Deteriorating Loan Book Management: Why no Salami slicing by Banks
By: Amit Bhushan Date: 27th April 2015
The demand on banks to restructure the corporate loan books is growing on the side-lines as we keep hearing our media for several burning issues. At stakes is amount of capital equal to the net-worth of all banks; however our commercial news media will cover the news quite sparsely at best. The same is true about the so called 'main political parties'. This is even as several states will make noise about they being fund starved to meet the needs to deliver services to population and also have not witness to any good projects that could be a showpiece for further development in their districts. Some of the states may be crying hoarse for their loan books to be restructured as well. We may even have some NPAs in fund starved Small and Medium Enterprise sectors, however the overall loss from such loans is normally recovered with higher margin for almost all well managed banks (Read: Private sector). Needless to say that overall employment generation per unit credit is much more in SME segment, however all sectors cannot be covered by SMEs alone such as those which are Capital intensive with high technology or infrastructure etc.
In spite of these advantages, why SMEs are unable to score any political punches is because of their modest political contribution compared to large entities which donate with an eye on key strategic projects where they can have entry barriers for competitors and resultant profits. With disruptive technologies like distributed manufacturing or supply chain management things might change a bit for some of the sectors; however the situation is unlikely to ameliorate any time soon. It is in this context that the article intends to raise questions that the banks have not attempted anything new while they have relied on whims and fancies of existing corporate managements to restructure loans in spite of years of experience that the same is a vicious cycle; which the political leaders may not be interested to change by raising loudly in public.
While there have been many ironies including why banks have not insisted upon a change in management of the corporate including some 'fixed terms for professional managers', 'insisting that they be consulted while appointing professional managers beyond a certain level in such groups where they are having bad/re-structured assets'. Partly such measures would be subject to even greater manipulation by political leaders as their span of influence would increase to corporate executives rather than just being limited to controlling groups. The political leaders whether new or old, have put little focus on the issue and have at best stayed away from any 'vyavastha parivartan' in this regards, probably sensing that it's much easier to raise slogans rather than 'conceptualizing delivery'; the point is raised to just to get 'people' thinking in this regard.
However, a project can always be viewed as consisting of various sub-units and each of which manages several distinct processes. Many such sub-units can be viable enterprises in themselves. Just as the banks have been subjected to identification of good and bad assets, the banks can subject enterprises to identify good and bad sub-units with help of independent professionals/consultants or repute in the industry and can go for a 'salami slicing' technique. This would allow them to focus on managing the 'bad piece' and restrict the entire asset going bad at a later stage as is usually the experience of the bank. This may also restrict the overall 're-structured loan book' size for which they now have to make a higher provisioning. This will give rise to professional management taking control of sliced pieces of existing large projects. The assets size under existing non-performing management would tend to shrink. So such management would have incentive to perform and grow rather than the current situation where they 'buy' political and executive support (in banks) so get the loan book re-structured and some to keep commercial news media away or even fixated upon their uncompromising value delivery to customers and to the society. It is an irony that the commercial news media which tracks all the sundry 'value movements' in the 'markets' with such gusto remains totally silent on the quantum of 'bad oranges' in the basket and the 'value erosion' for the lenders/savers and taxpayers that such situation entails.
By: Amit Bhushan Date: 27th April 2015
The demand on banks to restructure the corporate loan books is growing on the side-lines as we keep hearing our media for several burning issues. At stakes is amount of capital equal to the net-worth of all banks; however our commercial news media will cover the news quite sparsely at best. The same is true about the so called 'main political parties'. This is even as several states will make noise about they being fund starved to meet the needs to deliver services to population and also have not witness to any good projects that could be a showpiece for further development in their districts. Some of the states may be crying hoarse for their loan books to be restructured as well. We may even have some NPAs in fund starved Small and Medium Enterprise sectors, however the overall loss from such loans is normally recovered with higher margin for almost all well managed banks (Read: Private sector). Needless to say that overall employment generation per unit credit is much more in SME segment, however all sectors cannot be covered by SMEs alone such as those which are Capital intensive with high technology or infrastructure etc.
In spite of these advantages, why SMEs are unable to score any political punches is because of their modest political contribution compared to large entities which donate with an eye on key strategic projects where they can have entry barriers for competitors and resultant profits. With disruptive technologies like distributed manufacturing or supply chain management things might change a bit for some of the sectors; however the situation is unlikely to ameliorate any time soon. It is in this context that the article intends to raise questions that the banks have not attempted anything new while they have relied on whims and fancies of existing corporate managements to restructure loans in spite of years of experience that the same is a vicious cycle; which the political leaders may not be interested to change by raising loudly in public.
While there have been many ironies including why banks have not insisted upon a change in management of the corporate including some 'fixed terms for professional managers', 'insisting that they be consulted while appointing professional managers beyond a certain level in such groups where they are having bad/re-structured assets'. Partly such measures would be subject to even greater manipulation by political leaders as their span of influence would increase to corporate executives rather than just being limited to controlling groups. The political leaders whether new or old, have put little focus on the issue and have at best stayed away from any 'vyavastha parivartan' in this regards, probably sensing that it's much easier to raise slogans rather than 'conceptualizing delivery'; the point is raised to just to get 'people' thinking in this regard.
However, a project can always be viewed as consisting of various sub-units and each of which manages several distinct processes. Many such sub-units can be viable enterprises in themselves. Just as the banks have been subjected to identification of good and bad assets, the banks can subject enterprises to identify good and bad sub-units with help of independent professionals/consultants or repute in the industry and can go for a 'salami slicing' technique. This would allow them to focus on managing the 'bad piece' and restrict the entire asset going bad at a later stage as is usually the experience of the bank. This may also restrict the overall 're-structured loan book' size for which they now have to make a higher provisioning. This will give rise to professional management taking control of sliced pieces of existing large projects. The assets size under existing non-performing management would tend to shrink. So such management would have incentive to perform and grow rather than the current situation where they 'buy' political and executive support (in banks) so get the loan book re-structured and some to keep commercial news media away or even fixated upon their uncompromising value delivery to customers and to the society. It is an irony that the commercial news media which tracks all the sundry 'value movements' in the 'markets' with such gusto remains totally silent on the quantum of 'bad oranges' in the basket and the 'value erosion' for the lenders/savers and taxpayers that such situation entails.