Well COST AUDIT and COSTING METHODS have been abolished with the blessing of the lovers of the profession. The banking industry has undergone a sea change after the first phase of economic liberalization in 1991 and hence credit management. Well credit management in India in the recent times has been a key concern. I will not be surprised that within the next decade the biggest collapse of the financial sector and prolonged slowdown would be coming to Indian economy from the failures of the Indian banking system. Well the present and upcoming Chairman of the various banks (specially the PSU) would be annoyed but I am compelled.

Well COSTING and COST ACCOUNTANTS are never being provided the opportunity in the banking space since their report might alert the Indian government by ringing the bell of the NPA game theory developed by the Indian corporate. Each year the Indian government deploys thousand corers of funds (Tax payer money) into the banking liquidity system. NPA of current PSU banks are around are at 4.4 per cent in March 2014 compared with 2.09% in 2008-09, adding, the gross NPA increased by almost four times from Rs 59,972 crore March 2010 to Rs 2,04,249 crore as on March 2014. Overall NPAs or bad loans of the banks, including private sector lenders, increased from 2.36 per cent to 3.90 per cent in March 2014. The state-owned banks, especially the mid-tier banks, are in a particularly difficult position due to their high share of stressed assets and weak capital and earnings position. Moreover Fitch, which downgraded the viability ratings (VRs) of many state-owned banks in 2012 and 2013, does not expect any significant improvement in performance in the immediate future, though incremental downside risk is somewhat contained in the medium term. Now if COST AUDIT and COSTING METHODS were given the opportunity to this segment they would have been able to help in number of ways:

  • Developing Risk assessment models
  • Line and limit assignment
  • Risk assessment and decision process integration
  • Risk mitigation techniques and workflows
  • Automated centralized risk ratings systems
  • Early warning systems based on analytics driven rules and qualitative inputs
  • Dynamic collateral management with emphasis on periodic revaluation and prudent cross collateralization logic
  • Independent collateral liquidation and covenant enforcement teams
  • Effective pricing of bad asset for optimizing debt-sale

In between I would like to draw the attention of the government towards the critical segment which might have been overlooked for the past couple of years but with the increase of cost the same cannot be ignored. The theoretical Relationship between Non-performing Loans and Bank Efficiency from the point of view of management accounting, bank asset quality and operating performance are positively related. If a bank’s asset quality is inadequate (e.g. the loan amount becomes the amount to be collected), the bank will have to increase its bad debt losses as well as spend more resources on the collection of non-performing loans. This increase in non-performing loans in the banking industry can be due to external events, such as adverse situation in economic activities. When banks list the loan amount for collection, banks will incur extra operating costs from non-value-added activities to handle and supervise the collection process. These non-value-added activities consist of constantly tracking the debtor’s financial status, being cautious of the collateral value, discussing the amortization plan, paying expenses for contract negotiation, calculating the costs to withhold, deposit and dispose of collateral at the time the loans become non-payable.

The costs include winning the trust from management and the public, preserving the banks from being rated poor as a consequence of external affairs, declining deposits because of a loss in credibility, and extra costs to monitor loan quality. Furthermore, higher future costs are generated by the ignorance of the problems from other operations when the loan quality issues grab the attention of the senior management. This escalation in cost, in turn, deteriorates bank efficiency. The banks’ management might not thoroughly evaluate their customers’ credit application due to their poor evaluation skills. In addition, the problem of asymmetric information between lenders and borrowers further complicates the matter. Besides that, the management might not be efficient in managing loan portfolios. Consequently, this leads to lower credit ratings for the approved loans and high probability of default resulting in higher non-performing loans. Therefore, banks’ inefficiencies might lead to higher non-performing loans.

Well the problem does not end with NPA only or injecting liquidity into the system but with the burden of prolonged cost associated with the same. We should be prepared to see more United Bank of India type of cases.

PSU on the capital requirements over the next five years will still be 65-75% of their current capital base. The muted near-term profitability due to higher provisioning cost, higher operating expenses and lower margins, and structurally lower profitability due to a decrease in leverage under Basel-III means that any capital raise would be dilutive for existing shareholders. The Government shedding its direct control of PSU banks could structurally ease the profitability pressure but the governments political will to relinquish control remains questionable. The profitability of PSU banks is unlikely to improve over the next couple of years or more than due to   (i) high provisioning cost due to low provisioning coverage , (ii) higher employee expenses due to the 10th bipartite agreement and higher pension expenses, and (iii) pressure on margins due to deposits growing at a slower pace than advances. Moreover with the revival of the Indian equity market banks FD would loose much of its sheen. So even by diluting the stake of the PSU banks below 50% will not be solution in the long terms since NPA would keep on rising and process of recovery and others remains slack.

But I doubt about the dis-investments aspects of the Indian government regarding the Banking space. Prime reason being No dividend payouts going forward as capital and performance both would be under pressure and finally investors don’t bet on loosing horses. Basel III requirement, high capital requirements, and no dividend hence ROE and ROA would be under severe pressure making disinvestment less attractive. The only option is that Government and RBI should be vigilant enough to get signals and react accordingly the NPA performance or restructuring of assets. Day after day we are no longer in the position of restricting of assets since banks would not be able to absorb the NPA in their system.

Now government of India has now decided to form National Asset Management Company for improving the performance of DRTs (debt recovery tribunals) to collect loans. I have something more to add to this and reduce the burden of excess cost borne by the Indian Banking system from the pains and struggle of not able to sell the distressed assists.   Now this is the place where Cost Records and Cost Accountants and Costing methods can be part of this National Asset Management Company.

  • Help this National Asset Management Company to acquire and take up the NPA declared assets from the PSU banks.
  • COSTING Methods could develop the price and valuation in parallel to the cost of the banks for that asset minimizing the loss of the bank to the maximum level.
  • Feeding the Government with history and track record of the class and type of assets being absorbed by the NPA
  • COST METHODS and COST AUDIT could help to identify the macro economic problems which might lead an asset to be declared as NPA. The early signal can save the tax payers money.

Well rest I keep it with myself since everything cannot be developed overnight. Do remember that we COST ACCOUNTANTS save billions of funds through blocking the loopholes of Abnormal loss, so we can also block the loopholes of NPA. In a democratic country it’s free to abolish COST AUDIT and COSTING METHODS, but will that save or serves the Indian economy from the future collapse. Do remember that our audit report helped you to develop industries where products of those industries used to be imported. If there was not COST AUDIT or COSTING METHODS how India will define its cost and competitiveness is a matter big of question.

Indraneel Sen GuptaIndraneel Sen Gupta (neel19414@gmail.com )

Global Macro Economic Researcher and Business Strategist

Master of Economics, MBA in International Business Management, ICWAI (Final)/CWM Final/Journalist

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0 responses to “Rising NPA…Cost Audit Might Have Helped”

  1. D K Gupta says:

    Well diagnosis of financial disease

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