NON PERFORMING ASSETS --- A VIEW TO KILL

NON PERFORMING ASSETS – a view to kill

Introduction

The economy of a country depends on the development of the financial sector. The banking sector is an indispensable financial service sector supporting development plans through channelizing funds for the productive purpose, intermediating flow of funds from surplus to deficit units and supporting financial and economic policies of the government. NPA is the major problem faced by the banking sector in India, particularly Public sector bank as compared to the private and foreign banks.  The increasing NPA is affecting the health of the bank and its profitability. It is a double-edged sword, at one end it will cut the interest income and on the other hand, it cut down the profit through provisions.  Can NPA be eradicated totally and go to the scenario where there will not be any more NPAs? The Answer is NO. NPA will happen every now and then and how prudent we are in managing it.  That is why, whenever, we price a loan we will be adding Risk Premium to the pricing, evaluating various factors. The increasing NPAs in public sector banks are due to several factors and we can broadly classify as external and internal.

Position of NPA in banking sector in India

From the table below we understand that the NPA in Indian Banking industry is growing at a constant speed in last five years. While the new private sector bank and the Foreign bank have it under control, the NPA is growing at a Higher speed in case of Public Sector Banks, that too in the year 2015-2016 it has almost doubled. Can we presume that the NPA in New Private Sector Banks are under real control? The answer is big no. There is suppression of NPA in new private sector banks also.

GROSS AND NET NPAs OF SCHEDULED COMMERCIAL BANKS BANK GROUP-WISE -----(Amount in ₹ Billion)
Year (end-March)		Non-Performing Assets (NPAs)
	Net	Gross		Net
		Amount	As Percentage of Gross Advances	Amount	As Percentage of Net Advances
Scheduled Commercial Banks
2004-05	11156.63	593.73	5.2	217.54	2.0
2005-06	15168.11	510.97	3.3	185.43	1.2
2006-07	19812.37	504.86	2.5	201.01	1.0
2007-08	24769.36	563.09	2.3	247.30	1.0
2008-09	29999.24	683.28	2.3	315.64	1.1
2009-10	34970.92	846.98	2.4	387.23	1.1
2010-11	42987.04	979.00	2.5	417.00	1.1
2011-12	50735.59	1423.26	3.1	650.19	1.3
2012-13	58797.73	1935.09	3.2	986.09	1.7
2013-14	67352.13	2633.72	3.8	1423.83	2.1
2014-15	73881.60	3233.35	4.3	1758.41	2.4
2015-16	78964.67	6119.47	7.5	3498.20	4.4
Public Sector Banks
2004-05	8489.12	483.99	5.5	169.04	2.1
2005-06	11062.88	413.58	3.6	145.66	1.3
2006-07	14401.46	389.68	2.7	151.45	1.1
2007-08	17974.01	404.52	2.2	178.36	1.0
2008-09	22592.12	449.57	2.0	211.55	0.9
2009-10	27013.00	599.26	2.2	293.75	1.1
2010-11	33056.32	746.00	2.4	360.00	1.2
2011-12	38773.08	1172.62	3.3	592.05	1.5
2012-13	44728.45	1644.61	3.6	899.52	2.0
2013-14	51011.37	2272.64	4.4	1303.62	2.6
2014-15	54762.50	2784.68	5.0	1599.51	2.9
2015-16	55935.77	5399.56	9.3	3203.76	5.7
Old Private Sector Banks
2004-05	677.42	42.00	6.0	18.59	2.7
2005-06	829.57	37.59	4.4	13.75	1.7
2006-07	928.87	29.69	3.1	8.91	1.0
2007-08	1116.70	25.57	2.3	7.40	0.7
2008-09	1285.04	30.72	2.4	11.59	0.9
2009-10	1541.36	36.22	2.3	12.71	0.8
2010-11	1846.47	36.00	1.9	9.00	0.5
2011-12	2300.79	42.00	1.8	13.00	0.6
2012-13	2699.37	52.10	1.9	20.00	0.7
New Private Sector Banks
2004-05	1236.55	45.82	3.6	23.53	1.9
2005-06	2300.05	40.52	1.7	17.96	0.8
2006-07	3218.65	62.87	1.9	31.37	1.0
2007-08	4067.33	104.40	2.5	49.07	1.2
2008-09	4468.24	138.54	3.1	62.52	1.4
2009-10	4783.58	140.17	2.9	52.34	1.1
2010-11	6128.86	145.00	2.7	34.00	0.6
2011-12	7363.23	187.68	2.2	44.01	0.6
2012-13	8733.11	210.71	1.8	59.94	0.7
2013-14	13429.35	245.42	1.8	88.62	0.7
2014-15	15843.12	341.06	2.1	141.28	0.9
2015-16	19393.39	561.86	2.8	266.77	1.4
Foreign Banks In India
2004-05	753.54	21.92	2.8	6.39	0.8
2005-06	975.62	19.28	1.9	8.08	0.8
2006-07	1263.39	22.63	1.8	9.27	0.7
2007-08	1611.33	28.59	1.8	12.47	0.8
2008-09	1653.85	64.44	3.8	29.96	1.8
2009-10	1632.60	71.33	4.3	29.77	1.8
2010-11	1955.39	50.00	2.5	12.00	0.6
2011-12	2298.49	62.97	2.8	14.12	0.6
2012-13	2636.80	79.77	3.1	26.63	1.0
2013-14	2911.42	115.65	3.9	31.60	1.1
2014-15	3275.99	107.61	3.2	17.62	0.5
2015-16	3635.51	158.05	4.2	27.67	0.8

Let us examine the factors contributing to increasing in NPAs. The factors can be broadly classified into External and Internal

External Factor:

1.   Legal system

The Government has taken a number of initiatives such as Sarfaesi act, Debt recovery tribunal, Bankruptcy, and Insolvency act to speed up the legal process of recovery of NPAs. But the bank suffers due to the consequences of non- recovery carelessness and ineffectiveness in the process.  The Bank also does not have the data updated as regards to the borrower causing ineffectiveness in delivering of notices and enforcement of recovery under Sarfaesi act.

Further, credit score system also prevails wherein the default / or acceptableness of a borrower or company can be ascertained before entertain them for loans. Many a time, the official does not check the credit scores while processing the loans and there are incidents of non reporting the default, the data may not reflect the true position.

2.   Willful defaults

There are borrowers do have resources to pay back the loan but prefer to hold the repayment. Stringent measures need to be taken against these types of the borrowers in the recovery process. The willful defaulters are on increase due to bad precedence created by the government in mass loan waiver.

3.    Natural calamities

Natural Calamity is a measured factor creating the alarming increase of NPAs. This is happening in all sectors but more particularly in the agriculture sector. Every now and then, India is affected by natural calamities such a cyclone which causing damage due to heavy rains and drought where crops fail due to non- availability of rainwater. As Indian agriculture mainly based on monsoon rains, failure will affect the product and consequently default the loan.

4.    Project handling

The project is delayed for implementation due to

Ø  Inappropriate project handling,

Ø  ineffective management,

Ø  lack of adequate resources,

Ø  lack of advance technology,

Ø  day to day changing govt. Policies produce industrial sickness.

Therefore, the banks that finance those industries ultimately end up with a low recovery of their loans.

5.   Demand/supply

Entrepreneurs in India could not predict their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities.  Further, change of policies of the government also makes it difficult in getting the continuous supply of raw materials particularly if it is an imported one.

The bank recovers the amount by selling off their assets, which covers the smallest label. Therefore the banks record the unrecovered part as NPAs and have to make provision for it.

6.    Change in Govt. policies

With every new govt., banking sector gets new policies for its operation, so it has to cope with the changing principles and policies for the regulation of the rising of NPAs. For example, the fallout of handloom sector is continuing as most of the weavers' Co-operative societies have become defunct largely due to the withdrawal of state patronage. The rehabilitation plan worked out by the Central government to renew the handloom sector has not yet been implemented, so the loans to handloom sectors are becoming NPAs. The action of Government for mass loan waiver for agriculture sector also impact the repayment of the loans by the agriculturist. The person who has repaid the loans becomes a fool as his good standing caused loss to him. Had he not paid the loan back, he would have been benefited by the loan waiver scheme. The scheme is only promoting willful defaulter.

7.   Bank Finance

The Bank also many time do not finance the project appropriately. The unilaterally reduce the quantum of the loan without understanding the implication to suit to their process.  The promoters have no option but to accept the terms of the Bank. Under financing will lead borrowings at the higher cost and eventually make the project fail.

8.   Global scenario

With the globalization process, the world becomes interdependent.  No country is working in isolation and any change the world economic and political scenario will affect the domestic industry also.  The economic slowdown is affecting the sales and thereby the profit. This makes them economically not viable and hence the loan could not be repaid by them.

9.   Change in regulations

Past 15 years, there are lots of changes were implemented for recognition of NPA and realization of Interest income. The Changes in Basel implementation reason for mounding NPAs in the Banking.

Internal Factors

a. Defective Lending process

The Banks while doing the appraisal, decided to lend based on the collaterals instead of the economic viability of the company, sustained profitability and cash generation. Unless the unit generates surplus cash, it may not be in a position to replay the Principle and Interest. Collaterals will give comfort and there are cases where the realization value of the collateral is not accessed properly by the appraisal team. The assumption viz production, sales, and competition are to be meaningful and achievable. The Character of the borrower and his past record are to be analyzed and satisfied before financing because the repayment of the loan depends on the willingness to replay. 
The banker should, therefore, take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is competent of carrying it out successfully, he should be a person of integrity and good character.

b. Inappropriate technology

Before computerization, all the cheques drawn by the borrower will be passed through the Official handling the loan portfolio. He will get a clear picture from the cheques whether the loan funds are used for the business purpose or diversion/investment purpose. As a result of the technology implementation, the transactions are done at various places and hence many time the relationship manager does not aware of the diversion of funds. There should be some improvement in technology to make it possible for the relationship manager to know about the use of funds all time.

c. Improper Appraisal

The appraisal should contain the strength, weakness, opportunity and threat analysis of the unit.  Due to the pressure of work, the relationship officer does not appraise the unit properly instead of forwarding the proposal submitted by the chartered accountant for sanction without adding value to it. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and creditworthiness of the borrower, so, banks should consider the borrowers own capital investment and the bank should collect credit information of the borrowers from, a. Bankers b. Enquiry from market/segment of trade, industry, business. c. From external credit rating agencies. Many a time the relationship manager does not understand the change in the economic/political condition affecting the borrowers' prospects.

Due to lack of training and development, the relationship officers could not read the balance sheet and profit and loss statement meaningfully. The quarterly information system, stock statements are taken for the procedural purpose only and filed without analysis.

d. Managerial deficiencies

 To achieve the targets, the banks do not carry out the Risk management process of borrower selection. Many a time, the proposals are imposed instead of selected based on merit. The basis for selection of borrowers such as the Marketability and Acceptability of the product, Safety of the funds, honesty, expertise, and integrity of the promoters etc. are not evaluated properly. The principle of keeping all the eggs in one basket is also not followed. The cross-selling has now gained more importance and the core business has not been given the importance it required. This is due to heavy incentive given to all the people including the top brass of the Bank. After sanction follow up and continuous monitoring the functioning of unit both off-site and on-site is not carried out.

Absence of regular industrial visit

The irregularities in spot visit also increase the NPAs, the absence of regular visit of bank officials to the customer point decreases the collection of interest and principals on the loan. In some cases, it has been done as a formality only.In some banks, the regular visits to the spot have been given to the outsourcing agency but the bank is unable to monitor the agency whether it carries out the job carefully and verify their reports at regular intervals.

Covering up by management:

The Top brass of the bank prefers to hide or show the NPA as performing asset in order to show a rosy picture about the health of the bank during his tenure. This is being done with an indention show that they have kept the bank in a good position to the world and to the promoters. Since action has not been taken at the appropriate time, it becomes very difficult to recover. We have seen incident os showing increased NPA and provision when there is a change in incumbency.  

What should be done now?

 NPAs leads to asset contraction for banks and create a problem in recycling the funds and also spend good time and money for the recovery. As per Basel III, the banks need to provide more capital against the risk-weighted assets. NPA, on one hand, will not contribute to the profit of the bank and on the other hand, take away the profit in the name of Provision thereby affecting capital accumulation through profit. With the increase in NPAs, Bank will restrict the credit flow affecting the economic growth

Remedies/Measures for managing NPAs

a.   The operating staff should be trained in the appraisal process, analyses of Balance sheet/ profit and loss statement and management credit portfolio.

b.   The credit monitoring system should be strengthened to catch up the early warning signals and take remedies then and there.

c.   Databank for Industry risk profile/ commercial risk has to be set up and made available for the relationship manager to use the same while appraisal of the loan.

d.   The release of loans should be on the cash flow modal as against traditional stock/ receivable statement method.

e.    Specialization in letter and spirit should be encouraged for the staff. Bank also should take care adequate staffing in their credit department.

f.    Recovery team should be strengthened for follow up/ coordination of cases under various legal actions.

g.   All loans above the certain threshold limit, a nominee of the bank should be in the management team to monitor the performance and use of funds.

h.   The government should take steps to speed up the legal process and ensure effective recovery.

i.     Top management also to be made accountable for failure large loans.

j.    The promoter should be blacklisted whatever their standing or group to which they belong and the banking facilities should be stopped for the group.

k.   Banking supervision should be delinked from RBI and the supervision corporation should closely monitor all the banks and regular intervals through an onsite/offsite audit.

l.     Politics should be away from the financial sector and financial sector to allow it to function independently.

m. The Incentive for cross-selling should be given only to the marketing person (Branch manager only) not all the people above him.

n.   There should be cooperation with all the banks so that a defaulter can not avail banking facilities from any other bank. This can be achieved only with data management and data sharing.

o.   ARCs should be encouraged and Banks may be allowed to promote their own ARCs for recovery of bad loans.

p.   The banks should know how to leave the unit  When they catch the early warning signals. ICICI bank exit from King Fisher where are all the public sector banks caught therein.

q.   The defaulting promoters should be financed again for another project because they are the responsible for the failure of the project.

Conclusion

The Financial sector should be strong for any economy to flourish and any failure in the banking sector will affect the depositors trust in the banking system and will adversely affect the economy. The topic of NPA is being talked above for years and now it is time to take stringent action to curb the NPAs and strengthen the recovery. This task cannot be achieved by Banks alone. All the stakeholders, I,e. The government, regulator, and the Banks should join together for solution and implementation. Delay will create non-performing banks only.

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http://www.indianmba.com/Faculty_Column/FC56/fc56.html

https://financetapmi.wordpress.com/2017/03/10/rising-npas-in-indian-banking-sector-causes-effects-implications-and-remedies/

https://indianmoney.com/articles/what-is-the-main-cause-for-an-increase-in-non-performing-assets-of-banks

www.rbi.org.in 

Six Leadership Styles, And When You Should Use Them

6 Leadership Styles, And When You Should Use Them

                                                                         

      

Taking a team from ordinary to extraordinary means understanding and embracing the difference between management and leadership. According to writer and consultant Peter Drucker, "Management is doing things right; leadership is doing the right things."
Manager and leader are two completely different roles, although we often use the terms interchangeably. Managers are facilitators of their team members’ success. They ensure that their people have everything they need to be productive and successful; that they’re well trained, happy and have minimal roadblocks in their path; that they’re being groomed for the next level; that they are recognized for great performance and coached through their challenges.
Conversely, a leader can be anyone on the team who has a particular talent, who is creatively thinking out of the box and has a great idea, who has experience in a certain aspect of the business or project that can prove useful to the manager and the team. A leader leads based on strengths, not titles.
The best managers consistently allow different leaders to emerge and inspire their teammates (and themselves!) to the next level.
When you’re dealing with ongoing challenges and changes, and you’re in uncharted territory with no means of knowing what comes next, no one can be expected to have all the answers or rule the team with an iron fist based solely on the title on their business card. It just doesn’t work for day-to-day operations. Sometimes a project is a long series of obstacles and opportunities coming at you at high speed, and you need every ounce of your collective hearts and minds and skill sets to get through it.
This is why the military style of top-down leadership is never effective in the fast-paced world of adventure racing or, for that matter, our daily lives (which is really one big, long adventure, hopefully!). I truly believe in Tom Peters’s observation that the best leaders don’t create followers; they create more leaders. When we share leadership, we’re all a heck of a lot smarter, more nimble and more capable in the long run, especially when that long run is fraught with unknown and unforeseen challenges.
Change leadership styles
Not only do the greatest teammates allow different leaders to consistently emerge based on their strengths, but also they realize that leadership can and should be situational, depending on the needs of the team. Sometimes a teammate needs a warm hug. Sometimes the team needs a visionary, a new style of coaching, someone to lead the way or even, on occasion, a kick in the bike shorts. For that reason, great leaders choose their leadership style like a golfer chooses his or her club, with a calculated analysis of the matter at hand, the end goal and the best tool for the job.
My favorite study on the subject of kinetic leadership is Daniel Goleman’s Leadership That Gets Results, a landmark 2000 Harvard Business Review study. Goleman and his team completed a three-year study with over 3,000 middle-level managers. Their goal was to uncover specific leadership behaviors and determine their effect on the corporate climate and each leadership style’s effect on bottom-line profitability.
The research discovered that a manager’s leadership style was responsible for 30% of the company’s bottom-line profitability! That’s far too much to ignore. Imagine how much money and effort a company spends on new processes, efficiencies, and cost-cutting methods in an effort to add even one percent to bottom-line profitability, and compare that to simply inspiring managers to be more kinetic with their leadership styles. It’s a no-brainer.
Here are the six leadership styles Goleman uncovered among the managers he studied, as well as a brief analysis of the effects of each style on the corporate climate:

1. The pacesetting leader expects and models excellence and self-direction. If this style were summed up in one phrase, it would be “Do as I do, now.” The pacesetting style works best when the team is already motivated and skilled, and the leader needs quick results. Used extensively, however, this style can overwhelm team members and squelch innovation.
2. The authoritative leader mobilizes the team toward a common vision and focuses on end goals, leaving the means up to each individual. If this style were summed up in one phrase, it would be “Come with me.” The authoritative style works best when the team needs a new vision because circumstances have changed, or when explicit guidance is not required. Authoritative leaders inspire an entrepreneurial spirit and vibrant enthusiasm for the mission. It is not the best fit when the leader is working with a team of experts who know more than him or her.
3. The affiliative leader works to create emotional bonds that bring a feeling of bonding and belonging to the organization. If this style were summed up in one phrase, it would be “People come first.” The affiliative style works best in times of stress, when teammates need to heal from a trauma, or when the team needs to rebuild trust. This style should not be used exclusively, because a sole reliance on praise and nurturing can foster mediocre performance and a lack of direction.
4. The coaching leader develops people for the future. If this style were summed up in one phrase, it would be “Try this.” The coaching style works best when the leader wants to help teammates build lasting personal strengths that make them more successful overall. It is least effective when teammates are defiant and unwilling to change or learn, or if the leader lacks proficiency.
5. The coercive leader demands immediate compliance. If this style were summed up in one phrase, it would be “Do what I tell you.” The coercive style is most effective in times of crisis, such as in a company turnaround or a takeover attempt, or during an actual emergency like a tornado or a fire. This style can also help control a problem teammate when everything else has failed. However, it should be avoided in almost every other case because it can alienate people and stifle flexibility and inventiveness.
6. The democratic leader builds consensus through participation. If this style were summed up in one phrase, it would be “What do you think?” The democratic style is most effective when the leader needs the team to buy into or have ownership of a decision, plan, or goal, or if he or she is uncertain and needs fresh ideas from qualified teammates. It is not the best choice in an emergency situation, when the time is of the essence for another reason or when teammates are not informed enough to offer sufficient guidance to the leader.

Bottom line? If you take two cups of authoritative leadership, one cup of democratic, coaching, and affiliative leadership, and a dash of pacesetting and coercive leadership “to taste,” and you lead based on need in a way that elevates and inspires your team, you’ve got an excellent recipe for long-term leadership success with every team in your life.




By Robyn Benincasa

The article I read in Internet and impresssed.