Various recommendations have been made by various study groups appointed by Government of India and RBI to arrest the incidents of accounts becoming NPA and circulars are being issued by RBI from time to time giving directions and guidance to banks and financial institutions on the steps to be taken to prevent slippage of NPA. Yet there are no visible signs of reduction in NPA because the implementation of credit monitoring and the steps taken by banks and financial institutions are shoddy and ineffective and concentration and commitment is totally lacking by all sections of the employees including executives at all levels. Top executives of bank and financial institution have many periodical meetings with Government Officials, RBI officials, among themselves under IBA banner and forming committees and sub committees to tackle the ticklish question of NPA which so far has not produced any tangible results. Instead if such officials spend more quality time with their borrowers to understand the problems and predicaments mutually faced by the lender and the borrower to find out effective solutions for the benefit of both, that would produce the desired results.
Perpetual Self Renewal Programming (PSRP) is a concept to continuously taking preventive steps under credit monitoring implementation programme to analyze the circumstance and reasons for an account tending to becoming non-performing asset and to take appropriate effective remedial steps in consultation with and participation by the borrower as and when the account starts showing first signals of stress and continue the credit monitoring without any letup and complacency with the active involvement of the lender and borrower..
The following are the steps to be undertaken in the process.
Knowledge and quality of human resources.
The success or failure of any organisation depends upon the quality, knowledge and the motivational level of its employees irrespective of the positions they hold in the organisation. Besides any organization without culture, ethics and values will not survive the test of the time. Introduction of technology and its innovation can bring only the marvels of technology but it cannot produce economic results unless put into us for its maximum effect which can be created by human resources only. It is not the technology that counts but the people who make use of the technology to produce the results that counts more. Hence, recruitment of human resources with positive attitude and training them to become self actualized work force plays a very important role in the making of an enterprise. “Human resources are like natural resources; they’re often buried deep. You have to go looking for them; they’re not just lying around on the surface. You have to create the circumstances where they show themselves.” Leadership is pivotal to produce the results and it is turning a vision into a mission to achieve success by planning to do the right things and doing the things right.
Assessment and Appraisal of credit needs and uninterrupted flow of credit.
The most important aspect is that any wrong assessment and appraisal of the credit needs and any laxity in the flow of credit would lead to a financial gap which will affect the implementation of the project and the day to day functioning of the Enterprise. Further the mode of credit delivery should ensure the utility of the nature of facility. If the facility sanctioned cannot be efficaciously used, then it is as good as no credit is given. Hence adequate and appropriate financial facilities and its continuous uninterrupted timely flow should be ensured to meet the legitimate demands of the business at any point of time. There should also be a mechanism to make available additional limit without undergoing the formality of assessment and appraisal to meet urgent requirements depending upon the need of the hour without delay. A pragmatic, practical and realistic cash flow assessment would guarantee the borrower to meet his financial commitments. Yet another important factor is that the terms and conditions stipulated are to be easily implementable and reasonable without any prejudice and bias towards the borrower.
Financial discipline and understanding the vagaries of the market conditions for the sustenance and success of any organisation being the paramount important factors, the assessment and appraisal of financial needs also should include an evaluation of the quality and competency of the key responsible people connected with the borrower clients and their continued availability. A meticulous and conscientious assessment and appraisal would ensure fruitful governance for the success of the organisation of the borrower client.
One of the most important aspects of credit assessment and appraisal is the risk analysis under taken by the bank / financial institution either by themselves or through external agencies or both through which credit rating is awarded to the account which will determine the interest rate and availability of credit also. Not only periodical risk analysis is to be undertaken, there must be a provision to help the borrower in case of alteration in the rating due to unforeseen circumstances creating adverse business environment to sustain and survive the changes.
Credit monitoring process.
The purpose of credit monitoring is to undertake continuously and constantly to ensure the flow of credit and its effective utilisation to meet the purpose of the loan and the consequent results achieved and to take remedial measures to prevent the account becoming NPA. Credit monitoring starts after the sanctioned credit facilities are made available to the borrower after complying with the terms and conditions of sanction. The following are the steps that are required to be taken.
(a) A core group of knowledgeable and skilled employees specifically trained for the purpose of credit monitoring should be constituted by the bank / financial institution in every branch, regional offices, zonal offices, circle offices and at head office to continuously and effectively supervising and examining loan utilisation, operation and conduct of the loan account particularly ensuring cash flow enough to meet the financial commitments of the borrower and to prevent diversion of funds and money laundering. Besides, a close watch to find any signs of distress is very much vital to prevent the account from slipping in to NPA. A review of the existing reporting system can be made to introduce any change to reflect the factual position and conduct of the account pointing out deficiencies and the effective steps to be taken to rectify such defects and to put the account back on the right track by involving the borrower in the process to implement the corrective steps either by the borrower or by the bank, if necessary, by appointing specialists from outside without any time gap to prevent further deterioration.
(b) Identifying the reasons for the distress is very essential to find practical solutions. The distress can be attributed to the following reasons.
(i) The attitude and approach of the bank and shortcomings in the process of assessment and appraisal and delivery of credit. Lack of knowledge and analytical ability to foresee the impending distress on the part of the employees and higher executives dealing with credit and taking timely decision.
(ii) Defective and inefficient organizational set up of the borrower to achieve organizational objectives to fulfill their business commitments and lack of good governance. Lack of understanding the complexities of banking and business environment. Professionalism of a high standard should be inculcated among the employees and key responsible persons and the management.
(iii) Lack of understanding and co-operation between the bank / financial institution and the borrower and conflict of their respective interests and mistrust.
The aforesaid reasons are in the domain and control of the respective organizations.
(iv) Fiscal policies of the government, business environment of the country, prevailing political situation, changes in the global economy, natural calamities and many such unforeseen happenings would have an impact on the performance of the companies and enterprises which are beyond the control of the lender and the borrower. On such occasions there should be a policy in place to take immediate remedial measures with mutual understanding and consent by both the lender and the borrower to avert any adverse impact on the business. Procrastination of decision and action to prevent the account slipping into NPA is very much detrimental and hence should be completely eliminated.
(c) A competent credit monitoring system and practice could enable the bank / financial institution to identify a willful defaulter based on RBI norms at the earliest opportunity before it becomes too late to take any corrective measures. The bank / financial institution can at the first sign of distress itself undertake a Forensic Auditas per RBI guidelines through competent people to identify such borrowers and to take stringent actions against them including framing criminal charges and other appropriate steps to recover the dues. Such tough action can also deter other borrowers from indulging in such activities.
(d) Branches of the bank are categorized based on nature of credit that they are allotted to undertake such as SME branch, Mid Corporate and Large Corporate branches and Retail loan branches etc. Such branches other than retail loan branches should be brought under compulsory concurrent audit with its strict compliance which if conducted diligently can detect signs of impending distress and to take curative measures without any delay. Besides, the bank should undertake purposeful periodical inspections and stock audit, review of performance, conduct of the account and constant interaction with the clients which will enable the bank to take corrective measures with the co-operation and participation by the borrower to avert the account being classified as NPA. Customer education is an important integral part of credit monitoring.
(e) The following circulars issued by RBI are worth mentioning in the matter of credit monitoring. (i)Study on Preventing Slippage of NPA accounts (ii) Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy. (iii) Revised Prompt Corrective Action (PCA) Framework for Banks (iv) RBI-Review of Supervisory Processes of Commercial Banks – Report of High Level Steering Committee.
But the pertinent question is, “Does the bank implement the recommendations contained in the aforesaid circulars diligently and conscientiously with all sincerity in letter and spirit?” If so, why the result is not coming through? These are questions to be pondered over by the bank and financial institution and also by Reserve Bank of India.
The success of Perpetual Self Renewal Programming (PSRP) depends upon the capacity of management to take timely decisions and immediate remedial action. If the management system is to shirk duty and avoid responsibility and fixing blame on persons and punishing them instead of identifying the problems and fixing and solving them, then, there is bound to be decision and performance paralysis. The reason for the failure of the present recovery process is the ‘Fear Psychosis Syndrome’ prevailing among the employees and the management of bank and financial institution. The prevailing ‘Fear Psychosis Syndrome’ has to be removed to take bold step without fear or favour by the management of the bank / financial institution 0without the interference of the Government or RBI.
Reserve Bank of India has made recommendations based on the report of the Consultative Group of Directors of Banks / Financial Institutions (Dr. Ganguly Group) on the Responsibilities of Board of Directors and also on Role and Responsibility of Independent and Non-Executive Directors. The intent of the recommendations is for the good and effective governance of the bank and financial institution.
The Role of Auditors.
“An effective internal audit function should evaluate, independently and objectively, the quality and effectiveness of a bank’s internal control, risk management and governance processes, which would assist senior management and the Board of Directors in protecting their organisation and its reputation.” Further, the Supervisors should have regular communication with the bank’s internal auditors to discuss (i) the risk areas identified by both parties, (ii) understand the risk mitigation measures taken by the bank, and (iii) monitor the bank’s response to weaknesses identified. Further, an inter action with the borrower’s auditors, if necessary, to get information regarding their observations over important financial issues and accounting methodology and how effective is the good governance of the borrower client.
“Understanding the customer”
Understanding the respective roles of the bank and the borrower which are complimentary to each other is a very important step. KYC (Know Your Customer) norms are already implemented. There is vast difference between knowing the customer and understanding the customer and hence more importantly new UYC (Understand Your Customer) norms are to be formulated. Effective communication is the key to understanding because the very purpose of communication is to understand and to be understood which will pave the way for an endearing and enduring relationship between the bank and its clients. Understanding each other is the basis for solving problems and finding solutions.
A detailed well documented plan of action based on the aforesaid basic principles of Perpetual Self Renewal Programming (PSRP) and also RBI guidelines if initiated and implemented with due diligence, commitment and concentration by the lender and the borrower without any let up and complacency with proper understanding of the process and importance of the Perpetual Self Renewal Programming would definitely minimise the incidents of accounts becoming NPA.
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