T. R. Radhakrishnan
Enough and more guidelines are being issued from time to time by Reserve Bank of India who is the central regulator of banks and financial institutions and in spite of SARFAESI ACT of 2002 and RDDB & FI Act of 1993 which give banks and financial institutions vast and substantial powers to recover the dues from defaulted borrowers, there seems to be no significant improvement in the recovery of debts but only an ever increasing trend in creations of more NPAs is seen. Hence, the imperative need is to undertake a new approach based on the experiences of the past and the result so far achieved through the various measures already implemented and based on the harsh realities on the ground level prevailing in banks and financial institutions at their branches so as to initiate a new orientation in the matter of recovery of debts of banks and financial institutions.
The banking reforms have been initiated by the government to take the banking out of its rut and to face the challenges of the future and the new complexities of the markets, national and international, to make the Indian banking system to go global. The approach to the reforms is to ensure that the financial services industry operate on the basis of operational flexibility and functional autonomy with a view to enhancing efficiency, productivity and profitability. Even though the visible signs of improvement are seen in the technological and fiscal spheres of banking, the functional and the operational sides of banking are still under the influence of the hangover of the past. Other than the technological delivery of the banking services, the credit management portfolio particularly credit monitoring in the banks is neither efficient nor effective which include assessment and execution of the tasks involved.
Accepting deposits and lending are the primary functions of the bank and particularly lending which is the chief source of income for the banks and financial institutions. Hence lending plays a crucial role in the health of the bank. Lending in general terms means investing public money into productive ventures so as to get a reasonable return without jeopardizing the public money. Hence the following aspects of lending are to be taken care of. (1) Quantum required to be lent. (2) Duration of lending. (3) Return on lending. (4) Safety and security of lending. Reserve Bank of India has given functional autonomy in the aforesaid spheres to a greater extent and relaxed many of the control by them over such matters other than as a functional supervisor for the activities of the banks and financial institutions.
The three important aspects of lending are the appraisal and assessment of credit needs, the delivery style of credit and the follow up by way of credit monitoring. What are the internal inadequacies found in the banking system?
1. Knowledge and Analytical skill.
Credit management is an investment and not a cost. Hence, it requires well trained professionals who are experts in their chosen field. Credit management provides the final link in the bank’s cash flow and survival. The credit team turns the handles on financial faucets. Bank management does not give the required importance to the selection of knowledge workers nor proper practical training. They also do not bother about updating the knowledge level of the employees and executives alike. Knowledge is like a perishable commodity. What was available yesterday is not what is needed today. What we have today may not be useful for tomorrow. Hence, imparting new knowledge, skills and technology to suit the need of the present is to be met through training the work force which includes top executives also. If any of the employees or the top executives feels that he knows every aspect of business of banking, they are greatly mistaken. How many of the employees and executives know that RBI directives are mandatory to be implemented and followed and that any individual staff who violates any of the RBI directives can face punishment under Banking Regulation Act and that RBI has issued a circular immediately after the enactment of SARFAESI ACT in the year 2002 that banks and financial institutions have to undertake certain measures as per RBI circular on Prevention of Slippage of NPA Account? Had they known and taken such steps as envisaged by RBI, many of the incidents of NPA could have been avoided. The impact of lack of knowledge is more acutely felt in the branch level.
Knowledge realities are totally lacking in banks. No knowledge analysis is ever made. One has to work constantly at retaining one’s specific excellence. Knowledge analysis must be fed back into the market analysis to bring out opportunities to help borrowers. The conclusion of market analysis will bring out needs for new or changed knowledge. What is required is creating borrower identification with specific understanding and need expressed through distinctive styling with fair continuity.
The primary two aspects of banking knowledge are the legal aspect and the banking aspects. The legal aspects are governed by their respective Acts and rules, legal system and procedures and the banking aspects consist of the relevant rules, regulations, systems and procedures of banking and various regulations through Reserve Bank of India. The advent of Basel norms applicable globally in the banking sector and the introduction of prudential norms during the Indian banking reforms initiated in the year 1990 along with the dawn of the concept of non-performing assets (NPA) and the enactment of Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and The Securitisation And Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 , have changed the entire perceptions of law and practice of banking with specific regard to acquiring legal knowledge and RBI directives which have become an inevitable necessity for the officers and executives of the banks and financial institutions to deal particularly with the loans and the recovery of loans. The already existing Banking Regulation Act, 1949 with its subsequent amendments empowers Reserve Bank of India to exercise control and supervision over banks and financial institutions by giving guidelines through its notifications and circulars which are mandatory for the banks and financial institutions to follow. One of the biggest flaw lies on the lack of knowledge about banking laws and practice of banking including contents of various RBI guidelines and directives among the bank employees including many of the top executives. Banks have a separate legal department managed by legal professionals and if they have the expertise and knowledge to tackle legal matters, why should the banks outsource the services of lawyers incurring heavy expenses out of public money for which they are the custodians? If only the bank executives understand the genuine problems pertaining to the many facets of business faced by the borrowers and follow the RBI guidelines and the banking laws and Acts and take a pragmatic and practical approach to solve the problems through mutual discussion, many of the incidents of NPA could have been avoided. Customer education is also a part of the problem solving. “If there is a will, there is a way” is an old dictum and it applies to both the banks and financial institutions and the borrowers.
Banks and financial institutions conduct training programmes to equip their employees to take up the challenges of the present and to face the uncertain future with confidence and trust. But it is found that most of the participants of the training workshops consider the time spent on training as paid holidays. The effectiveness of the training programmes with regard to gaining knowledge and skills and the ability of the participants to effectively use their new found knowledge on the job at hand is never tested and judged. Hence training becomes a routine exercise to fulfill the statistical requirement.
Trend Analysis and Analytical Approach.
A unit –wise analysis of performance and a comparison with the trend analysis of the like industry coming under the same category would help not only to undertake a SWOT analysis of the unit financed but also understand the reasons for any adverse features, if any, which would broaden the banker’s perspectives about the industry and its performance. It may be that industry-wise analysis may not be available and even if it is, hardly any attempt is made to have a subjective and objective comparative study on the performance of the unit financed. Yet another fact is that most of the branches do not have any such materials nor provided with such information on the industry which help the branch officials to take timely decision and remedial actions. Branches do not have expertise or infrastructural facilities to undertake such studies at their level. Besides, the impact of government policies on the working of industries and also global market changes are often over looked and never given any priorities by banks.
It is observed that an analytical study supported by practical and pragmatic approach to the problems faced by the borrowers is very rarely undertaken. The branch level customer meet is expected to be conducted in the presence of an executive every month where in all the problems faced by the customers and particularly borrowers are discussed to find viable solutions. But most of the time, it is neither convened or even if it is convened, it is stage managed where in only the favoured clients are called who praise the branch services. Such meetings are held only for the purpose of fulfilling the statutory statistical needs of the bank. No serious attempts are made by higher executives to understand the problems and predicament faced by the borrowers and no practical and pragmatic steps are discussed to find the solutions. Unless sincere attempts are made by both the bank officials and the borrowers to solve the critical problems through mutual understanding, no tangible result will be achieved.
2. Decision Making.
The most important aspect in credit appraisal and assessment and monitoring is the capacity of the sanctioning, monitoring and reviewing authorities to take timely decision based on the performance of the past and the prospects of the future to meet the challenges of the present. The effectiveness of the decision depends upon understanding the existing market realities, ability to predict the future trends, perspectives of the business environment and efficacy of risk management. But this is the area where most deficiencies are found in the effective management of credit sanction and monitoring. The basic behavior and strategy are decided through priority decisions which convert good intentions into effective commitments and insight into actions. But the decision making is full of risk and responsibilities and accountability and here lies the entire problem.
The most important factor for the decay in effectiveness is he “Fear Psychosis” prevailing among all sections of employees, particularly among the officers, managers and executives. Timely decisions are so vital in banks, which if not taken, would prove detrimental to both the customer and the bank. Managerial job requires making decisions to commit extensive resources of finance and usually involve an impressive level of uncertainty with respect to the outcome or result. The banks are laden with rules and regulations that the initiative is blunted.
Since the results of decision are most unpredictable because so many variables and external factors are involved, the decisions are to be made systematically, deliberately and consciously with due care. It is better to make firm decisions and carry it out and goes wrong than to shirk decision making as unpleasant and painful job as a result, to allow the accidents of business to set priorities by default. It is true that banks should minimize risk and maximize opportunities. But if the behaviour of the banks is governed by the attempt to escape risk, it will end up by taking the greatest and least risk of all, the risk of doing nothing.
No officer or executive wants to take timely decision, even if their decision is inevitable on most important matters, simply because of the fear that they may become accountable for their acts of commissions and omissions and error of judgment. The “Fear Psychosis” is outcome of fixing up responsibility and punishing ruthlessly devoid of any sensitiveness to intentions of the decision maker and needs of the circumstances. This has created suspicion and mistrust among the employees and executives. Mutual trust is the basis of all transactions in banks, be it customer-banker relationship or employer-employee relationship. The situation prevailing in banks is such that everybody wants to save one’s own skin, come what may to the customer or the bank.
The one and the only remedy is to bring the employees of all categories out of their present negative perceptions and “Fear Psychosis” and to motivate them to make firm commitment; a commitment to produce economic results through contribution of their knowledge and efforts, a commitment to take responsibilities and concentrate on opportunities and results and finally a commitment to take systematic, purposeful and organized discharge of economic risks in their own job and work as well as in the total business. The knowledge employee on whom so much depends should be held to high demands for efforts and performance and they should also make high demands on the job for self actualization and satisfaction.
Bank bosses are expected to monitor borrowal customers’ reaction and their perception and their problems and predicaments on services offered to prevent their accounts becoming NPA. It is very much essential for banks and financial institutions to closely monitor the customers’ requirements of credit needs and credit monitoring of their borrowal accounts and the follow-up measures undertaken by them. Banks and financial institutions have to organise a credit monitoring service system which understands the credit needs of the customer, to take decisions to serve the customer better and improve further on the basis of feedback and through innovation and also analysing the factors that triggers creation of NPA to provide a totally harmonious credit delivery and credit monitoring system that prevents or cure the NPA cause. But unfortunately, too many bosses are involved in long range plan meetings and busy attending various conferences often to the point that they no longer know what the customers’ needs are and how they are being treated. Getting to know the customers does not come via computer print-outs or the endless stream of overhead transparencies and files viewed in the meeting rooms. To know the customer, the boss has to be in the market place to understand the problems and predicaments faced by his customers. Credit monitoring will have no meaning unless the boss takes timely action to meet the needs of the borrower clients and to take effective steps either to prevent the accounts becoming NPA or find timely appropriate cure by initiating bold steps as per RBI directives. Invoking legal measures can only be the last resort when every other mean fails.
One of the persistent problems faced by the bank management in the human resources is how to improve bank’s effectiveness through proper utilisation of human resources. The major hurdle is the alienating attitude of the employees.
The major dimensions of work alienation are (1) lack of personal control over work process or powerlessness; (2) a sense of social isolation or estrangement; (3) lack of work significance; (4) lack of self expression. When the bank does not provide the employee any opportunity for developing a sense of belonging in the bank as well as the social system, the employee is bound to isolate him from the system and its goals.
The crux of the programme of action is building, maximising, allocating and properly deploying the scarcest and most productive resource: – high caliber people. Introduction of technology will bring only the marvels of latest technology. It cannot produce economic results. Results are produced by the people behind the machines- the high caliber knowledge people. Special attention need to be paid to planning knowledge work, which demands sharply focused plan of action. The greatest drawback of the bank management is that they tend to diffuse first-rate resources rather than concentrate them. Any major opportunity is a challenge demanding undivided attention and dedication. The pattern of staffing decisions and personal policies decide whether the bank has a programme for effectiveness.
What the banking industry today needs is an effective management to turn bank’s planning and programmes into performance. For this, the bank’s programmes must be integrated in the practices of business and the employees should be made to understand the importance of economic performance and how it is linked to the spirit and objectives of the bank. Moreover, a united plan should be involved for the entire bank. The work plan should be based on decisions on idea of business and its objectives, on the areas of excellence on priorities and on strategies. Goals and targets can be fixed thereafter. This then leads to an assessment of the efforts and to the selection of the resources to be committed. Subsequently, assignments are given to committed knowledge worker.
Today, the knowledge worker should be allowed to take economic decisions, for which he should know what sort of performance and result the bank is looking for. In turn the knowledge employee must be ‘excited’ to produce the results. He need not be supervised. He must direct, manage, and motivate himself. That can be made possible only when he is allowed to see how his knowledge and work contribute to the while business. But above all, the most important aspect is their ability to build and lead an effective and cohesive human resources team for which understanding the objectives and goals, self as well as the bank, the demands of economic performance are essential pre-requisites. In short, it is the empowerment of work force to produce the desired results.
In the ultimate analysis what is needed is to understand the banking business in its entirety and prospective.”Understanding is needed as much for the immediate task of effectiveness today as it is for work on the future many years hence. It is a necessary tool for any executive who takes seriously his entrepreneurial responsibility. And it is a tool which neither be fashioned for him nor wielded for him. He must take part in making it and using it. The ability to design and develop this tool and the competence to use it should be standard equipment for the business executive.” To be more than a figure head for the talents given in his keeping, the chief executive of the bank and the financial institution should accept his responsibility for making the future happen. It is the willingness to tackle purposefully this task of making the future happen, the most important task of banks and financial institution that distinguishes the great bank and great financial institution from merely competent one, and the banking and financial institution builder from the executive-suite custodian.
(The author invites comments from readers and he can be contacted through his e-mail id firstname.lastname@example.org or mobile – 9229248048)