Non-performing Asset Management for Banks in India - Part II
As mentioned in part 1 of this article, (see Non-performing Asset Management for Banks in India – Part I) non-performing assets (NPAs) have been a great worry for India’s public sector banks. Increasing provisions for NPAs every year have been a drain on the profitability of these banks, but there are methods of preventing NPAs. This article outlines various ways of achieving better information management and credit monitoring.
The job begins with the know-your-customer (KYC) and credit appraisal stage itself. The banks must first get the basic data on the borrower and this includes details such as name and address of the business unit, name and addresses of business partners, directors, guarantor, details of any authorised advance, credit rating score, details of credit facilities, and other relevant documentation. This should be prepared by the credit officer and approved by the branch head. A monthly MIS to be generated for the branch.
Details of any unusual transactions or large value transactions in the account, if there is no activity in the account for more than seven days. This should be a daily MIS for the branch management. Unusual transactions would be checks favoring any new customer not already disclosed by the borrower at the time of proposal, checks for round amounts etc. Large value transactions would vary according to the size of the company and the limit or line of credit sanctioned.
This would have details such as name of the account. Limits sanctioned, drawing power as at the end of the month and outstanding, details of arrival of drawing power – should show clearly value of unpaid stocks not reckoned for drawing power, details of debits over a particular amount in the account with purpose, details of insurance held for securities and expiry date, details of production in the quarter vis-a-vis projections. There should also be surveillance of any shortfall, and all pertinent details, such as whether reasons for it were discussed with the borrower, sales and profit during the quarter vis-a-vis projection, how it compares with the same period for the previous year, or whether the unit would achieve the projected sale for the year based on the performance so far. An analysis of quarterly results of the company should be made. The continuous surveillance statement must be seen and verified by the credit officer and the branch head and would be available as a tool for ascertaining staff lapses in case the account goes bad. If the account had thrown signals and the statement also reflected the same and despite that if prompt action is not taken to prevent slippage it becomes easier to identify staff lapses in monitoring.
This must be verified everyday by the credit officer and the branch manager. It must have a column for their comments where they must record the details of discussion with the borrower about the reasons for the frequent return of check.
A daily statement to be generated, indicating name of the account, limit sanctioned, drawing power, outstanding, date and amount of instalment/interest due, date of last inspection of the unit by branch official and name.
This should indicate in addition to the above the details of outstandings in other borrower accounts of the same party and overdues, if any, in such accounts. The monthly statement beyond a cut-off limit should be available to the controlling office simultaneously. The monthly statements should also generate simultaneously a pre programmed politely worded reminder letter to the borrower.
A monthly statement should be generated to show portfolio concentrations by industry, geography and borrower segments. This would just have under each head the name of the borrower, limits sanctioned and outstanding as at the end of every month.
This must give the bills outstanding beyond due date for usance bills and 21 days for demand bills. This must have information on name and address of the drawee, whether demand or usance and if usance the tenor, whether a satisfactory credit report has been obtained on the drawee and if not who authorized the purchase or discount without the credit report, whether bills purchased on the drawee have been delayed before or returned earlier. The system should generate a reminder to the bank for all bills outstanding beyond seven days from the due date with a copy to the customer for his follow up. The system should reject purchase bills on drawees whose bills have been returned more than once. Monthly statement of overdue bills purchased and discounted should have an additional column for fate of goods covered by the respective consignments and whether this was discussed with the borrower. Similar statements as above have to be generated for foreign bills purchased and discounted – weekly and monthly separately for letter of credit (LC) bills and non-LC bills.
A letter to the borrower to provide necessary funds for debit and a letter to the insurance company asking for renewal premium should be generated on the first day of every month. This has to be pursued by the credit officer till renewal.
A monthly statement should be generated for the credit officer. It should also be seen by the branch head. A quarterly statement of lapsed limits should be generated with the above details with an extra column for the date of visit by the credit officer and the branch head to the unit for discussions on renewal of limits.
Accounts with funds overdue of Rs1m (approximately US$25,430) and above are to be included on this statement to be generated on the 15th and 30th of every month. From all the above data a watch category statement is to be generated at the end of every fortnight to the branch head who has to add his comments the same day and a monthly statement should be available to the controlling office on the first working day of every month. The fortnightly statement for the branch and the monthly statement for the controlling office should have the following details: name and address of the unit, date of first sanction and by whom, date of renewal, details of limits sanctioned, drawing power, outstanding, extent of irregularity, reasons for irregularity, when the unit was last inspected, whether the unit is working, whether the documents are in order and when the account is expected to be regularized, what the branch proposes to do to regularize the account and the amount of penal interest recovered. If the account remains overdue for more than six months and remains in watch category for more than nine months with persisting overdues the account is to be transferred to assets recovery or reconstruction department for further course of action.
This should be generated once every three months – where a downgrade or slippage is likely, but the loans are assessed as acceptable to the bank, the credit officer should send a mitigation report to the branch head as to why the credit is still acceptable to the bank. It should detail the risks and the mitigants for the same. This would be a monthly statement for the credit officer and the branch head.
The assets recovery/reconstruction department gets the account for its follow up in the 10th month from the date it fell overdue. Immediately on receipt of the account this department should start the recovery proceedings. The first step would be to visit the unit for a discussion to explore the possibility of resurrecting the unit from its illness and retransfer the account to the branch. The credit officer of the branch or its branch head should also accompany the assets reconstruction department people for the discussion. This branch should actively involve itself in the recovery efforts of the assets reconstruction department because they know the borrower better. The visiting official should record his findings. On the ninth month from the date it became overdue the statement should indicate whether efforts for a one-time settlement with the unit was made. At the end of 12 months the assets reconstruction department should explore the possibility of selling the account to any assets reconstruction corporation for a price. If that is not possible at the end of 18 months they should initiate legal steps if their efforts for an OTS or for revival or for sale to an ARC had failed. If the unit is found to be a willful defaulter then a report should be generated for the RBI. The name and address of the unit and the directors and partners should be blacklisted and any unit in which they are interested which also has received finance from the bank should also be put on the watch category list for an in-depth analysis.
A monthly statement of recoveries made in NPA accounts indicating total NPAs as at the beginning of the month, cash recoveries made during the month, slippage during the month, up gradation during the month, NPA level as at the end of the month to be generated for the branch head. Accounts falling under corporate debt restructuring mechanism should be handled only by the branch and not transferred to the assets reconstruction branch.
Nearly 90% of the operations of the banks in India are now computerized. KYC norms are in place. The banks have introduced credit rating models acquired from credit rating agencies like the CRISIL. Although the banks do not price their credit products based on the conclusions derived from the credit rating models but have their own archaic rating exercise for pricing, the contents and conclusions derived from the credit rating models would be very useful for credit monitoring. CBS is available at almost all the medium, large and very large branches where 90% of a bank’s total credit is concentrated. With existing computer systems, the banks can put in place the above systems.