What one needs is a firm approach to management with an understanding of the structure and capabilities of the people
The gross non-performing assets of the Indian banking system are estimated to be at 4.5 per cent of the total loans. At the same time, the Investment Information and Credit Rating Agency of India limited has estimated that bad loans of the Government banks stand at 5.1 per cent.
On March 30, the Reserve Bank of India allowed banks to use upto 50 per cent of their counter-cyclical buffer to provide for the NPAs. This was up by 17 per cent of the prevailing practices. The counter-cyclical buffer itself was an outcome of the financial crises of 2008.
Meanwhile, the economy itself is in the grip of a strange man-made situation: On matters of acquisition of land, availability of fuel, getting environmental approval etc. When this is capped with poor credit evaluation procedures, the cup of misery overflows.
Of course, the Government has progressively infused higher capital in some of the public sector banks. Many a time this has been un-correlated to the budgetary allocation. The inefficiency of some of the public sector undertakings not to take this seriously is because of their faith that the Government will keep bailing out these banks.
This is a palpably illusory situation. Clearly, the experience of Air India has not been registered seriously enough in concerned quarters. Banks’ relationships with, say, troubled energy companies, have a high potential of enhancing defaults and bankruptcy filings.
On June this year, the policymakers of Bank of England flagged the issue of interest rates. Predictably, it got hinged to the Bank of England’s approach towards domestic inflation. The world was in the hope that the tail-winds of global growth would catch on.
At the end of the day, there seems to be much in common in the patterns of the forecasts made by the economists and the behaviour of the stock exchange! Added to this is the frailty and unpredictability of human behaviour.
This is well illustrated by the nominal impact that low oil prices have caused on the general price index. Of course, the faithful still believe that analytics will come to the rescue.
In this kind of an environment, which resembles the babble in the tower of Babylon, no one knows what’s coming and what’s going.
In his Bancon address of 2010, this writer had pleaded to make the ‘choice of performance’ as a conscious one. There is a difference between talking of performance in a matter of making a grand stand and adopting efforts of re-inventing one’s systems and procedures to meet the requirements of time.
One may or may not be a Modiite. That’s another matter. However, Prime Minister Narendra Modi certainly comes out to be a person with a clear sense of direction in many areas. This has to be seen by the corporates — especially by the financial institutions — as a possible route to the solution in tune with the demands of time.
Mission-vision is fine. Equally important is the capacity of the leaders to use the compass of his judgements to find a path out of the woods. This will make solutions context-specific.
The bank and the financial institutions provide a fit case for this kind of approach. This writer’s research has established that it can be done. One needs a purposeful approach to management with a clear understanding of the structure, processes and the capabilities of the people who populate the organisation.
Sub-standard designations done in different environment of loans by regulators, clearly highlight doubts on the borrower’s ability to re-pay or question the value of the assets that back a loan. Political favours have to be kept out from this domain.
Apart from the Russian banks, among the lenders in emerging markets, Indian banks have the least capacity to absorb the losses.
The International Monetary Fund had warned of this in mid-April itself. like in Chile, Hungary and a few other places, a deterioration in loan quality can threaten capital levels. According to the Global Financial Stability report of the IMF, the loss-absorbing buffer of the Indian banking sector is 7.9 per cent of risk weighted assets, as against 7.8 per cent in Russia.
Several firms in countries like Argentina, Brazil, China, Nigeria, and Turkey have relatively constrained re-payment capacity in terms of interest-coverage ratios, and the likes of them owe significant share of the debts.
Time requires a managerial response to managerial problems. It may be fanciful to treat the managerial issues with an economic tool-box.