SARFAESI Act Management Of NPA (Non Performing Assets) – Part IV

T.R.Radhakrishnan

In the final analysis a meticulous and methodical study on the impact of NPA accounts on the banking, the reasons for the creation of NPA and to find the ways to prevent accounts becoming NPA and a cure if an account turns out to be an NPA are required to tackle the ticklish issue of NPA which will enable the employees and the executives from the branch level onwards to take appropriate steps at the appropriate time.

I.        The Impact of NPA on banking operations: 

The banks performance and standing are based on CAMELS rating as per Basil norms. Hence it is imperative that banks have to follow strictly the standards fixed as per prudential norms and monitored by Reserve Bank of India. The efficiency of a bank is not always reflected only by the size of its balance sheet but also the level of return on its assets. The major impacts of NPA on banking operations are as follows:

1. Once the account is declared as NPA as per RBI norms, that account ceases to generate any income which affects the profit of the bank. As per the norms, only interest and other charges realised alone can be taken as income and not accrued.
2. When an account is declared as NPA, the bank is required to provide for the various classifications of assets which block the net funds available for the bank.
3. Capital adequacy ratio is affected and the cost of funds goes up.
4. There may be an erosion of the value of assets.
5. Banks rating is also affected.
6. The economic value addition (EVA) by banks gets upset because EVA is equal to the net operating profit minus cost of capital

2.    Causes responsible for creation of NPAs:

(i)    Bank’s internal inadequacies.

(a)    Lack of understanding between the bank and financial institutions and the borrowers with regard to the project and its implementations.

(b)    Faulty appraisal and assessment of financial needs for the project and its implementation due to insufficient knowledge of the employees and executives.

(c)    Ineffective investigation about credit and other information regarding the borrowers background by the banks and financial institutions.

(d)    Lack of proper exchange of information among the banks and financial institutions regarding the borrower/s.

(e)    Lack of understanding of the local economic and market complexities and global financial and fiscal impact on the industry and commerce particularly for export oriented industries and trades.

(f)     Lack of proper and appropriate data on the type of industry for a comparative study.

(g)    Insufficient information regarding the background and details of expertise and capacity for good governance of the promoters and key responsible persons connected with the project implementation and management of the enterprise.

(h)    Terms and conditions of sanction which are practically impossible to comply with.

(i)      Faulty execution of security documents.

(j)      Lack of knowledge about the law, RBI directives and law and practice of banking.

(k)    Lack of timely decision making capacity among the employees and executives.

(l)      Ineffective credit monitoring by the banks and financial institutions.

(m)  Employees and executives lack knowledge of law and banking for effectively dealing with problems and predicaments coupled with lack timely decision making capacity.

(n)    Fear complex prevailing among the employees and executives.

(o)    Lack of sensitivity of the employees and executives with regard to customer care and service.

(p)    Managerial and executives attitude regarding financing.

In the ultimate analysis, the success of monitoring of credit and approach to the customer problems depend upon the pragmatism and purpose shown in tackling the ticklish question of credit by understanding the borrower needs, problems and predicaments in their correct perspectives coupled with timely decision and effective follow up to realise objectives – “A help delayed is a help denied” is very much true in the matter of credit monitoring.

(ii) Borrower attitudes.

a.    Lack of knowledge about banking.

b.    Lack of good governance.

c.    Absence of financial discipline.

d.    Diversion of funds.

e.    Non compliance of terms and conditions.

f.      Absence of knowledge employees and workers and faulty man power management.

g.    Lack of quality leadership.

h.    Timely servicing of interest and payment of installments on time.

i.      No or inadequate planning and execution of plans and programmes, if any, as planned.

j.      Effective communication and transparent business dealings.

k.    Payment of statutory dues to government on time.
l.      Lack of Effective working capital management for achieving results.

m.  Non fulfillment of all commitments of the borrowers to the bank and others connected with the business.

(ii)  External factors.

a.    Socio economic changes taking place in the country.

b.    Global meltdown and economic turbulent in the local and global market.

c.    Global and national political and economic events affecting the business.

d.     Government policy matters.

e.    Technological changes taking place globally.

f.     National and global competition.

(iii) Symptoms of sickness.

In their circular dated September 12, 2002 on Preventing Slippage of NPA accounts clearly brings out the early symptoms of impending incipient sickness of the business enterprise and some of the important symptoms are as follows.

(a)  Delay in submission of stock statement / other control statements / financial statements and return of cheques issued by borrowers.

(b)  Devolvement of DPG installments and non-payment within a reasonable period.

(c)  Frequent devolvement of LC and non-payment within a reasonable period.

(d)  .Frequent invocation of BGs and non-repayment within a reasonable period.

(e)  Return of bills / cheques discounted.

(f)   Non-payment of bills discounted or under collection.

(g)  Poor financial performance in terms of declining sales and profits, cash losses, net losses, erosion of net worth etc.

(h)  Incomplete documentation in terms of creation / registration of charge / mortgage etc.

(i)    Non-compliance of terms and conditions of sanction.

The impact of NPA accounts on the banking, the reasons for the creation of NPA and to find the ways to prevent accounts becoming NPA and a cure if an account turns out to be an NPA are required to tackle the ticklish issue of NPA which will enable the employees and the executives from the branch level onwards to take appropriate steps at the appropriate time. What is required to achieve the aforesaid objectives is the availability of knowledge employee and executives who are capable of delivering the results for which the prime requirement is the training of employees and executives to update their knowledge and expertise. Training and developing people are the strategic focus. In a highly competitive world of business, the objective is to lead the work force to achieve results through effective training. This will not happen unless every person including the top management executives makes a personal investment in leadership, in learning, and in development. This is the central concept around building quality work life, getting the best people to come to work for and to fulfill the individual aspirations for development and progress and for achieving the organizational goals. It cannot be overemphasized. A well trained highly motivated and extremely inspired knowledge work force will deliver the desired result through a well articulated and excellently executed task.

(To be continued)

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