brunt of bad loans. The Government should contemplate front-loading the payments allocated through the Indradhanush plan rather than staggering the amounts.
According to the plan, Rs. 10,000 Cr. each is to be disbursed to banks in FY 18 and FY 19. Instead, it would serve the purpose better if Rs. 20,000 Cr. is disbursed in FY 18 itself. It is important to quickly tackle the malaise plaguing the banking sector so that the wound is not allowed to fester.
The faster the banks are cleaned up of its bad assets, the easier it would be for the Government to revive the banking system. This in turn will play a huge role in kick-starting economic activity at the earliest.
Hopefully, this time around PSB’s will distribute the loans in a measured manner instead of indiscriminately doling it out like we saw in the previous business cycle.
(Source: rbi.org.in)
(The writer is a thinker, philosopher and has previously worked in the field of equity research and investment banking. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)