Mounting NPAs have been a cause of concern for a long time. To accelerate recoveries, small yet tough measures must be taken to strengthen the internal workings of banks and make them accountable
When credit does not perform to create economic assets and surplus income for borrowers, it becomes non-performing assets (NPAs). The borrower does not get enough income from his economic assets to repay the bank loan. NPAs are, in fact, a the part and parcel of the banking sector. Banks do loan business and earn interest income.
While doing business, banks take risk and sometimes give loan to people whose business fails or they do not manage the business well. In the process, they lose their business and banks do not get back the loan with interest. It is difficult to examine each and every borrowers’ credibility when the branch manager works under pressure to meet annual disbursement targets. Social sector targets add to his burden.
Around three per cent of the NPAs of the total loans and advances is good for banks as it shows the banks’ ability to take risk. If NPAs cross the four per cent mark, it is a cause of concern and if it goes above six per cent, it is alarming. But banks can take simple steps to check the growth of NPAs.
As a first step, banks must rotate their staff attached to loan desks every year. If a staff continues to be at the loan desk for years, there is a possibility that he could evolve ingenious methods to commit frauds. Even the internal auditor and inspecting officer should change every three years.
It is the responsibility of the top bankers to identify honest staff for managing loans and advances portfolios. The bank’s chief should be necessarily computer savvy to personally monitor the big loan portfolios. If the CEOs and senior officers of banks are not the first generation computer educated, they are likely to face hell of the problems in a core banking environment. If a CEO is well versed with the applications of computer softwares, he can easily analyse data, monitor loan, NPA graph in different sectors and issue suitable advice to his staff. There are many NPA indicators in the bank which give early warning to top bankers.
Banks should be made fraud proof by tightening internal audit, concurrent audit, legal audit and information system audit. Dedicated legal audit is very important in view of documentations fraud. legal documents and certificates should be properly examined by banks before giving loans. Information system audit brings out the defects in transaction in core banking environment. It all depends on bank management how best they can utilise the audit mechanism to improve the banks’ health.
One of the biggest threats to the banking sector today are some fake global companies who run away with bank credit. Many of them change their names and addresses quite often to dodge banks’ scrutiny. Those bogus entities are also responsible for the banks’ NPAs as many of them have transferred huge bank loans to undefined destinations in the last 10 years. They are still there in India and are waiting for an opportunity to mop up the loan again. How to keep those entities at bay is the biggest challenge before the country.
The general public should not suffer for the NPA, which is caused by big borrowers. Banks should be free to decide their ‘Know Your Customers’ norms as more paper work chase away depositors. Deposits from general public are the core strength of the banks. Banks deduct TDS on interest income above Rs 10,000 per annum. This amount should be increased to Rs 20,000 so that people are encouraged to keep more deposits in banks. Banks should always have dedicated investment review which will help them invest the depositors money in profit-making sectors.
Banks keep thousands of quintals of gold as mortgage for giving loans. But banks have no full proof mechanism to test the purity of gold. local goldsmith is hired to test purity. There is no certificate given for purity. Here banks have to introduce electronic gold checking machine to know the actual weight and purity of the gold kept as mortgage. This is a must do reform in the banking sector.
If 20 per cent of the gold mortgaged in banks are found fake, it would sink many banks. People at the time of mortgage and receipt of gold should get their ornaments checked by electronic gold checking machines and get certificate from banks about the weight and purity.
It is high time for the bankers to develop relationship banking, which will help bankers understand the borrowers and make credit plan better. There are many unexplored areas where the banks can give loans. Small traders take more than 80 per cent loan from informal sources of credit. Banks can step in to tap potential borrowers in the unorganised sector. India has multiple untapped economic sectors which can give good return to the banks if good governance prevails.
(The writer is a freelance commentator)