Description
Description explain how to prevent non performing assets in small scale industries.
Munich Personal RePEc Archive
How to Prevent Non Performing Assets
in Small Scale Industries
Rituparna Das
5. January 2003
Online at http://mpra.ub.uni-muenchen.de/65191/
MPRA Paper No. 65191, posted 23. June 2015 06:29 UTC
CENTRE FOR STUDIES IN BANKING AND FINANCE
(Established by the Reserve Bank ! India at Natinal "a# University$ %dh&'r(
Paper for Workshop on Non Performing Assets
and
Prevention and Detection of Baking Frauds
How to Prevent Non Performing Assets in Small Scale Industries
Rit'&arna Das
%an'ary )**+
%E" Cde, G )-
DOI: 10.13140/RG.2.1.1226.2563
" 'The loan which I have not yet paid', being here, having made requital of the loan to
Yama, he goes freed from the debt to the world of heaven." Yajur Veda
Abstract
This paper tries to seek a solution to the problem of non performing assets in the
small scale industries under the present circumstances of banking and insurance
working together under the same roof. What is stressed in this chapter is the
pressing need of the small scale entrepreneur for becoming aware and educated
in modern business management holding a professional attitude toward rational
decision making and banks have to facilitate that process as a part of the credit
policy sold by them.
Keywords: Bancassurance, Credit Risk, Entrepreneureship
A revised version of this paper is published as Chapter 7 in Research
Methodology in Social Sciences and Management: Models on Indian Issues,
ISBN-13: 978-3639295467, pp 167-223.
2
1. Introduction
2. The issues
3. The methodology
4. Answers to the issues
5. Benefits of the proposal
6. Costs of the proposal
7. Conclusion
1. Introduction
Ever since the introduction of financial sector reforms in India the NPA (non
performing assets) of the banking system have been getting attention. NPA cause
serious strain on the profitability as, on the one hand banks cannot book income on
such accounts and on the other hand they are required to charge the funding cost and
provision requirements to their profits. Since the early 90s the government has had to
give over Rs. 23000 crores in bailouts to various banks and financial institutions, out
of the taxpayers’ money. Banks feel afraid of high risk of lending to small business
because of lack of accounting and reputation, uncertain property rights of the assets
they are holding and noncompliance with regulations
1
. As per the international
norms net NPA i.e. gross NPA less provision for loss are to be slashed down to 2-
3%.
India is the only country with an extensive set of policies supporting and protecting
many kinds of small enterprises by directly subsidizing them or exempting them
from taxes and preferring them for government purchases
i
. Amongst the priority
sector components the SSI (small-scale industries) contribute the maximum share
19.24% in total NPA of public sector banks, 18.27% in total NPA of old private
sector banks and 5.74% in total NPA of new private sector banks during 2002-03 as
an individual component as per the Reserve Bank of India statistics
ii
. As per the RBI
report on sectoral deployment of NPA 2002-03, the SSI contributed the maximum
amongst various priority sectors. This paper seeks to diagnose the problem and
thereafter prescribe a solution model that can minimize the chance of NPA
generation in the SSI sector.
2. The issues
This article attempts to answer to the following questions:
a). What are NPA? How does the concept evolve in the context of India?
b). What is the policy intervention of management of NPA? What has been done so
far?
c). What are the shortcomings in the above?
d). How to select the right candidate for SSI loans especially under various
government schemes
e). How to enable them to manage risk and survive in the phase of a number of
external constraints like competition from large scale industries, dereservation,
bottlenecks in infrastructure and supplies of factors of production
f). How to control willful default and moral hazard
Endnotes
1
Morrison C., Lecomte H.B.S. and Oudin X (1994): Microenterprises and The Institutional
Framework in The Developing Countries, OECD, Paris, Chapter 4
3
Answers to these are the crux of the paper.
3. The methodology
The work is a mix of doctrinaire and empirical survey. It draws heavily from related
books, articles, reports, case studies and internet. The data about Indian banking
downloaded from internet is cross-checked by the relevant RBI reports on the one
hand and on the other hand interviews with a select number of officials from the
appropriate departments of the central bank
iii
. While surveying the current literatures
on Indian banking and insurance a link between the two is detected, where insurance
can function as a complementary product to bank loan in order to make it viable and
ensure its quality. The innovative use of insurance clubbed with bank loan turns into
a powerful mechanism that minimizes the chance of NPA generation in the SSI
sector.
4. Answers to the issues
a). What is NPA? How did the concept evolve?
An asset including a leased asset becomes non-performing when it ceases to generate
income for the bank
iv
. A non-performing asset was defined as a credit facility in
respect of which the interest and/or installment of principal has remained past due for
a specified period of time. The specified period was reduced in a phased manner as
under:
Year ending March 31 Specified period
1993 Four quarters
1994 Three quarters
1995 Two quarters
2004 onwards One quarter
An amount due under any credit facility is treated as past due when it has not been
paid within 30 days from the due date. Due to improvements in the payment and
settlement systems, recovery climate, upgradation of technology in the banking
system etc it was decided to dispense with ‘past due’ concept with effect from March
31, 2001. Accordingly as from that date a non-performing asset shall be an advance
where
• Interest and/or installment of principal remain overdue for a period of more than
180 days in respect of a term loan.
• The account remains ‘out of order’ for a period of more than 180 days, in respect
of an overdraft/cash credit.
• The bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted.
• Interest and/or installment of principal remains overdue for two harvest seasons
but for a period not exceeding two half years in the case of an advance granted
for agricultural purposes and
• Any amount to be received remains overdue for a period of 180 days in respect
of other accounts
With a view to moving towards international best practices and to ensure greater
transparency it has been decided to adopt the ‘90’ days overdue norm for
4
identification of NPA, from the year ending March 31, 2004. Accordingly with effect
from March, 2004 a NPA shall be a loan or an advance where
• Interest and/or installment of principle remain overdue for a period of more than
90 days in respect of term loan.
• The account remains ‘out of order’ for a period of more than 90 days, in respect
of an overdraft or cash credit.
• The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted
• Interest and/or installment of principal remains overdue for two harvest seasons
but for a period not exceeding two and half years in the case of an advance
granted for agricultural purposes and
• Any amount to be received remains overdue for a period of more than 90 days in
respect f other accounts.
As a facilitating measure for smooth transition to 90 days norm, banks have been
advised to move over to charging of interest at monthly rests, by April 1, 2002.
However, the date of classification of an advance as NPA should not be changed on
account of charging of interest at monthly rests. Banks should therefore continue to
classify an account as NPA only if the interest charged during any quarter is not
serviced fully within 180 days from the end of the quarter with effect of April 1,
2002 and 90 days from the end of the quarter with effect from March 31, 2004.
An account should be treated out of order if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power. In the cases where
outstanding balances in the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for six months as on the
date of balance sheet or credits are not enough to cover he interest debited during the
same period, these accounts should be treated as ‘out of order’.
An amount due to the bank under any credit facility is overdue if it not paid on the
due date fixed by the bank
v
.
b). What is the policy intervention of management of NPA? What has been done
so far?
It has been suggested that the central Boards of banks should periodically NPA
related problems of the bank and lay down the following policies in this regard
a). With a view to get focused attention, creation of separate Division to look after
very large accounts.
b). HRD intervention, to upgrade the skills of operating officials dealing with credit
follow-up to arrest slippages of assets from standard Asset category.
c). Introduction of credit audit to ensure proper appraisal and compliance of terms
and conditions of sanction; credit audit reports to indicate early identification of
problem loans and warning signals for potential NPA, so that corrective action could
be taken.
d). Banks should lay down NPA Management Policy, which should indicate early
identification of problem loans and warning signals
e). NPA task force should review all loans at Apex level, Regional level and Branch
Level. Suitable cut off limits can be kept for each level. Action points emanating
5
from such reviews should be conveyed down the line and follow up action should be
watched.
f). Cases referred to DRTs (Debt Recovery Tribunal) and BIFR (Board of Financial
Reconstruction) should be followed up. Operating functionaries be advised to seek
appropriate relieves at the internal stages, whenever warranted, to prevent asset
stripping by promoters. Nodal offices be appointed to monitor cases in DRT and
BIFR.
g). Establishing specialized Rehabilitation and Recovery branches for speedy follow
up.
h). Credit Risk Rating System should be firmly in place.
In this context early warning signals are specified with special emphasis on conduct
of accounts, danger signs appearing during unit inspection, submission of financial
statements and non-financial indicators visible to banker
vi
.
Following are the common strategies adopted by banks for containment/recovery of
NPA accounts
a). Strengthening post sanction follow up especially by getting alerted as soon as one
quarter default in interest/installment payment is noticed.
b). Exerting tremendous pressure and resorting to arm twisting measures on
recalcitrant borrowers by attachment of their assets, putting these assets quickly on
auction/sale and wide publicity to such firm steps taken. This may compel the
borrower either to repay the dues rather quickly or settle the same through the
compromise route. It also has a demonstrative/deterrent effect on other defaulters.
c). Quick responses on various adverse developments noticed in the borrowal
accounts or in suit filed cases helped in retrieving the situation sooner. The endeavor
has been to thwart deterioration in the position due to efflux of time.
d). Strengthening information management in NPA accounts to track down what is
happening at the ground level to avoid surprise/shocks have been found to be of
great help.
e). Using audiovisuals as a technique for mass education of borrowers on the
importance of cultivating timely repayment habit.
f). Assigning due weight and importance to macroeconomic and industry level
developments at the time of appraisal to avoid slippages within a short period of
sanction
vii
.
(c). How far the above policy interventions and the strategies are successful
The success of above policy interventions and the strategies can be gauged in terms
of the data on trend of NPA in different sectors and with different categories of
banks:
Table 1: Aggregate NPA figures with different categories of banks in Rs. Crores
Year Nationalized Banks
viii
State Bank Group Old Private Sector Banks
2000-01 32,983.42 20,190.70
4,810.82
2001-02 36,762.78 19,743.57 4,850.89
2002-03 35,848.82 16,958.10 4,636.05
Source of data: Report on Trend and Progress of Banking in India, Reserve Bank of
India for the years 2000-01, 2001-02 and 2002-03
6
From the above table we find that there is hardly any improvement with Nationalized
Banks and Old Private Sector Banks, whereas there is marginal improvement with
the State Bank Group to the extent of 16%.
Table 2: Sectorwise average NPA shares with Nationalized Banks and Old
Private sector banks in terms of percentages
Year Priority Sector
Public
Sector
Non-priority
Sector Total
Agriculture SSI Others
2000-01 9.67 18.225 11.725 2.035 58.335 99.99
2001-02 9.365 19.98 12.255 0.765 57.63 99.995
2002-03 9.835 19.035 13.685 0.875 56.57 100
Source: Same as in Table 1
Here we find while there is significant improvement by more than 75% with public
sector, there is hardly any improvement with SSI and little deterioration with
agriculture.
Table 3: Sectorwise average NPA shares with the State Bank of India Group in
terms of percentages
Year Priority Sector Public Sector
Non-Priority
Sector Total
Agriculture SSI Others
2001
14.95 18.84 10.43 6.01 49.77
100.00
2002
16.02 18.59 11.07 3.14 51.18
100
2003
17.53 18.07 11.88 3.1 49.41
99.99
Source: Same as Table 1
Here the picture is same as table 2. While public sector NPA have declined by 50%,
agriculture NPA has worsened and the SSI NPA has shown hardly any improvement.
Again public sector banks have settled about 30% of their NPA cases for which they
issued notices under the SARFAESI (Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest) Act 2002. A total of 33,736 notices
under the SARFAESI Act were issued by 20 nationalized banks and the subsidiaries
of SBI for recovery of Rs 12,147 crore after the enactment of the Act. These banks
together have settled 9,946 cases, according to data compiled by CMIE (Center of
Monitoring Indian Economy). Though the percentage of dispute cases settled till
June 03 amount to 29.5%, in terms of value it amounts to a paltry Rs 499 crore only,
accounting for just 4.1% of the total outstanding amount for which notices were
issued. The SBI and its subsidiaries together have recovered Rs 83 crore out of Rs
4,771 crore loan outstanding for which they had issued notices till June 03.
Similarly, Punjab National Bank and Canara Bank, which had sent 3,015 and 1,011
notices respectively for recovery of loans amounting to Rs 711 crore and Rs 350
crore, have recovered Rs 39.3 crore and Rs 34.5 crore respectively till June 03
ix
.
Now we try to find what is wrong with the policy interventions and strategies
adopted by the banks?
7
All the policy interventions suggested are related to the banks and the enforcing
authority. They do not relate to the borrowers. They aim at strengthening the
administrative machinery, but are not concerned with the problems of borrowers and
defaulters. Secondly, while strategy ‘e’ to some extent relates to the borrower, other
strategies try to answer the question ‘what after default’, but not ‘how to prevent
default and expand the bank’s business with the same client’. Thirdly, the data
reveals that the problem exists in the borrowers, not in the banks and administration
in the post-lending period, while in the pre-lending period, problem exists in the
banks. As per Wignaraja 2003 lack of managerial skill in these borrowers is eating
out the competitiveness of the developing countries like India vis-à-vis the developed
countries
x
. In the pre-lending period, proper assessment of the competence of the
applicant is required. Fourthly, banks do not see that the business runs successfully.
It is necessary that banks enter into insurance business as risk carriers so that they
may also sell credit policies designed to minimize the risk of default.
In short the following issues remain undressed:
1. How to select the right candidate for SSI loans especially under various
government schemes
2. How to enable them to manage risk and survive in the phase of a number of
external constraints like competition from large scale industries, dereservation,
ceiling on further capital investment, bottlenecks in infrastructure and supplies of
factors of production
3. How to control willful default and moral hazard
First we answer the third issue. In order to control willful default and moral hazard
the bank should see that the loan-applicant has insured himself against all future
losses which can handicap his repaying ability. This is possible in two ways – first
the applicant can buy the appropriate insurance cover from a general insurance
company and surrender it to the bank and second the bank itself insures him. The
second possibility implies that the bank should enter general insurance business.
Regarding the first possibility the current in India is that premium is not returned in
case the event does not happen. Neither the bank nor the borrower gets any benefit
from this. In addition if the borrower defaults the bank loses. But if the bank sells
him the general insurance, then if the insured event does not take place and the
borrower defaults, the paid premium can cancel out a part of the bank’s loss.
It can be proved that in order to avoid default it is wise for the borrower to insure his
business fully against the events causing losses and on other hand liberalization of
the financial sector consequent upon competition in the banking industry would
make the bank insure the borrower fully against any loss when there is fear of
default. This is the economic aspect of lender’s liability.
First we prove that the borrower should insure his business fully.
Let the business have an initial monetary wealth ‘A’. He will lose an amount ‘B’ the
probability of which is ‘q’. This loss would prevent him to repay the loan as he can
allege. Let him buy an insurance cover, which would provide him ‘C’ if the event
occurs and he has to pay a premium ‘p’ for every rupee of coverage. His utility
function is U(A – B – pC + C) in case the event happens and U(A – pC) in case the
event does not happen. He will maximize his expected utility function
8
EU = qU(A – B – pC + C) + (1-q) U(A – pC) by choosing the optimum amount of C.
The choice variable here is C.
The first order condition is dEU/dC = qU
C
(A – B – pC + C)(1-p) + (1-q) U
C
(A –
pC)(-p) = 0; U
C
= dU/dC
The expected profit from the insurance business is q(pC – C) + (1-q)pC. Competition
sets q(pC – C) + (1-q)pC = 0 ? q = p. This is called pure premium. This happens
when there is no transactions cost, marketing cost and any other costs in absence of
any externality in the market. Putting q = p in qU
C
(A – B – pC + C)(1-p) + (1-q)
U
C
(A – pC)(-p) = 0 yields U
C
(A – B – pC + C) = U
C
(A – pC)
Assuming risk aversion i.e. U
WW
(W) < 0 by the business man,
U
C
(A – B – pC + C) = U
C
(A – pC) ? A – B – pC + C = A – pC
? B = C. So the borrower would insure his business fully against any future loss.
Second we prove that if there is any fear of default, the lending agency should fully
insure the borrower or see that the borrower fully insures himself against any future
loss in a liberalized competitive market. Let the anticipated loss of the consumer be
‘B’. Let ‘1’ be the situation when the loss occurs and ‘2’ be the situation when the
loss does not occur. Let q
11
be the probability of loss when the borrower does not
intend to default, q
12
be the probability of loss when the borrower intends to default,
q
21
be the probability of not occurrence of loss when the borrower does not intend to
default and q
22
be the probability of not occurrence of loss when the borrower
intends to default. Let u be the minimum utility the borrower expects from not
intending to default, let D be the opportunity cost of not intending to default and I
i
, i
= 1,2 be the premium payment from the borrower to the insurance business. If the
insurer wants the borrower not to intend to default, then the incentive problem in the
principal-agent framework is
Maximize W = q
11
I
1
+ q
12
I
2
subject to the participation constraints
q
11
U(A – I
1
– B) + q
21
U(A – I
2
) – D ? u
q
11
U(A – I
1
– B) + q
21
U(A – I
2
) – D ? q
12
U(A – I
1
– B) + q
22
U(A – I
2
)
Here when the loss does not occur the borrower loses I
2
and when the loss does not
occur he loses I
1
+ B. Competitive equilibrium needs I
2
= I
1
+ B. If I
2
> I
1
+ B, he
will not buy insurance. On the other hand if I
2
< I
1
+ B, this means there is existence
of difference between premiums in the industry. Perfect competition would reduce
this difference to nil such that I
2
= I
1
+ B. Thus the borrower would be fully insured
by the bank. Following the same logic we can say that perfect competition will
ensure
q
11
I
1
+ q
12
I
2
= 0
and
q
11
U(A – I
1
– B) + q
21
U(A – I
2
) – D = q
12
U(A – I
1
– B) + q
22
U(A – I
2
)
These are two equations in two variables I
1
and I
2
. Solving these two equations gives
the equilibrium values of the variables
xi
. The interesting point is that if small
entrepreneur buys business insurance from the same bank he has taken loan from, he
is absolutely under the supervision and guidance under the bank. In fact banks are
expected to provide entrepreneurs with financial assistance as well as inputs to
support and promote their enterprise
xii
. Again if the insurance is of such type that on
occurrence of the incident insured against before the expiry of the stipulated term the
entrepreneur gets the assured sum and on non occurrence of the incident he gets the
9
sum after expiry of the term provided he makes timely repayment of installment and
on the other hand if he does not repay loan as per terms and conditions, the bank
confiscates the assured sum whether the incident occurs or not, for which he has
been paying premiums, this can check willful default. This kind of banking-cum-
insurance system is more profitable than the banking system. In the first case the
bank can get all premiums whereas in the second case the bank will get a part
thereof.
Now we answer the second issue.
In the macroeconomic scenario the internal causes of sickness of the SSI in India
include poor management of image and brand, poor marketing skills and lack of
market penetration, poor sales promotion, inadequate pricing policy, absence of
professionalism, absence of cost control mechanism, tardy debt collection, faulty
inventory management policy and absence of knowledge of fund management. These
are the variables internal to the firm, and well under the control of the entrepreneur
provided he knows to control. According to the RBI Committee (1981) the two most
important reasons behind sickness of SSI are management deficiency and marketing
constraints
xiii
.
Bhaumik et al 2001 argued that the process of bank restructuring has to involve an
improvement in the quality of the banks’ balance sheets
xiv
. The report of the Khan
Committee set up by the RBI recognizes the importance of risk management in a
complex financial organization, and emphasized the need of risk management
capabilities. This process would have to involve a resolution of the banks’ problems
with respect to NPA, and the introduction of measures and institutions that allow
banks to take a reasonable amount risk to augment their returns while providing
options to manage and hedge against these risks adequately. Banking products
include business loan also. NPA arise if the lent money does not come back.
Prevention of NPA means to maximize the chance of the lent money coming back
with interest. The success of the borrowing entrepreneur is a relevant issue here. In
the context of India if the quality of entrepreneurship is tested before sanctioning
bank loans and in addition, training regarding how to insure against various business
risks is imparted to the budding entrepreneur then the probability of business failure
reduces to the minimum.
Unfortunately the Indian banks have been found to be lacking on both counts and the
concept of integrated approach to entrepreneur development is totally absent
xv
.
While the infrastructure and supportive inputs like knowledge and training are
conspicuous by their absence, the financial assistance made available by the banks is
not entirely to the satisfaction of entrepreneurs. It is also true that it is not the
business of banks to train entrepreneurs or conduct management program. This is not
required by Banking Regulation Act or Reserve Bank guidelines. One of the major
causes that may be identified for huge NPA is the negligence on the part of banks in
realizing their role in the proper development of entrepreneurs. The lack of
marketing knowledge, technological obsolescence and deficient managerial skill are
amongst the most serious drawbacks in the non-farm rural SSI despite technical,
economic, managerial and marketing consultancy and entrepreneur training provided
by The Small Industries Development Organization, Small Industries Extension
Training Institute, The National Board of Entrepreneurial Development and the
10
National Institute of Entrepreneurship and Small Business Development
xvi
. Hence, it
is imperative in the present scenario that banks make some alternative arrangement
for providing training and rendering the requisite knowledge to entrepreneurs for
running their business successfully by assigning the task of entrepreneur
development to other institution other than involving themselves on the one hand and
on the other concentrating on what is the banking business proper – design and sell
financial products. The results of these efforts would be improved quality of loans
and increased business for the banks. In broader terms, the development of
entrepreneurs would result in a flourishing business, which would not only be
profitable, but also self-sustaining and making positive contribution to national
economy.
A study
xvii
covering 11 branches of Allahabad bank in the Varanasi district of Uttar
Pradesh conducted by the Faculty of Management, Benaras Hindu University reveals
that bank officers themselves are not enough equipped to train the entrepreneurs, nor
could they find time after their routine jobs to spend on the these people, who
therefore prefer to visit private consultants. It was further noted that those who were
aware of the various schemes had acquired the information from personal contact
with other customers, borrowers, professionals, friends and their Bankers. Only
about one-third of the borrowers came to know about Bank credit policies from the
Bank. Another one-third obtained the information through professionals like
chartered accountants and management consultants. The government agencies
propaganda and media appeared to have had little impact as only 5% of the
borrowers that too among those with limits less than Rs. 15 lacs, acquired
information from this source. The word of mouth served the purpose in about one-
fourth of the cases, which indicated that their friends, other customers and borrowers
provided information to them. Analyzing activitywise, it appears that professionals
played a better role than the bank. It is interesting to find that as far as the nature of
assistance provided by the Bank functionaries is concerned, 87% borrowers did not
approach the Bank for technical aspects. Out of the 13% borrowers who approached
Bank, only 3% could get significant help. The Bank officers also mentioned that
mostly they could assist the applicants in financial aspects only as they themselves
were not equipped to handle technical and marketing matters
xviii
. Many bank officers
themselves felt that adequate skills were not available with them. The reasons
attributed to such a situation were lack of training, lack of infrastructure, and lack of
time to become familiar with the lending principles and entrepreneurial development.
Among the bank officials, over 50% were of the opinion that taking the help of
independent management consultants would improve the financial management
skills of the SSI entrepreneurs as well as the financial discipline among them. Banks
are facing problem of high level of NPA and the most important reasons for it, as
perceived by bank officers have been inadequate entrepreneurial skill, intentional
default, lack of supervision and follow up of credit by the bank, indiscriminate
financing and change in environmental conditions beyond control. It is clear that
banks have not been taking the task of entrepreneurial development in all seriousness
as is evident from their casual approach to creating awareness amongst potential
entrepreneurs as well as providing necessary assistance to the existing borrowers.
The smooth running of day-to-day operations of business enterprises as also their
11
ultimate development into self-sustaining systems do not seem to draw sufficient
interest from the bankers who have financial stake in the enterprises. With the
widespread changes being introduced into the banking sector, it has become
important that banks keep a constant vigil over the enterprises being financed by
them. On one hand, it has to be monitored that funds are being properly utilized in
business, while on the other hand it has to be ensured that the enterprise does not fail
because of poor management despite the best intentions of the entrepreneur
xix
.
In the appendix is the list of loans and consultancy and training services delivered by
the SCBs (Schedule Commercial Banks). Proper administration of the loan money
can ensure on time repayment. A survey of available 57 websites out of 100 SCBs in
India during the first half of May 2002 finds that hardly six banks train and counsel
the borrowers
xx
. After delivering the loans to the clients the banks should not stay
aloof of the quality and manner the loans are being utilized. Banks have to confirm
that the borrowers know what to do with the loan money and for that purpose
borrowers are educating their personnel through some agencies or business school
xxi
.
It is also true that in today’s competitive market where the SSI have to fight large-
scale industries on the one hand and on the other with cheap imports flooding the
market as a direct fallout of removing quantitative limits on 821 items reserved for
SSI out of which 643 items have been put under Open General License since 1998-
99 as per WTO norms
xxii
. So it is advisable on the following grounds that the tasks of
project appraisal, training and educating entrepreneurs and project monitoring and
follow up should be bestowed with the professionally oriented training institutions
like Entrepreneur Development Institute of Gujarat, Indian Institutes of
Management, other established business schools as also Management Faculties of the
universities spread across the country
xxiii
.
The answer the first issue can now be given. The task of all project appraisals should
be assigned to the professional bodies instead of banks.
The answers to three above issues together can be presented in terms of Figure 1:
1. Refer all loan applications submitted to the banks to the nearest one of
aforementioned institutions (AIs) for project appraisal and approval. The AI should
examine whether the candidate deserves loan. There is a difference between the need
for loan and deserving loan. The candidate has to prove the spirit of entrepreneurship
before the AI
xxiv
.
2. If the project is approved by the AI send the applicant for entrepreneur training to
that AI at his/her own cost before sanctioning the loan.
3. The entrepreneur development program must have separate modules on risk
management, business insurance and those areas, which are found to be causes of
sickness. It should be designed to shape and polish entrepreneurs and prepare them
for the real world and thus is required to cover the following
xxv
:
• Personal grooming
• Social and communication skills and marketing skill
xxvi
• Management skills development program
xxvii
• General awareness and ability to anticipate future changes in external
environment
• Improvisation or ability to adjust with changing circumstances
• Credit Management skill including ability to collect outstanding
xxviii
12
• Habit of continuous SWOT analysis of the brand/product/service
4. On successful completion of the training the candidate has to get certified by the
AI.
5. On production of the AI certificate the bank can sanction loan and sell various
forms of insurance enumerated above required for business, where the entrepreneur
has to pay the first premium with a part of the loan money. The insurance should
have a design that on expiry of the stipulated period the entrepreneur gets a part of
the premium refunded if the incident insured against does not occur provided he
repays loan as per terms and conditions. If he defaults he does not get the premium
back whether the incident occurs or not. For a select category of entrepreneurs
government can contribute a part of premiums as it happens in social insurance
schemes declared in recent GOI budgets.
6. The project will be monitored and followed up by the AI during the term of the
loan: -
a. If the project is successful the entrepreneur shall repay loan as per terms and
conditions. If he does not do so the bank shall forfeit all insurance premiums she
paid already and shall not reimburse any money on occurrence of the events insured
against and further can take up the matter to an appropriate authority.
b. If the enterprise fails then the AI shall investigate the case and accordingly suggest
the entrepreneur regarding the turnaround strategy and the bank regarding the
treatment of the NPA if there is no hope of turnaround.
7. For continuous updating entrepreneurs with current trends and strategies AIs are
required to conduct EDPs periodically. For any typical entrepreneurs it is just not
13
advisable in an environment full of sweeping changes that he attends EDP once for
all in order to have the loan disbursed. Nor is there any management education that
does not fall obsolete.
8. The question of comparative advantages in relevant here. In business training
business schools/management institutions have competence and infrastructure.
Banks do not have all these. The trainers are mostly bank officers and government
officials, who themselves are not entrepreneurs. On the other hand many of the
students of management institutions have become successful entrepreneurs.
Qualitywise these people are better than mere government officeholders.
9. The AIs can get two-tier fee structure. The fee of pre-loan training can be charged
on the applicants and the fee of project monitoring can be charged on banks as a
proportion of the loan amount associated with the project. The first premiums of all
the prescribed insurances have to be paid by a part of bank loan. For that matter
banks have to increase the loan amount. In the process of continuous project
monitoring and follow up by the business schools it will be clear whether the
entrepreneur could be able to pay loan installments and insurance premium. Because
guided by business schools and loan being granted after multiple screening the
chance of business failure would come down. After all these efforts if NPA
generates, the matter has to be referred to the Asset Securitization Company. Here
we can think of some a mix of social and business insurance schemes, where the
government may agree to contribute. A number of non-life insurance schemes are
proposed in the budgets of recent years. The same may apply to small-scale business
insurance scheme. Besides this, competition in insurance industry can reduce
insurance premium over time. In order to improve quality of assets the banks should
pay fees to the business schools. It is the price of increased asset quality and virtual
expansion of universal bank. After all these institutions are reducing the risk of
banking.
5. Benefits of the above proposal
1. Reduction of NPA generation: Total risk of business comprises a number of risk
components. A part of these is uninsurable against and the rest insurable against. If
the latter is insured against and at the same time the best quality project consultancy
is available from the concerned AI we can assume that business risk is managed the
best thereby minimizing the chance of failure and hence maximizing the chance of
loan recovery in those cases where no moral hazard is involved.
2. EDP training can make the entrepreneur more efficient thereby leading to
downward shift of the average cost and marginal cost curves. Assuming that
numerous players exist in a particular commodity market, each selling a product
marginally differentiated from others, the market structure is monopolistically
competitive. Each firm thinks that he is monopolist in his niche, but he is not able to
dictate the price because of his small size and thus he is a price taker. Figure 2 may
be his condition before he takes EDP. Figure 3 and Figure 4 evaluate his states of
affair after he takes EDP.
14
Improvement in variable cost can nullify his insurance premium cost which is a fixed
cost.
3. Flourishing of bank owned insurance companies: Since bank loan is given to those
people who come through the rigorous screening of AIs, we can assume that very
few cases may turn to failure and the rest successful. The successful entrepreneur
would obviously expand and diversify business as it happens during sustainable
expansion of an enterprise. Through these enterprises the insurance business in
which the bank has a major stake can grow. The entrepreneur can make portfolio
investment with the profit accrued from his business. He may put part of the money
in mutual fund or other schemes. If the bank enters these fields as well like State
Bank of India, ICICI Bank, HDFC Bank and Vaisya Bank and then much of their
business can come from their once upon a time borrower.
4. Generation of opportunities of employment and self-employment: An AI can open
entrepreneur development wings in different areas. How should the responsibility of
entrepreneur development in the entire country be divided into existing AIs?
Suppose there are m banks in the country and the their number of branches are n
1
, n
2,
, , ,
n
m-1
and
n
m
. So total number of branches is ?n
i
where i = 1, 2, , , m-1 and m. One
criterion of dividing the responsibility may be like the following: If total number of
15
AIs is k, then each AI should take care of entrepreneurship development of ? n
i
/k
branches. But the problem with this rule may be that number of loan applicants
varies from branch to branch within the same bank and from bank to bank. Although
each AI gets equal responsibility in terms of number of bank branches, it may
happen that the number of applicants is not the same for all the AIs. Here one can
divide the responsibility by dividing the total number of applicants of all branches of
all banks together in to the number of AIs. But this rule is also not free of flaw in
matter of project monitoring and follow-up, though it can work well in matter of pre-
loan training and examination, because the amounts of loan vary from one applicant
to other depending upon the nature of the project. It can happen that an AI with a
lesser number of applicants has to handle big-budget projects calling for a relatively
heavier load of work compared to an AI with a larger number of applicants handling
small budget projects. Here what is advisable is to divide the total amount of loan
given by all branches of all banks by the number of AIs and make the minimum
adjustment such that the number of entrepreneurs is an integer for every AI. For this
task the AIs has to increase faculty and staff. Moreover the AIs can design some
entrepreneurship consultant development course whereby training would be imparted
to the educated youth, who can be self-employed consultants on successful
completion of training and certification by AI. A market indeed exists for these
external consultants. The advantage a consultant has is that he can provide an outside
view without the organizational prejudices. World Bank, ESAMI and International
Labor Organization (ILO) produce the trainers, who train the small business
entrepreneurs in the countries including Kenya, Nigeria, Lesotho, Burkina Faso,
Senegal and Togo
xxix
.
5. Employment generation – an inherent potential of business school (B-school) or
management education institution: Understood that B-school training could enhance
the proportion of successful amongst the entrepreneurs, there is a larger possibility of
employment generation in the successful enterprises. It can help also many of the
people who are employed in public and private sector often want to do something,
which they consider their own.
6. Additional advantage compared to training by others than a B-school: B-School
training widens a person’s horizon. It imparts the trainee an all round knowledge of
business and makes him sensitive to all its facets. It gives him strong conceptual
skills, which coupled with experience forms a recipe for success. B-Schools can
bring industry experience into the classroom. These are the people who can give a
contemporary perspective in academia
xxx
.
6. Additional costs of the proposal
There are two prime costs:
1. Insurance cost: This aspect is addressed in point 2 in the previous section.
2. Physical costs comprising government contribution to business insurance of SSI
and fees to AIs: The first one will add to premium collection of banks, which will be
invested in long run projects mostly as per investment norms for insurance sector.
The second one is the price of quality of enterprise. But over time the premium as a
percentage of the assured sum may come down because of competition in the
deregulated and liberalized insurance industry.
16
3. Moral hazard: the banks have to build up strong investigation machineries for
occurrence of spurious incidents insured against. It is a part of life in any insurance
business.
7. Conclusion
This article tries to seek a solution to the problem of NPA in the present
circumstances of banking and insurance working together under the same roof.
Insurance is a supplementary tool, which can minimize the chance of business failure
as well as minimize moral hazard. Implementation of this system calls for a high
degree of flexibility in the rules and guidelines of the banks. In the proposed system
there is a potential of flourishing banking-cum-insurance business of the banks
because the percentage of successful entrepreneurs shall rise here and banks would
be able to sell various life and non-life insurance products to the entrepreneurs and
their families. As these entrepreneurs expand, diversify and technically upgrade
business, banks can give more loans and earn interest. The AIs have to take up the
tasks of selection of right people and appraisal, monitoring and follow up of projects.
Banks will concentrate on what is their business. What is stressed in this article is the
pressing need of the small-scale entrepreneur for becoming aware and educated in
modern business management holding a professional attitude toward rational
decision-making and banks have to facilitate that process as a part of the credit
policy sold by them.
References
Acs Z.J. and Audretsch D.B (1991): Innovation and Small Firms, MIT,
Massachusetts
Acs Z.J and Audretsch D. B. ed. (1990): The Economics Of Small Firms - A
European Challenge, Kluwer, London, p 11
Barber J., Metcalf S. and Porteous M. (1989): Barriers to Growth: The Arcade Study,
in Baber J., Metcalf S. and Porteous M. ed. (1989): Barriers to Growth in Small
Firms, Routledge, New York
Bhaumik S.K. and Mukherjee P (2001): “The Indian Banking Industry – A
Commentary”, Social Science Research Network Working Paper, Harvard
Black J (2002): Oxford Dictionary of Economics, Oxford University Press, Oxford,
2
nd
Edition, p 15
Business India (2002). Editorial, April 15-28, 2002,
http://www.businessindiagroup.com/bi-editorial.aspx
Butler B., Butler D. and Issacs A. ed. (1997): Oxford Dictionary of Finance and
Banking, Oxford University Press, Oxford, 2
nd
edition, p 17
17
Desai V. (1999): Small Scale Enterprises, Volume 12, Himalaya, Mumbai,
Chapter14
Dignard L. and Havet J (1995): Women in Micro and Small Scale Enterprise
Development, Westview, London, Chapter 10
Harper M. and Vyakarnam S. ed. (1988): Rural Enterprise Case Studies from
Developing Countries, Intermediate Technology Publications, London
Little I. M. D (1987): “Small Manufacturing Enterprises in Developing Countries”,
The Word Bank Economic Review, Volume 1, Number 2
Mehta M.M and Das M. K (2003): “Non performing Assets and Prevention and
Detection of Bank Frauds”, Center for Studies in Banking and Finance Workshop,
National Law University, Jodhpur, pp 87-90
Rahman A. and Khan S (1989): “Abstract of the Country and Case Studies: India” in
Kaneslingam V. ed. (1989): Appropriate Technology for Rural Industries - The case
of South Asia, Tata McGraw-Hill, New Delhi.
Reserve Bank of India (2003). Report on Trend and Progress of Banking in India
2002 – 03,
https://www.rbi.org.in/Scripts/Publications.aspx?publication=Annualwww. rbi.org
Reserve Bank of India (2002) Circular DBOD No. BP. BC. 1 / 21/04.048 / 2002-03,
4 July, 2002, https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7358
Reddy P. K (2002): A Comparative Study of the Non Performing Assets in India in
the Global Context, Indian Institute of Management Ahmedabad Working Paper.
https://www.scribd.com/doc/76610492/A-Comparative-Study-of-Non-Performing-
Assets-in-Indian-Banking-Industry
Varian H (1992): Microeconomic Analysis, Norton, New York, 3
rd
Edition, Chapters
11 and 25
Wignaraja G. ed. (2003): Competitive Strategies in Developing Countries,
Routledge, London, Ch 2
Endnotes
i
This was revealed by a study on small enterprises in India and Colombia conducted by World Bank
and by relevant documents from other countries - Little I. M. D (1987): “Small Manufacturing
Enterprises in Developing Countries”, The Word Bank Economic Review, Volume 1, Number 2
ii
Report on Trend and Progress of Banking in India 2002 – 03, Reserve Bank of India
iii
The names of the officials are given in the end of the paper with their respective departments.
iv
An asset is any object tangible or intangible, which is of value to its possessor. In most cases it is
either a cash or can be turned into cash; exceptions includes prepayments, which may represent
18
payments made for rent, rates or motor licenses in cases in which the time paid for has yet not been
expired. Tangible assets include land and debtors and cash; intangible assets include goodwill,
patents, copyrights and trademarks. For capital gain tax purpose an asset consists of all forms of
property, whether at the home country abroad including options, debts, incorporeal property, currency
(other than sterling), and any form of property either created by the person disposing of it or owned
without being acquired. It must however consist of some form of property for which a value can be
ascertained. Some assets are exempt from capital gain tax. Asset value is the total value of assets
minus value of liabilities divided by the number of ordinary shares issued. Asset management is the
management of financial assets of a company to maximize return on investment. Asset stripping is
acquisition or takeover of a company whose shares are valued below their asset value - Butler B.,
Butler D. and Issacs A. ed. (1997): Oxford Dictionary of Finance and Banking, Oxford University
Press, Oxford, 2
nd
edition, p 17
Economists classify assets into real and financial assets. Real assets include land, buildings or
machinery owned. Financial assets include cash and securities and credit extended to customers. The
assets side of a company’s balance sheet includes both real and financial assets. Asset is also used in
metaphorical and usually favorable sense to describe things that cannot actually be owned, e.g. the
phrase “a company’s best assets are the skill and loyalty of its employees” - Black J (2002): Oxford
Dictionary of Economics, Oxford University Press, Oxford, 2
nd
Edition, p 15
v
Reserve Bank of India circular DBOD No. BP. BC. 1 / 21/04.048 / 2002-03, 4 July, 2002
vi
A comparative picture of measures taken in India vis-à-vis other East Asian Economies troubled by
the NPA problem is available in Reddy P. K (2002): A Comparative Study of the Non Performing
Assets in India in the Global Context, Indian Institute of Management Ahmedabad Working Paper. It
is given in the end of the paper.
vii
Mehta M.M and Das M. K (2003): “Non performing Assets and Prevention and Detection of Bank
Frauds”, Center for Studies in Banking and Finance Workshop, National Law University, Jodhpur, pp
87-90
viii
The list of different categories of the banks is given in the appendix. New private sector banks are
not considered here because of convenience in comparison. During 2000-01, data of NPA with these
banks are not available. Again before 2000-01, NPA figures are not available.
ix
http://www.banknetindia.com/banking/0448.htm, visited on 27.08.04
x
Wignaraja G. ed. (2003): Competitive Strategies in Developing Countries, Routledge, London, Ch 2
xi
Varian H (1992): Microeconomic Analysis, Norton, New York, 3
rd
Edition, Chapters 11 and 25
xii
http://www.sbaer.uca.edu/Research/1998/ICSB/n009.htm, visited on 13 April 2002
xiii
Desai V. (1999): Small Scale Enterprises, Volume 12, Himalaya, Mumbai, Chapter14
xiv
Bhaumik S.K. and Mukherjee P (2001): “The Indian Banking Industry – A Commentary”, Social
Science Research Network Working Paper, Harvard
xv
Supra no 13
xvi
Rahman A. and Khan S (1989): “Abstract of the Country and Case Studies: India” in Kaneslingam
V. ed. (1989): Appropriate Technology for Rural Industries - The case of South Asia, Tata McGraw-
Hill, New Delhi.
xvii
Supra no 16
xviii
Marketing skill is very important for the SSI. In the phase of shift of consumers’ preferences from
standardized mass product goods towards stylized and personalized goods, the SSI can, through
proper marketing activity carve out small niches where giant firms are not comfortable - Acs Z.J. and
Audretsch D.B (1991): Innovation and Small Firms, MIT, Massachusetts
xix
Empirical investigation into the Rural Planning Department (RPD) as well as the Department of
Banking Operation and Development (DBOD) of the Reserve Bank of India, Headquarter, Fort,
Mumbai gives the glimpse of the fact that the apex bank of the country is yet to have serious concerns
in this regard of the fact that the quality of entrepreneurship affects the quality of bank loan. Naturally
the circulars and guidelines sent to Scheduled Commercial Banks (SCBs) by the RBI and various
credit policies are required to take into consideration this issue.
xx
The details of the websites are given in the end of the article.
xxi
For example, Executive Education Program, Management Development Program, Advanced
Education Program or Foreign Trade Management Program or else the banks have to arrange it with
some institutions. These are conducted by IIM Lucknow, Gurgaon based Management Development
19
Institute and IIFTM of GOI respectively or themselves are taking training from institutions like
Entrepreneur Development Institute (EDI), Gujarat.
xxii
Editorial, Business India, April 15-28, 2002
xxiii
EDI is a wholly autonomous and not-for-profit institution, set up in 1983, is sponsored by apex
financial institutions, the Industrial Development Bank of India (IDBI), the Industrial Finance
Corporation of India (IFCI), the Industrial Credit and Investment Corporation of India (ICICI) and the
State Bank of India (SBI). The Government of Gujarat pledged twenty-three acres of land on which
stands the majestic and sprawling EDI campus. The EDI has been spearheading entrepreneur
movement throughout the nation with a belief that entrepreneurs need not necessarily be born; they
can be developed through well-conceived and well-directed activities. Over the year, EDI has
designed and conducted Training Programs on skill development and attitude development of bank
managers and officers engaged in project appraisal as also the entrepreneur behind-the-project. Some
of its important programs, directed towards achieving this objective are Training Program on
Industrial Project Preparation and Appraisal (IPPA), Training Program on Financial and Economic
Analysis of Industrial and Infrastructure Projects using Computer Model for Feasibility Analysis and
Reporting (COMFAR III) Expert and Training Program on Assessing the Entrepreneur using Focused
Behavioral Event Interview (FBEI) technique. These programs have received encouraging response at
national as well as international level. The Institute has received support from the World Bank, ILO,
UNIDO, Commonwealth Secretariat, Friedrich-Naumann-Stiftung (FNSt), European Union and
several other international agencies. Its international activities cover a range of entrepreneurship and
investment promotion-related training programs/ workshops. Ever since its inception in 1983, the
Institute has interacted with 30 developing countries thus helping them build capabilities for industrial
development. So far, over 1,000 professionals from developing countries have benefited from EDI's
capacity building programs including the one on Industrial Project Preparation and Appraisal co-
sponsored by UNIDO. The EDI Inter-Regional Centre (IRC) is the result of UNIDO’s strategic
thinking that innovative methodologies should be transferred to developing world through regional
institutions with proven skills in the area of entrepreneurship and investment promotion. EDI is also a
partner institution with proven skills in the area of entrepreneurship and investment promotion. EDI is
also a partner institution for implementation of the European Union Economic Cross Cultural
Program-ENTRIXIE Project (Entrepreneurship Training and Information Exchange for Small
Businesses in India and Europe), especially set up to promote partnerships among the SMEs (small
and medium enterprises) of India and Europe. EDI has an international network that has been
continuously benefiting the entrepreneurs from thirty developing countries starting from Afghanistan
through Vietnam to Zambia. Because the institutions like EDI are not enough to work all over the
country others like institutions like Management Faculties of the universities, IIMS and other
established business schools can share the task.
http://www.evishwagujarati.net/egupdate/edu/egguj.html, 13 April 2002
xxiv
As per Knight (1921), entrepreneurs must finance themselves and bear the risk of their failure. His
superior foresight must be accompanied by willingness to bear risk. Again as per McClelland (1961),
who becomes an entrepreneur is determined not by personality but by entrepreneurial ability and the
extent to which individuals form accurate estimates of their entrepreneurial abilities - Acs Z.J and
Audretsch D. B. ed. (1990): The Economics Of Small Firms - A European Challenge, Kluwer,
London, p 11
xxv
These are required for survival, sustenance and growth of small as found in U.K and India - Barber
J., Metcalf S. and Porteous M. (1989): Barriers to Growth: The Arcade Study, in Baber J., Metcalf S.
and Porteous M. ed. (1989): Barriers to Growth in Small Firms, Routledge, New York
xxvi
Materials contributed by the participants in the Cranfield course on the promotion of small
enterprises in developing countries conducted by the Enterprise Development Centre, Cranfield
School of Management explain the importance of market research and relative importance of
sociology vis-à-vis general demography of the market area for the purpose of proper understanding of
market needs - Harper M. and Vyakarnam S. ed. (1988): Rural Enterprise Case Studies from
Developing Countries, Intermediate Technology Publications, London
xxvii
http://www.indiainfoline.com/bisc/sibmalumni01.html, visited on 20 April 2002
xxviii
Nowadays credit control along with outstanding collections is recognized as a separate skill -
Business India, Mumbai, April 29 – May 12, 2002, p142.
20
xxix
Dignard L. and Havet J (1995): Women in Micro and Small Scale Enterprise Development,
Westview, London, Chapter 10
xxx
Supra number 28
__________
doc_914877482.pdf
Description explain how to prevent non performing assets in small scale industries.
Munich Personal RePEc Archive
How to Prevent Non Performing Assets
in Small Scale Industries
Rituparna Das
5. January 2003
Online at http://mpra.ub.uni-muenchen.de/65191/
MPRA Paper No. 65191, posted 23. June 2015 06:29 UTC
CENTRE FOR STUDIES IN BANKING AND FINANCE
(Established by the Reserve Bank ! India at Natinal "a# University$ %dh&'r(
Paper for Workshop on Non Performing Assets
and
Prevention and Detection of Baking Frauds
How to Prevent Non Performing Assets in Small Scale Industries
Rit'&arna Das
%an'ary )**+
%E" Cde, G )-
DOI: 10.13140/RG.2.1.1226.2563
" 'The loan which I have not yet paid', being here, having made requital of the loan to
Yama, he goes freed from the debt to the world of heaven." Yajur Veda
Abstract
This paper tries to seek a solution to the problem of non performing assets in the
small scale industries under the present circumstances of banking and insurance
working together under the same roof. What is stressed in this chapter is the
pressing need of the small scale entrepreneur for becoming aware and educated
in modern business management holding a professional attitude toward rational
decision making and banks have to facilitate that process as a part of the credit
policy sold by them.
Keywords: Bancassurance, Credit Risk, Entrepreneureship
A revised version of this paper is published as Chapter 7 in Research
Methodology in Social Sciences and Management: Models on Indian Issues,
ISBN-13: 978-3639295467, pp 167-223.
2
1. Introduction
2. The issues
3. The methodology
4. Answers to the issues
5. Benefits of the proposal
6. Costs of the proposal
7. Conclusion
1. Introduction
Ever since the introduction of financial sector reforms in India the NPA (non
performing assets) of the banking system have been getting attention. NPA cause
serious strain on the profitability as, on the one hand banks cannot book income on
such accounts and on the other hand they are required to charge the funding cost and
provision requirements to their profits. Since the early 90s the government has had to
give over Rs. 23000 crores in bailouts to various banks and financial institutions, out
of the taxpayers’ money. Banks feel afraid of high risk of lending to small business
because of lack of accounting and reputation, uncertain property rights of the assets
they are holding and noncompliance with regulations
1
. As per the international
norms net NPA i.e. gross NPA less provision for loss are to be slashed down to 2-
3%.
India is the only country with an extensive set of policies supporting and protecting
many kinds of small enterprises by directly subsidizing them or exempting them
from taxes and preferring them for government purchases
i
. Amongst the priority
sector components the SSI (small-scale industries) contribute the maximum share
19.24% in total NPA of public sector banks, 18.27% in total NPA of old private
sector banks and 5.74% in total NPA of new private sector banks during 2002-03 as
an individual component as per the Reserve Bank of India statistics
ii
. As per the RBI
report on sectoral deployment of NPA 2002-03, the SSI contributed the maximum
amongst various priority sectors. This paper seeks to diagnose the problem and
thereafter prescribe a solution model that can minimize the chance of NPA
generation in the SSI sector.
2. The issues
This article attempts to answer to the following questions:
a). What are NPA? How does the concept evolve in the context of India?
b). What is the policy intervention of management of NPA? What has been done so
far?
c). What are the shortcomings in the above?
d). How to select the right candidate for SSI loans especially under various
government schemes
e). How to enable them to manage risk and survive in the phase of a number of
external constraints like competition from large scale industries, dereservation,
bottlenecks in infrastructure and supplies of factors of production
f). How to control willful default and moral hazard
Endnotes
1
Morrison C., Lecomte H.B.S. and Oudin X (1994): Microenterprises and The Institutional
Framework in The Developing Countries, OECD, Paris, Chapter 4
3
Answers to these are the crux of the paper.
3. The methodology
The work is a mix of doctrinaire and empirical survey. It draws heavily from related
books, articles, reports, case studies and internet. The data about Indian banking
downloaded from internet is cross-checked by the relevant RBI reports on the one
hand and on the other hand interviews with a select number of officials from the
appropriate departments of the central bank
iii
. While surveying the current literatures
on Indian banking and insurance a link between the two is detected, where insurance
can function as a complementary product to bank loan in order to make it viable and
ensure its quality. The innovative use of insurance clubbed with bank loan turns into
a powerful mechanism that minimizes the chance of NPA generation in the SSI
sector.
4. Answers to the issues
a). What is NPA? How did the concept evolve?
An asset including a leased asset becomes non-performing when it ceases to generate
income for the bank
iv
. A non-performing asset was defined as a credit facility in
respect of which the interest and/or installment of principal has remained past due for
a specified period of time. The specified period was reduced in a phased manner as
under:
Year ending March 31 Specified period
1993 Four quarters
1994 Three quarters
1995 Two quarters
2004 onwards One quarter
An amount due under any credit facility is treated as past due when it has not been
paid within 30 days from the due date. Due to improvements in the payment and
settlement systems, recovery climate, upgradation of technology in the banking
system etc it was decided to dispense with ‘past due’ concept with effect from March
31, 2001. Accordingly as from that date a non-performing asset shall be an advance
where
• Interest and/or installment of principal remain overdue for a period of more than
180 days in respect of a term loan.
• The account remains ‘out of order’ for a period of more than 180 days, in respect
of an overdraft/cash credit.
• The bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted.
• Interest and/or installment of principal remains overdue for two harvest seasons
but for a period not exceeding two half years in the case of an advance granted
for agricultural purposes and
• Any amount to be received remains overdue for a period of 180 days in respect
of other accounts
With a view to moving towards international best practices and to ensure greater
transparency it has been decided to adopt the ‘90’ days overdue norm for
4
identification of NPA, from the year ending March 31, 2004. Accordingly with effect
from March, 2004 a NPA shall be a loan or an advance where
• Interest and/or installment of principle remain overdue for a period of more than
90 days in respect of term loan.
• The account remains ‘out of order’ for a period of more than 90 days, in respect
of an overdraft or cash credit.
• The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted
• Interest and/or installment of principal remains overdue for two harvest seasons
but for a period not exceeding two and half years in the case of an advance
granted for agricultural purposes and
• Any amount to be received remains overdue for a period of more than 90 days in
respect f other accounts.
As a facilitating measure for smooth transition to 90 days norm, banks have been
advised to move over to charging of interest at monthly rests, by April 1, 2002.
However, the date of classification of an advance as NPA should not be changed on
account of charging of interest at monthly rests. Banks should therefore continue to
classify an account as NPA only if the interest charged during any quarter is not
serviced fully within 180 days from the end of the quarter with effect of April 1,
2002 and 90 days from the end of the quarter with effect from March 31, 2004.
An account should be treated out of order if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power. In the cases where
outstanding balances in the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for six months as on the
date of balance sheet or credits are not enough to cover he interest debited during the
same period, these accounts should be treated as ‘out of order’.
An amount due to the bank under any credit facility is overdue if it not paid on the
due date fixed by the bank
v
.
b). What is the policy intervention of management of NPA? What has been done
so far?
It has been suggested that the central Boards of banks should periodically NPA
related problems of the bank and lay down the following policies in this regard
a). With a view to get focused attention, creation of separate Division to look after
very large accounts.
b). HRD intervention, to upgrade the skills of operating officials dealing with credit
follow-up to arrest slippages of assets from standard Asset category.
c). Introduction of credit audit to ensure proper appraisal and compliance of terms
and conditions of sanction; credit audit reports to indicate early identification of
problem loans and warning signals for potential NPA, so that corrective action could
be taken.
d). Banks should lay down NPA Management Policy, which should indicate early
identification of problem loans and warning signals
e). NPA task force should review all loans at Apex level, Regional level and Branch
Level. Suitable cut off limits can be kept for each level. Action points emanating
5
from such reviews should be conveyed down the line and follow up action should be
watched.
f). Cases referred to DRTs (Debt Recovery Tribunal) and BIFR (Board of Financial
Reconstruction) should be followed up. Operating functionaries be advised to seek
appropriate relieves at the internal stages, whenever warranted, to prevent asset
stripping by promoters. Nodal offices be appointed to monitor cases in DRT and
BIFR.
g). Establishing specialized Rehabilitation and Recovery branches for speedy follow
up.
h). Credit Risk Rating System should be firmly in place.
In this context early warning signals are specified with special emphasis on conduct
of accounts, danger signs appearing during unit inspection, submission of financial
statements and non-financial indicators visible to banker
vi
.
Following are the common strategies adopted by banks for containment/recovery of
NPA accounts
a). Strengthening post sanction follow up especially by getting alerted as soon as one
quarter default in interest/installment payment is noticed.
b). Exerting tremendous pressure and resorting to arm twisting measures on
recalcitrant borrowers by attachment of their assets, putting these assets quickly on
auction/sale and wide publicity to such firm steps taken. This may compel the
borrower either to repay the dues rather quickly or settle the same through the
compromise route. It also has a demonstrative/deterrent effect on other defaulters.
c). Quick responses on various adverse developments noticed in the borrowal
accounts or in suit filed cases helped in retrieving the situation sooner. The endeavor
has been to thwart deterioration in the position due to efflux of time.
d). Strengthening information management in NPA accounts to track down what is
happening at the ground level to avoid surprise/shocks have been found to be of
great help.
e). Using audiovisuals as a technique for mass education of borrowers on the
importance of cultivating timely repayment habit.
f). Assigning due weight and importance to macroeconomic and industry level
developments at the time of appraisal to avoid slippages within a short period of
sanction
vii
.
(c). How far the above policy interventions and the strategies are successful
The success of above policy interventions and the strategies can be gauged in terms
of the data on trend of NPA in different sectors and with different categories of
banks:
Table 1: Aggregate NPA figures with different categories of banks in Rs. Crores
Year Nationalized Banks
viii
State Bank Group Old Private Sector Banks
2000-01 32,983.42 20,190.70
4,810.82
2001-02 36,762.78 19,743.57 4,850.89
2002-03 35,848.82 16,958.10 4,636.05
Source of data: Report on Trend and Progress of Banking in India, Reserve Bank of
India for the years 2000-01, 2001-02 and 2002-03
6
From the above table we find that there is hardly any improvement with Nationalized
Banks and Old Private Sector Banks, whereas there is marginal improvement with
the State Bank Group to the extent of 16%.
Table 2: Sectorwise average NPA shares with Nationalized Banks and Old
Private sector banks in terms of percentages
Year Priority Sector
Public
Sector
Non-priority
Sector Total
Agriculture SSI Others
2000-01 9.67 18.225 11.725 2.035 58.335 99.99
2001-02 9.365 19.98 12.255 0.765 57.63 99.995
2002-03 9.835 19.035 13.685 0.875 56.57 100
Source: Same as in Table 1
Here we find while there is significant improvement by more than 75% with public
sector, there is hardly any improvement with SSI and little deterioration with
agriculture.
Table 3: Sectorwise average NPA shares with the State Bank of India Group in
terms of percentages
Year Priority Sector Public Sector
Non-Priority
Sector Total
Agriculture SSI Others
2001
14.95 18.84 10.43 6.01 49.77
100.00
2002
16.02 18.59 11.07 3.14 51.18
100
2003
17.53 18.07 11.88 3.1 49.41
99.99
Source: Same as Table 1
Here the picture is same as table 2. While public sector NPA have declined by 50%,
agriculture NPA has worsened and the SSI NPA has shown hardly any improvement.
Again public sector banks have settled about 30% of their NPA cases for which they
issued notices under the SARFAESI (Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest) Act 2002. A total of 33,736 notices
under the SARFAESI Act were issued by 20 nationalized banks and the subsidiaries
of SBI for recovery of Rs 12,147 crore after the enactment of the Act. These banks
together have settled 9,946 cases, according to data compiled by CMIE (Center of
Monitoring Indian Economy). Though the percentage of dispute cases settled till
June 03 amount to 29.5%, in terms of value it amounts to a paltry Rs 499 crore only,
accounting for just 4.1% of the total outstanding amount for which notices were
issued. The SBI and its subsidiaries together have recovered Rs 83 crore out of Rs
4,771 crore loan outstanding for which they had issued notices till June 03.
Similarly, Punjab National Bank and Canara Bank, which had sent 3,015 and 1,011
notices respectively for recovery of loans amounting to Rs 711 crore and Rs 350
crore, have recovered Rs 39.3 crore and Rs 34.5 crore respectively till June 03
ix
.
Now we try to find what is wrong with the policy interventions and strategies
adopted by the banks?
7
All the policy interventions suggested are related to the banks and the enforcing
authority. They do not relate to the borrowers. They aim at strengthening the
administrative machinery, but are not concerned with the problems of borrowers and
defaulters. Secondly, while strategy ‘e’ to some extent relates to the borrower, other
strategies try to answer the question ‘what after default’, but not ‘how to prevent
default and expand the bank’s business with the same client’. Thirdly, the data
reveals that the problem exists in the borrowers, not in the banks and administration
in the post-lending period, while in the pre-lending period, problem exists in the
banks. As per Wignaraja 2003 lack of managerial skill in these borrowers is eating
out the competitiveness of the developing countries like India vis-à-vis the developed
countries
x
. In the pre-lending period, proper assessment of the competence of the
applicant is required. Fourthly, banks do not see that the business runs successfully.
It is necessary that banks enter into insurance business as risk carriers so that they
may also sell credit policies designed to minimize the risk of default.
In short the following issues remain undressed:
1. How to select the right candidate for SSI loans especially under various
government schemes
2. How to enable them to manage risk and survive in the phase of a number of
external constraints like competition from large scale industries, dereservation,
ceiling on further capital investment, bottlenecks in infrastructure and supplies of
factors of production
3. How to control willful default and moral hazard
First we answer the third issue. In order to control willful default and moral hazard
the bank should see that the loan-applicant has insured himself against all future
losses which can handicap his repaying ability. This is possible in two ways – first
the applicant can buy the appropriate insurance cover from a general insurance
company and surrender it to the bank and second the bank itself insures him. The
second possibility implies that the bank should enter general insurance business.
Regarding the first possibility the current in India is that premium is not returned in
case the event does not happen. Neither the bank nor the borrower gets any benefit
from this. In addition if the borrower defaults the bank loses. But if the bank sells
him the general insurance, then if the insured event does not take place and the
borrower defaults, the paid premium can cancel out a part of the bank’s loss.
It can be proved that in order to avoid default it is wise for the borrower to insure his
business fully against the events causing losses and on other hand liberalization of
the financial sector consequent upon competition in the banking industry would
make the bank insure the borrower fully against any loss when there is fear of
default. This is the economic aspect of lender’s liability.
First we prove that the borrower should insure his business fully.
Let the business have an initial monetary wealth ‘A’. He will lose an amount ‘B’ the
probability of which is ‘q’. This loss would prevent him to repay the loan as he can
allege. Let him buy an insurance cover, which would provide him ‘C’ if the event
occurs and he has to pay a premium ‘p’ for every rupee of coverage. His utility
function is U(A – B – pC + C) in case the event happens and U(A – pC) in case the
event does not happen. He will maximize his expected utility function
8
EU = qU(A – B – pC + C) + (1-q) U(A – pC) by choosing the optimum amount of C.
The choice variable here is C.
The first order condition is dEU/dC = qU
C
(A – B – pC + C)(1-p) + (1-q) U
C
(A –
pC)(-p) = 0; U
C
= dU/dC
The expected profit from the insurance business is q(pC – C) + (1-q)pC. Competition
sets q(pC – C) + (1-q)pC = 0 ? q = p. This is called pure premium. This happens
when there is no transactions cost, marketing cost and any other costs in absence of
any externality in the market. Putting q = p in qU
C
(A – B – pC + C)(1-p) + (1-q)
U
C
(A – pC)(-p) = 0 yields U
C
(A – B – pC + C) = U
C
(A – pC)
Assuming risk aversion i.e. U
WW
(W) < 0 by the business man,
U
C
(A – B – pC + C) = U
C
(A – pC) ? A – B – pC + C = A – pC
? B = C. So the borrower would insure his business fully against any future loss.
Second we prove that if there is any fear of default, the lending agency should fully
insure the borrower or see that the borrower fully insures himself against any future
loss in a liberalized competitive market. Let the anticipated loss of the consumer be
‘B’. Let ‘1’ be the situation when the loss occurs and ‘2’ be the situation when the
loss does not occur. Let q
11
be the probability of loss when the borrower does not
intend to default, q
12
be the probability of loss when the borrower intends to default,
q
21
be the probability of not occurrence of loss when the borrower does not intend to
default and q
22
be the probability of not occurrence of loss when the borrower
intends to default. Let u be the minimum utility the borrower expects from not
intending to default, let D be the opportunity cost of not intending to default and I
i
, i
= 1,2 be the premium payment from the borrower to the insurance business. If the
insurer wants the borrower not to intend to default, then the incentive problem in the
principal-agent framework is
Maximize W = q
11
I
1
+ q
12
I
2
subject to the participation constraints
q
11
U(A – I
1
– B) + q
21
U(A – I
2
) – D ? u
q
11
U(A – I
1
– B) + q
21
U(A – I
2
) – D ? q
12
U(A – I
1
– B) + q
22
U(A – I
2
)
Here when the loss does not occur the borrower loses I
2
and when the loss does not
occur he loses I
1
+ B. Competitive equilibrium needs I
2
= I
1
+ B. If I
2
> I
1
+ B, he
will not buy insurance. On the other hand if I
2
< I
1
+ B, this means there is existence
of difference between premiums in the industry. Perfect competition would reduce
this difference to nil such that I
2
= I
1
+ B. Thus the borrower would be fully insured
by the bank. Following the same logic we can say that perfect competition will
ensure
q
11
I
1
+ q
12
I
2
= 0
and
q
11
U(A – I
1
– B) + q
21
U(A – I
2
) – D = q
12
U(A – I
1
– B) + q
22
U(A – I
2
)
These are two equations in two variables I
1
and I
2
. Solving these two equations gives
the equilibrium values of the variables
xi
. The interesting point is that if small
entrepreneur buys business insurance from the same bank he has taken loan from, he
is absolutely under the supervision and guidance under the bank. In fact banks are
expected to provide entrepreneurs with financial assistance as well as inputs to
support and promote their enterprise
xii
. Again if the insurance is of such type that on
occurrence of the incident insured against before the expiry of the stipulated term the
entrepreneur gets the assured sum and on non occurrence of the incident he gets the
9
sum after expiry of the term provided he makes timely repayment of installment and
on the other hand if he does not repay loan as per terms and conditions, the bank
confiscates the assured sum whether the incident occurs or not, for which he has
been paying premiums, this can check willful default. This kind of banking-cum-
insurance system is more profitable than the banking system. In the first case the
bank can get all premiums whereas in the second case the bank will get a part
thereof.
Now we answer the second issue.
In the macroeconomic scenario the internal causes of sickness of the SSI in India
include poor management of image and brand, poor marketing skills and lack of
market penetration, poor sales promotion, inadequate pricing policy, absence of
professionalism, absence of cost control mechanism, tardy debt collection, faulty
inventory management policy and absence of knowledge of fund management. These
are the variables internal to the firm, and well under the control of the entrepreneur
provided he knows to control. According to the RBI Committee (1981) the two most
important reasons behind sickness of SSI are management deficiency and marketing
constraints
xiii
.
Bhaumik et al 2001 argued that the process of bank restructuring has to involve an
improvement in the quality of the banks’ balance sheets
xiv
. The report of the Khan
Committee set up by the RBI recognizes the importance of risk management in a
complex financial organization, and emphasized the need of risk management
capabilities. This process would have to involve a resolution of the banks’ problems
with respect to NPA, and the introduction of measures and institutions that allow
banks to take a reasonable amount risk to augment their returns while providing
options to manage and hedge against these risks adequately. Banking products
include business loan also. NPA arise if the lent money does not come back.
Prevention of NPA means to maximize the chance of the lent money coming back
with interest. The success of the borrowing entrepreneur is a relevant issue here. In
the context of India if the quality of entrepreneurship is tested before sanctioning
bank loans and in addition, training regarding how to insure against various business
risks is imparted to the budding entrepreneur then the probability of business failure
reduces to the minimum.
Unfortunately the Indian banks have been found to be lacking on both counts and the
concept of integrated approach to entrepreneur development is totally absent
xv
.
While the infrastructure and supportive inputs like knowledge and training are
conspicuous by their absence, the financial assistance made available by the banks is
not entirely to the satisfaction of entrepreneurs. It is also true that it is not the
business of banks to train entrepreneurs or conduct management program. This is not
required by Banking Regulation Act or Reserve Bank guidelines. One of the major
causes that may be identified for huge NPA is the negligence on the part of banks in
realizing their role in the proper development of entrepreneurs. The lack of
marketing knowledge, technological obsolescence and deficient managerial skill are
amongst the most serious drawbacks in the non-farm rural SSI despite technical,
economic, managerial and marketing consultancy and entrepreneur training provided
by The Small Industries Development Organization, Small Industries Extension
Training Institute, The National Board of Entrepreneurial Development and the
10
National Institute of Entrepreneurship and Small Business Development
xvi
. Hence, it
is imperative in the present scenario that banks make some alternative arrangement
for providing training and rendering the requisite knowledge to entrepreneurs for
running their business successfully by assigning the task of entrepreneur
development to other institution other than involving themselves on the one hand and
on the other concentrating on what is the banking business proper – design and sell
financial products. The results of these efforts would be improved quality of loans
and increased business for the banks. In broader terms, the development of
entrepreneurs would result in a flourishing business, which would not only be
profitable, but also self-sustaining and making positive contribution to national
economy.
A study
xvii
covering 11 branches of Allahabad bank in the Varanasi district of Uttar
Pradesh conducted by the Faculty of Management, Benaras Hindu University reveals
that bank officers themselves are not enough equipped to train the entrepreneurs, nor
could they find time after their routine jobs to spend on the these people, who
therefore prefer to visit private consultants. It was further noted that those who were
aware of the various schemes had acquired the information from personal contact
with other customers, borrowers, professionals, friends and their Bankers. Only
about one-third of the borrowers came to know about Bank credit policies from the
Bank. Another one-third obtained the information through professionals like
chartered accountants and management consultants. The government agencies
propaganda and media appeared to have had little impact as only 5% of the
borrowers that too among those with limits less than Rs. 15 lacs, acquired
information from this source. The word of mouth served the purpose in about one-
fourth of the cases, which indicated that their friends, other customers and borrowers
provided information to them. Analyzing activitywise, it appears that professionals
played a better role than the bank. It is interesting to find that as far as the nature of
assistance provided by the Bank functionaries is concerned, 87% borrowers did not
approach the Bank for technical aspects. Out of the 13% borrowers who approached
Bank, only 3% could get significant help. The Bank officers also mentioned that
mostly they could assist the applicants in financial aspects only as they themselves
were not equipped to handle technical and marketing matters
xviii
. Many bank officers
themselves felt that adequate skills were not available with them. The reasons
attributed to such a situation were lack of training, lack of infrastructure, and lack of
time to become familiar with the lending principles and entrepreneurial development.
Among the bank officials, over 50% were of the opinion that taking the help of
independent management consultants would improve the financial management
skills of the SSI entrepreneurs as well as the financial discipline among them. Banks
are facing problem of high level of NPA and the most important reasons for it, as
perceived by bank officers have been inadequate entrepreneurial skill, intentional
default, lack of supervision and follow up of credit by the bank, indiscriminate
financing and change in environmental conditions beyond control. It is clear that
banks have not been taking the task of entrepreneurial development in all seriousness
as is evident from their casual approach to creating awareness amongst potential
entrepreneurs as well as providing necessary assistance to the existing borrowers.
The smooth running of day-to-day operations of business enterprises as also their
11
ultimate development into self-sustaining systems do not seem to draw sufficient
interest from the bankers who have financial stake in the enterprises. With the
widespread changes being introduced into the banking sector, it has become
important that banks keep a constant vigil over the enterprises being financed by
them. On one hand, it has to be monitored that funds are being properly utilized in
business, while on the other hand it has to be ensured that the enterprise does not fail
because of poor management despite the best intentions of the entrepreneur
xix
.
In the appendix is the list of loans and consultancy and training services delivered by
the SCBs (Schedule Commercial Banks). Proper administration of the loan money
can ensure on time repayment. A survey of available 57 websites out of 100 SCBs in
India during the first half of May 2002 finds that hardly six banks train and counsel
the borrowers
xx
. After delivering the loans to the clients the banks should not stay
aloof of the quality and manner the loans are being utilized. Banks have to confirm
that the borrowers know what to do with the loan money and for that purpose
borrowers are educating their personnel through some agencies or business school
xxi
.
It is also true that in today’s competitive market where the SSI have to fight large-
scale industries on the one hand and on the other with cheap imports flooding the
market as a direct fallout of removing quantitative limits on 821 items reserved for
SSI out of which 643 items have been put under Open General License since 1998-
99 as per WTO norms
xxii
. So it is advisable on the following grounds that the tasks of
project appraisal, training and educating entrepreneurs and project monitoring and
follow up should be bestowed with the professionally oriented training institutions
like Entrepreneur Development Institute of Gujarat, Indian Institutes of
Management, other established business schools as also Management Faculties of the
universities spread across the country
xxiii
.
The answer the first issue can now be given. The task of all project appraisals should
be assigned to the professional bodies instead of banks.
The answers to three above issues together can be presented in terms of Figure 1:
1. Refer all loan applications submitted to the banks to the nearest one of
aforementioned institutions (AIs) for project appraisal and approval. The AI should
examine whether the candidate deserves loan. There is a difference between the need
for loan and deserving loan. The candidate has to prove the spirit of entrepreneurship
before the AI
xxiv
.
2. If the project is approved by the AI send the applicant for entrepreneur training to
that AI at his/her own cost before sanctioning the loan.
3. The entrepreneur development program must have separate modules on risk
management, business insurance and those areas, which are found to be causes of
sickness. It should be designed to shape and polish entrepreneurs and prepare them
for the real world and thus is required to cover the following
xxv
:
• Personal grooming
• Social and communication skills and marketing skill
xxvi
• Management skills development program
xxvii
• General awareness and ability to anticipate future changes in external
environment
• Improvisation or ability to adjust with changing circumstances
• Credit Management skill including ability to collect outstanding
xxviii
12
• Habit of continuous SWOT analysis of the brand/product/service
4. On successful completion of the training the candidate has to get certified by the
AI.
5. On production of the AI certificate the bank can sanction loan and sell various
forms of insurance enumerated above required for business, where the entrepreneur
has to pay the first premium with a part of the loan money. The insurance should
have a design that on expiry of the stipulated period the entrepreneur gets a part of
the premium refunded if the incident insured against does not occur provided he
repays loan as per terms and conditions. If he defaults he does not get the premium
back whether the incident occurs or not. For a select category of entrepreneurs
government can contribute a part of premiums as it happens in social insurance
schemes declared in recent GOI budgets.
6. The project will be monitored and followed up by the AI during the term of the
loan: -
a. If the project is successful the entrepreneur shall repay loan as per terms and
conditions. If he does not do so the bank shall forfeit all insurance premiums she
paid already and shall not reimburse any money on occurrence of the events insured
against and further can take up the matter to an appropriate authority.
b. If the enterprise fails then the AI shall investigate the case and accordingly suggest
the entrepreneur regarding the turnaround strategy and the bank regarding the
treatment of the NPA if there is no hope of turnaround.
7. For continuous updating entrepreneurs with current trends and strategies AIs are
required to conduct EDPs periodically. For any typical entrepreneurs it is just not
13
advisable in an environment full of sweeping changes that he attends EDP once for
all in order to have the loan disbursed. Nor is there any management education that
does not fall obsolete.
8. The question of comparative advantages in relevant here. In business training
business schools/management institutions have competence and infrastructure.
Banks do not have all these. The trainers are mostly bank officers and government
officials, who themselves are not entrepreneurs. On the other hand many of the
students of management institutions have become successful entrepreneurs.
Qualitywise these people are better than mere government officeholders.
9. The AIs can get two-tier fee structure. The fee of pre-loan training can be charged
on the applicants and the fee of project monitoring can be charged on banks as a
proportion of the loan amount associated with the project. The first premiums of all
the prescribed insurances have to be paid by a part of bank loan. For that matter
banks have to increase the loan amount. In the process of continuous project
monitoring and follow up by the business schools it will be clear whether the
entrepreneur could be able to pay loan installments and insurance premium. Because
guided by business schools and loan being granted after multiple screening the
chance of business failure would come down. After all these efforts if NPA
generates, the matter has to be referred to the Asset Securitization Company. Here
we can think of some a mix of social and business insurance schemes, where the
government may agree to contribute. A number of non-life insurance schemes are
proposed in the budgets of recent years. The same may apply to small-scale business
insurance scheme. Besides this, competition in insurance industry can reduce
insurance premium over time. In order to improve quality of assets the banks should
pay fees to the business schools. It is the price of increased asset quality and virtual
expansion of universal bank. After all these institutions are reducing the risk of
banking.
5. Benefits of the above proposal
1. Reduction of NPA generation: Total risk of business comprises a number of risk
components. A part of these is uninsurable against and the rest insurable against. If
the latter is insured against and at the same time the best quality project consultancy
is available from the concerned AI we can assume that business risk is managed the
best thereby minimizing the chance of failure and hence maximizing the chance of
loan recovery in those cases where no moral hazard is involved.
2. EDP training can make the entrepreneur more efficient thereby leading to
downward shift of the average cost and marginal cost curves. Assuming that
numerous players exist in a particular commodity market, each selling a product
marginally differentiated from others, the market structure is monopolistically
competitive. Each firm thinks that he is monopolist in his niche, but he is not able to
dictate the price because of his small size and thus he is a price taker. Figure 2 may
be his condition before he takes EDP. Figure 3 and Figure 4 evaluate his states of
affair after he takes EDP.
14
Improvement in variable cost can nullify his insurance premium cost which is a fixed
cost.
3. Flourishing of bank owned insurance companies: Since bank loan is given to those
people who come through the rigorous screening of AIs, we can assume that very
few cases may turn to failure and the rest successful. The successful entrepreneur
would obviously expand and diversify business as it happens during sustainable
expansion of an enterprise. Through these enterprises the insurance business in
which the bank has a major stake can grow. The entrepreneur can make portfolio
investment with the profit accrued from his business. He may put part of the money
in mutual fund or other schemes. If the bank enters these fields as well like State
Bank of India, ICICI Bank, HDFC Bank and Vaisya Bank and then much of their
business can come from their once upon a time borrower.
4. Generation of opportunities of employment and self-employment: An AI can open
entrepreneur development wings in different areas. How should the responsibility of
entrepreneur development in the entire country be divided into existing AIs?
Suppose there are m banks in the country and the their number of branches are n
1
, n
2,
, , ,
n
m-1
and
n
m
. So total number of branches is ?n
i
where i = 1, 2, , , m-1 and m. One
criterion of dividing the responsibility may be like the following: If total number of
15
AIs is k, then each AI should take care of entrepreneurship development of ? n
i
/k
branches. But the problem with this rule may be that number of loan applicants
varies from branch to branch within the same bank and from bank to bank. Although
each AI gets equal responsibility in terms of number of bank branches, it may
happen that the number of applicants is not the same for all the AIs. Here one can
divide the responsibility by dividing the total number of applicants of all branches of
all banks together in to the number of AIs. But this rule is also not free of flaw in
matter of project monitoring and follow-up, though it can work well in matter of pre-
loan training and examination, because the amounts of loan vary from one applicant
to other depending upon the nature of the project. It can happen that an AI with a
lesser number of applicants has to handle big-budget projects calling for a relatively
heavier load of work compared to an AI with a larger number of applicants handling
small budget projects. Here what is advisable is to divide the total amount of loan
given by all branches of all banks by the number of AIs and make the minimum
adjustment such that the number of entrepreneurs is an integer for every AI. For this
task the AIs has to increase faculty and staff. Moreover the AIs can design some
entrepreneurship consultant development course whereby training would be imparted
to the educated youth, who can be self-employed consultants on successful
completion of training and certification by AI. A market indeed exists for these
external consultants. The advantage a consultant has is that he can provide an outside
view without the organizational prejudices. World Bank, ESAMI and International
Labor Organization (ILO) produce the trainers, who train the small business
entrepreneurs in the countries including Kenya, Nigeria, Lesotho, Burkina Faso,
Senegal and Togo
xxix
.
5. Employment generation – an inherent potential of business school (B-school) or
management education institution: Understood that B-school training could enhance
the proportion of successful amongst the entrepreneurs, there is a larger possibility of
employment generation in the successful enterprises. It can help also many of the
people who are employed in public and private sector often want to do something,
which they consider their own.
6. Additional advantage compared to training by others than a B-school: B-School
training widens a person’s horizon. It imparts the trainee an all round knowledge of
business and makes him sensitive to all its facets. It gives him strong conceptual
skills, which coupled with experience forms a recipe for success. B-Schools can
bring industry experience into the classroom. These are the people who can give a
contemporary perspective in academia
xxx
.
6. Additional costs of the proposal
There are two prime costs:
1. Insurance cost: This aspect is addressed in point 2 in the previous section.
2. Physical costs comprising government contribution to business insurance of SSI
and fees to AIs: The first one will add to premium collection of banks, which will be
invested in long run projects mostly as per investment norms for insurance sector.
The second one is the price of quality of enterprise. But over time the premium as a
percentage of the assured sum may come down because of competition in the
deregulated and liberalized insurance industry.
16
3. Moral hazard: the banks have to build up strong investigation machineries for
occurrence of spurious incidents insured against. It is a part of life in any insurance
business.
7. Conclusion
This article tries to seek a solution to the problem of NPA in the present
circumstances of banking and insurance working together under the same roof.
Insurance is a supplementary tool, which can minimize the chance of business failure
as well as minimize moral hazard. Implementation of this system calls for a high
degree of flexibility in the rules and guidelines of the banks. In the proposed system
there is a potential of flourishing banking-cum-insurance business of the banks
because the percentage of successful entrepreneurs shall rise here and banks would
be able to sell various life and non-life insurance products to the entrepreneurs and
their families. As these entrepreneurs expand, diversify and technically upgrade
business, banks can give more loans and earn interest. The AIs have to take up the
tasks of selection of right people and appraisal, monitoring and follow up of projects.
Banks will concentrate on what is their business. What is stressed in this article is the
pressing need of the small-scale entrepreneur for becoming aware and educated in
modern business management holding a professional attitude toward rational
decision-making and banks have to facilitate that process as a part of the credit
policy sold by them.
References
Acs Z.J. and Audretsch D.B (1991): Innovation and Small Firms, MIT,
Massachusetts
Acs Z.J and Audretsch D. B. ed. (1990): The Economics Of Small Firms - A
European Challenge, Kluwer, London, p 11
Barber J., Metcalf S. and Porteous M. (1989): Barriers to Growth: The Arcade Study,
in Baber J., Metcalf S. and Porteous M. ed. (1989): Barriers to Growth in Small
Firms, Routledge, New York
Bhaumik S.K. and Mukherjee P (2001): “The Indian Banking Industry – A
Commentary”, Social Science Research Network Working Paper, Harvard
Black J (2002): Oxford Dictionary of Economics, Oxford University Press, Oxford,
2
nd
Edition, p 15
Business India (2002). Editorial, April 15-28, 2002,
http://www.businessindiagroup.com/bi-editorial.aspx
Butler B., Butler D. and Issacs A. ed. (1997): Oxford Dictionary of Finance and
Banking, Oxford University Press, Oxford, 2
nd
edition, p 17
17
Desai V. (1999): Small Scale Enterprises, Volume 12, Himalaya, Mumbai,
Chapter14
Dignard L. and Havet J (1995): Women in Micro and Small Scale Enterprise
Development, Westview, London, Chapter 10
Harper M. and Vyakarnam S. ed. (1988): Rural Enterprise Case Studies from
Developing Countries, Intermediate Technology Publications, London
Little I. M. D (1987): “Small Manufacturing Enterprises in Developing Countries”,
The Word Bank Economic Review, Volume 1, Number 2
Mehta M.M and Das M. K (2003): “Non performing Assets and Prevention and
Detection of Bank Frauds”, Center for Studies in Banking and Finance Workshop,
National Law University, Jodhpur, pp 87-90
Rahman A. and Khan S (1989): “Abstract of the Country and Case Studies: India” in
Kaneslingam V. ed. (1989): Appropriate Technology for Rural Industries - The case
of South Asia, Tata McGraw-Hill, New Delhi.
Reserve Bank of India (2003). Report on Trend and Progress of Banking in India
2002 – 03,
https://www.rbi.org.in/Scripts/Publications.aspx?publication=Annualwww. rbi.org
Reserve Bank of India (2002) Circular DBOD No. BP. BC. 1 / 21/04.048 / 2002-03,
4 July, 2002, https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7358
Reddy P. K (2002): A Comparative Study of the Non Performing Assets in India in
the Global Context, Indian Institute of Management Ahmedabad Working Paper.
https://www.scribd.com/doc/76610492/A-Comparative-Study-of-Non-Performing-
Assets-in-Indian-Banking-Industry
Varian H (1992): Microeconomic Analysis, Norton, New York, 3
rd
Edition, Chapters
11 and 25
Wignaraja G. ed. (2003): Competitive Strategies in Developing Countries,
Routledge, London, Ch 2
Endnotes
i
This was revealed by a study on small enterprises in India and Colombia conducted by World Bank
and by relevant documents from other countries - Little I. M. D (1987): “Small Manufacturing
Enterprises in Developing Countries”, The Word Bank Economic Review, Volume 1, Number 2
ii
Report on Trend and Progress of Banking in India 2002 – 03, Reserve Bank of India
iii
The names of the officials are given in the end of the paper with their respective departments.
iv
An asset is any object tangible or intangible, which is of value to its possessor. In most cases it is
either a cash or can be turned into cash; exceptions includes prepayments, which may represent
18
payments made for rent, rates or motor licenses in cases in which the time paid for has yet not been
expired. Tangible assets include land and debtors and cash; intangible assets include goodwill,
patents, copyrights and trademarks. For capital gain tax purpose an asset consists of all forms of
property, whether at the home country abroad including options, debts, incorporeal property, currency
(other than sterling), and any form of property either created by the person disposing of it or owned
without being acquired. It must however consist of some form of property for which a value can be
ascertained. Some assets are exempt from capital gain tax. Asset value is the total value of assets
minus value of liabilities divided by the number of ordinary shares issued. Asset management is the
management of financial assets of a company to maximize return on investment. Asset stripping is
acquisition or takeover of a company whose shares are valued below their asset value - Butler B.,
Butler D. and Issacs A. ed. (1997): Oxford Dictionary of Finance and Banking, Oxford University
Press, Oxford, 2
nd
edition, p 17
Economists classify assets into real and financial assets. Real assets include land, buildings or
machinery owned. Financial assets include cash and securities and credit extended to customers. The
assets side of a company’s balance sheet includes both real and financial assets. Asset is also used in
metaphorical and usually favorable sense to describe things that cannot actually be owned, e.g. the
phrase “a company’s best assets are the skill and loyalty of its employees” - Black J (2002): Oxford
Dictionary of Economics, Oxford University Press, Oxford, 2
nd
Edition, p 15
v
Reserve Bank of India circular DBOD No. BP. BC. 1 / 21/04.048 / 2002-03, 4 July, 2002
vi
A comparative picture of measures taken in India vis-à-vis other East Asian Economies troubled by
the NPA problem is available in Reddy P. K (2002): A Comparative Study of the Non Performing
Assets in India in the Global Context, Indian Institute of Management Ahmedabad Working Paper. It
is given in the end of the paper.
vii
Mehta M.M and Das M. K (2003): “Non performing Assets and Prevention and Detection of Bank
Frauds”, Center for Studies in Banking and Finance Workshop, National Law University, Jodhpur, pp
87-90
viii
The list of different categories of the banks is given in the appendix. New private sector banks are
not considered here because of convenience in comparison. During 2000-01, data of NPA with these
banks are not available. Again before 2000-01, NPA figures are not available.
ix
http://www.banknetindia.com/banking/0448.htm, visited on 27.08.04
x
Wignaraja G. ed. (2003): Competitive Strategies in Developing Countries, Routledge, London, Ch 2
xi
Varian H (1992): Microeconomic Analysis, Norton, New York, 3
rd
Edition, Chapters 11 and 25
xii
http://www.sbaer.uca.edu/Research/1998/ICSB/n009.htm, visited on 13 April 2002
xiii
Desai V. (1999): Small Scale Enterprises, Volume 12, Himalaya, Mumbai, Chapter14
xiv
Bhaumik S.K. and Mukherjee P (2001): “The Indian Banking Industry – A Commentary”, Social
Science Research Network Working Paper, Harvard
xv
Supra no 13
xvi
Rahman A. and Khan S (1989): “Abstract of the Country and Case Studies: India” in Kaneslingam
V. ed. (1989): Appropriate Technology for Rural Industries - The case of South Asia, Tata McGraw-
Hill, New Delhi.
xvii
Supra no 16
xviii
Marketing skill is very important for the SSI. In the phase of shift of consumers’ preferences from
standardized mass product goods towards stylized and personalized goods, the SSI can, through
proper marketing activity carve out small niches where giant firms are not comfortable - Acs Z.J. and
Audretsch D.B (1991): Innovation and Small Firms, MIT, Massachusetts
xix
Empirical investigation into the Rural Planning Department (RPD) as well as the Department of
Banking Operation and Development (DBOD) of the Reserve Bank of India, Headquarter, Fort,
Mumbai gives the glimpse of the fact that the apex bank of the country is yet to have serious concerns
in this regard of the fact that the quality of entrepreneurship affects the quality of bank loan. Naturally
the circulars and guidelines sent to Scheduled Commercial Banks (SCBs) by the RBI and various
credit policies are required to take into consideration this issue.
xx
The details of the websites are given in the end of the article.
xxi
For example, Executive Education Program, Management Development Program, Advanced
Education Program or Foreign Trade Management Program or else the banks have to arrange it with
some institutions. These are conducted by IIM Lucknow, Gurgaon based Management Development
19
Institute and IIFTM of GOI respectively or themselves are taking training from institutions like
Entrepreneur Development Institute (EDI), Gujarat.
xxii
Editorial, Business India, April 15-28, 2002
xxiii
EDI is a wholly autonomous and not-for-profit institution, set up in 1983, is sponsored by apex
financial institutions, the Industrial Development Bank of India (IDBI), the Industrial Finance
Corporation of India (IFCI), the Industrial Credit and Investment Corporation of India (ICICI) and the
State Bank of India (SBI). The Government of Gujarat pledged twenty-three acres of land on which
stands the majestic and sprawling EDI campus. The EDI has been spearheading entrepreneur
movement throughout the nation with a belief that entrepreneurs need not necessarily be born; they
can be developed through well-conceived and well-directed activities. Over the year, EDI has
designed and conducted Training Programs on skill development and attitude development of bank
managers and officers engaged in project appraisal as also the entrepreneur behind-the-project. Some
of its important programs, directed towards achieving this objective are Training Program on
Industrial Project Preparation and Appraisal (IPPA), Training Program on Financial and Economic
Analysis of Industrial and Infrastructure Projects using Computer Model for Feasibility Analysis and
Reporting (COMFAR III) Expert and Training Program on Assessing the Entrepreneur using Focused
Behavioral Event Interview (FBEI) technique. These programs have received encouraging response at
national as well as international level. The Institute has received support from the World Bank, ILO,
UNIDO, Commonwealth Secretariat, Friedrich-Naumann-Stiftung (FNSt), European Union and
several other international agencies. Its international activities cover a range of entrepreneurship and
investment promotion-related training programs/ workshops. Ever since its inception in 1983, the
Institute has interacted with 30 developing countries thus helping them build capabilities for industrial
development. So far, over 1,000 professionals from developing countries have benefited from EDI's
capacity building programs including the one on Industrial Project Preparation and Appraisal co-
sponsored by UNIDO. The EDI Inter-Regional Centre (IRC) is the result of UNIDO’s strategic
thinking that innovative methodologies should be transferred to developing world through regional
institutions with proven skills in the area of entrepreneurship and investment promotion. EDI is also a
partner institution with proven skills in the area of entrepreneurship and investment promotion. EDI is
also a partner institution for implementation of the European Union Economic Cross Cultural
Program-ENTRIXIE Project (Entrepreneurship Training and Information Exchange for Small
Businesses in India and Europe), especially set up to promote partnerships among the SMEs (small
and medium enterprises) of India and Europe. EDI has an international network that has been
continuously benefiting the entrepreneurs from thirty developing countries starting from Afghanistan
through Vietnam to Zambia. Because the institutions like EDI are not enough to work all over the
country others like institutions like Management Faculties of the universities, IIMS and other
established business schools can share the task.
http://www.evishwagujarati.net/egupdate/edu/egguj.html, 13 April 2002
xxiv
As per Knight (1921), entrepreneurs must finance themselves and bear the risk of their failure. His
superior foresight must be accompanied by willingness to bear risk. Again as per McClelland (1961),
who becomes an entrepreneur is determined not by personality but by entrepreneurial ability and the
extent to which individuals form accurate estimates of their entrepreneurial abilities - Acs Z.J and
Audretsch D. B. ed. (1990): The Economics Of Small Firms - A European Challenge, Kluwer,
London, p 11
xxv
These are required for survival, sustenance and growth of small as found in U.K and India - Barber
J., Metcalf S. and Porteous M. (1989): Barriers to Growth: The Arcade Study, in Baber J., Metcalf S.
and Porteous M. ed. (1989): Barriers to Growth in Small Firms, Routledge, New York
xxvi
Materials contributed by the participants in the Cranfield course on the promotion of small
enterprises in developing countries conducted by the Enterprise Development Centre, Cranfield
School of Management explain the importance of market research and relative importance of
sociology vis-à-vis general demography of the market area for the purpose of proper understanding of
market needs - Harper M. and Vyakarnam S. ed. (1988): Rural Enterprise Case Studies from
Developing Countries, Intermediate Technology Publications, London
xxvii
http://www.indiainfoline.com/bisc/sibmalumni01.html, visited on 20 April 2002
xxviii
Nowadays credit control along with outstanding collections is recognized as a separate skill -
Business India, Mumbai, April 29 – May 12, 2002, p142.
20
xxix
Dignard L. and Havet J (1995): Women in Micro and Small Scale Enterprise Development,
Westview, London, Chapter 10
xxx
Supra number 28
__________
doc_914877482.pdf