The Debate on Banking and NPAs
By: Amit Bhushan Date: 4th July 2018
The debate on Banks and NPA related issues seems to have become hotter, than previous. This even as such debates remain in print and often on center pages rather on front and idiot box giving this a complete miss. People are exploring rationale of having too many similar institutions under same owner viz. the government and mimicking each other, rather than differentiating from each other. Earlier when these institutions were smaller, they had focus geographies but that practice gave way due to many reasons, one being to improve the access of banks to ordinary people. Now such institutions seem to be competing although this competition is limited to deposits only whereas for loans, it’s still about ability to strike deals by reaching out at the opportune time, especially for financing of the MSMEs and Corporate segments. That’s the story and happens at a striking regularity in most Public Sector Banks, whereas the private sector would also play ball albeit with a varying degree of caution. In fact with the advent of new technologies and its adoption by banks, the physical branches seem to be having a decreasing importance unless they are helping to solicit new business for the banks. Most banks would have Industry sector focused teams and geographic coverage focused teams and a similar cache of product offerings in their portfolio with little distinctions. And apparently, all of these are operating in market with a view to underwrite a limited amount of measurable risks and keep the interest of depositors in mind while conducting business.
Yet we have a situation where MSMEs would say that the banks really don’t understand them or their needs and as far as Corporates are concerned even bankers would agree that their structure is far too complex and businesses far too specialized for the banks to be able to understand these corporates. In spite of this, the loans to MSMEs and Corporate together accounts for approx. 50% of the banking sector’s books. So, what comes out is that banks having been making ‘all these relatively safer loans to the MSMEs and Corporates’ without much understanding of the risks. This is because every bank would claim to be following the nearly the same rules of credit governance and risk measurement as the banks which have been rather unscathed. So it’s about the leadership in these institutions, the attitude of people in key positions and focus on development and nurturing of the required competencies at these bank. Also, we don’t have any institutions which have relied on higher risk, higher rewards model or those focused upon select sectors or even those just about bank select groups and how have these fared. The fact is despite of chaos in bank, the Cooperative banking sector stands without any specific further deterioration should be an eye-opener. Even if the Cooperative banking sector has never been in ‘good shape’ from customers’ perspective, however in a chaos it was expected to collapse; but that has not happened. This is in spite of steps like demonetization and other steps like GST, which was predicted to have very strong impact on borrowers for such banks.
What it tells is that there is room for players which are managed differently and operate with a different strategy using different products, working on different opportunities offered by the markets. This is especially so, if such players could be well governed, tech friendly and professional to core rather than struck with ‘attitudinal issues’ and old habits. However what we have witnessed instead is that the New Age Private sector banks leading in technology including in ‘attitudes’ about ‘how to govern/manage the banks’ and most of the institutions whether new or old following the footsteps. This is true for not only all private institutions whether old or even those which are newly coming up, but even the PSU banks trying to mock the same ‘Best Practices’. Competencies or the lack of them and people’s attitude especially towards risk, thus takes over to decide the quality of underwriting as there are limited number of ‘good borrowers’ being chased and an overall dearth mechanisms to be adopted to segregate borrowers to different financeable buckets and chased through differentiated products priced suitably. In such scenario, the tendencies of adverse selection thrives since people tend to focus for a shorter term.
There are very few portfolio level experiments or studies to dissect MSMEs and Corporate loan portfolios to a more granular level and which can help make new discoveries around products, policies as well as pricing abilities for the bank to make such loans available. What is meant here, is that if there is a high growth industry sector in need of sustainable credit flows, then it may be able to so at possibly a higher rate of interest and make this by maintain some good margins from its customers. However, banks including large ones have failed to make identifications of such industrial sectors, understood drivers for these parameters and brought in products and policies that are amenable to the banks and also supportive of such growth. While some may blame the central bank for a lack of direction in this regards, however the banks are now free to make their own credit policies with an underlying undertaking that this would protect the interests of depositors and follow mandatory norms. Under normal circumstances, this should have spurred innovation, however dominance of PSUs has ensured that we have bureaucratic lethargy and rather than looking at policy and procedure level innovations, the corruption has brewed. The private sector has just managed the corruption issue rather well including absorption of technology, but not any innovative policy level approach to credit, barring may be in personal finance segments like housing, vehicle etc. And while we have had many debates, it is only now that things are being looked at a more granular level, however we still have just the leaders giving voice to what was already being said in these ‘Game’ articles, and any solutions or suggestions towards the same is still further away. Let the ‘Game’ evolve….