Experience = Best Teacher?
US is still grappling. Greece was almost knocked out dead, only to be saved by a strand. Italy has already shaken the world over. Spain is already cornered. Portugal, Japan, France are in queue. Japan is no longer the athletic economy it used to be. Often standing still and sometimes contracting, with the frequent natural calamities not being helpful either. Pakistan never had an economy. Russia always had only a black economy. If reports are to be believed, with the retirement of China's golden generation, it will house chunk of world's pensioners. Though they are paid, there is no productivity, and hence China may even struggle to grow, leave alone the frentic pace it is known far. Despite devaluation of their currency. Despite their military threat. Despite their new found expertise in arms trading.
Half the world economy is still in tatters.
Who is next on the hit list? India? May be. We may still escape. It depends. On lot of things. Which are "WITHIN" control.
Some People "N"ever "P"ay "A"ttention
During my first brush with Commerce education, I read and was taught that Finance is the life blood of a business. Great business ideas, with potential to dominate the market, will bite the dust, if the firm's finances are not managed properly. Examples are many. Popular ones are always found in the auto sector. As part of my initial Commerce education, I also learnt about the role of "Banks" in building business, and developing an economy.
This post is about a particular practice at Banks, which has a potential to "hide" or "ignore" or "brush aside" a very pertinent information, which may eventually lead the Country, or any Country for that matter, the way legendary or mythical pied piper led the rats, and eventually the kids.
In the language of banking, the issue relates to reporting and disclosure of NPA. For people who don't speak that language, it refers Non Performing Advances i.e. those loans given by the Bankers which have turned bad or in the process of becoming one, and eventually may become uncollectible at all.
The very common topic, openly discussed, yet never considered seriously, is this aspect of reporting of NPAs. Bank Officials ranging from a low level staff to a Senior people in the Management, are in a hurry to brush this aside. The external agents like the Auditors are also happy accomplices to this act of consented omission. People don't seem to realize the significance of this reporting mechanism. Even the persons to whom it is reported to live a life of denial.
What is NPA?
A lecture on what is NPA with all the technical words thrown around would invite more wrath than a para full of expletives. I'll try explaining it in simple language.
In a class of 30 students, a teacher would generally not worry too much about the top scoring students. A regular watch should be adequate, and not a full fledged review on their performance. However, the teacher would like to direct her watchful eyes and efforts on the low scoring students, and try and make them perform better. Else, they may not succeed when it matters, and worse, they might end of quitting education itself.
These low scoring students can be equalled to an NPA. A loan which is not performing at all. Regularity in interest payment, and payment of all dues is what performance is all about.
Why NPA?
Its a signal, to keep a watch, and take corrective action at a very early stage. Or atleast as early as possible. It may become a terminal illness if not attended to at an early stage.
No business in this world runs without money, and most, not just many, of them run only with the support of banks and financial institutions. Without adequate money, business will be royally screwed. And banks and financial institutions lend on a belief that it will be put into use productively, and the same will be refunded with all the interest dues. Most of the banks fund their money from Public Deposits and External Borrowings and the capital contributions of the investors. Which means that when somebody borrows money from a Bank, it is not just Banks who are interested in the eventual collection of money, but some many other people ranging from investors, lenders and the Government.
We all know that you can't really do anything once the patient is dead, nor can you do anything realistically when the patient is in terminal stages, you look out for some early symptoms, based on which we can avert most, even if not all, eventualities. Unless the symptoms are observed and noted, nothing can be done.
Non Payment of Interest and / or principal components of a loan is a signal that the borrower is in some sort of trouble, or intends to create one for the bank. These are the symptoms which are to be looked into by the Bankers, and to take corrective action. These are the information which they are required to pass on to the policy level decision makers such as the RBI and Central Government. This aspect is understood and accepted by everybody.
The Challenge
The difficulty is in recognizing its significance, and actually reporting the symptoms to the powers than can make a difference. Even more difficult is to convince the people, who are aware of the acuteness of the issue, but reluctant to put down on paper.
The usual response to the insistence of their disclosure is that such loans are definitely recoverable or such disclosure would adversely affect their performance and promotion opportunities etc. In many cases the Auditors too lack the will to ignore the persuasions of the Bankers. Including yours truly, who has played sometimes Dr. Jekyll and sometimes Mr. Hyde to perfection over the past ten years.
And funnily both the Bankers and external Auditors blame each other for the mess and send conflicting signals to one another. For instance, the Bankers, while addressing the Auditors in a meeting, will insist on accuracy and transparency. They do insist that all reporting may please be done as per the actual records available. Auditors also respond saying that there is often no or little support from the bank in these regard.
Fast forward to the actual audit activity. The staff at the Bank / Financial Institution do keep on feeding the Auditor's mouth to ensure that their mouth is otherwise engaged. Over a few days of effective blocking and selecting release of documents, the entire audit is often rendered ineffective.
And strangely, despite this, the external fellows do make some real interesting and hard hitting observations. Thats is when they get the maximum attention and are asked to tone down the reports. When you refuse, the holy cow which first addressed you with all the moral high handedness will literally lick your boot to ignore the observations on NPAs and documentary deficiencies. And the sucker of the external auditor, either cows down to the demand fearing future loss of income or tones down thinking he has won the battle of wits.
End of the day, very few instances are actually reported. And thereby the signals that reach the critical decision makers of the country / economy are one of camp fire rather than forest fire.
Nipping in the Bud
And then there are instances when loans are sanctioned to unjust and financially not feasible projects. I am not referring to the start ups and novel ideas floated by unknown individuals and group of first generation entrepreneurs. Such proposals definitely will have risks due to various known and unknown factors. There banks and venture capital investors do take a chance. Have to take a chance. One can't argue too much against such investments.
I am referring to people who are already in business and their very proposals for expansion and / or investment in related business, is an amalgam of too many "ifs" and "buts" rather than hard facts. And the hard facts are such that investment into their proposals is doomed from day one.
How do these projects get funded then? Fudging of records. Optimistic projections in to the future. Tactfully and fraudulently convincing the powers that influence the disbursement. Bribing the sanctioning authority. End of the day, one person's indiscretion pulls down the wealth of lot many individuals.
The Solution
There are two aspects to the solution. First one is integrity and independence of those involved. Starting from the Banker first, to the Statutory / External Auditors. If these two people are strong enough in their field, and stand by their observations to follow the rule come what may, not worrying about possibility of losing out on future income or promotions, as the case may be, the larger part of the trouble will be over.
This would most certainly mean, some of the loan proposals never cross the banking red tape, but then it would eliminate almost 90% of the bad debts, which brings down the entire economy. The proposals with greater degree of uncertainty may be funded / financed by either Venture Capital Companies or other forms of Financial Institutions, who do not involve the general public as part of their source of financing. Banks need not fund such high risk projects as a social obligations. With such high risks, they are not of any benefits to the society either.
People involved should stop this holy cow posturing and start acting properly. This applies to both the Bankers and External Auditors. They should be given a lesson on all the world economy collapses, and made to realize their role in the entire affair. They should be made to understand the philosophy of "Garbage In Garbage Out". When you give poor inputs to the decision maker, the decision is definitely going to be wrong. You need not wait for the results to know that it is wrong.
Second, lets make the banking as stale and sober as possible. As Paul Krugman, Economist and Nobel Laureate, once noted in a column in a magazine, "Banking should be boring business."
The larger part of the trouble, more than greed and inefficiency, is the lack of focus. Gone are the days, when the core activity of Banks and Bankers used to be Financing - Lending to eligible borrowers and seeking deposits. Today Banks double up as Insurances Sales Point, Property Sale Point, Telephone Bill Collection etc. Bankers are no longer the traditional bankers. They are Marketing Managers, who make high pitched sales promotion of their exotic products / services. They have no clue about the actual banking activity. They have little awareness about the business of their clients. They don't monitor the customer's activities, for they are busy sending reports to their Head Office.
The above two need not be the only solution. There can others, with lot more validity. But the bottom line, whatever be the solution, should be aimed at transparency and responsibility in core banking activities, without which I wouldn't be surprised if India is also pushed to the doors of international bankers begging for alms and financial support.
Note: The trigger for the above post are two - (a) Personal experiences at various bank branch audits and work done for financial institutions over the past decade, both as a professional and a student. (b) An input from known person, who was witness to almost a crore of rupees being exchanged for sanctioning of a loan which every body knew would turn bad.
 |
| Almost There.... |
Half the world economy is still in tatters.
Who is next on the hit list? India? May be. We may still escape. It depends. On lot of things. Which are "WITHIN" control.
Some People "N"ever "P"ay "A"ttention
This post isn't about these countries, though. It isn't about predicting monumental collapse of world economy, or about any financial apocalypse.
During my first brush with Commerce education, I read and was taught that Finance is the life blood of a business. Great business ideas, with potential to dominate the market, will bite the dust, if the firm's finances are not managed properly. Examples are many. Popular ones are always found in the auto sector. As part of my initial Commerce education, I also learnt about the role of "Banks" in building business, and developing an economy.
This post is about a particular practice at Banks, which has a potential to "hide" or "ignore" or "brush aside" a very pertinent information, which may eventually lead the Country, or any Country for that matter, the way legendary or mythical pied piper led the rats, and eventually the kids.
In the language of banking, the issue relates to reporting and disclosure of NPA. For people who don't speak that language, it refers Non Performing Advances i.e. those loans given by the Bankers which have turned bad or in the process of becoming one, and eventually may become uncollectible at all.
The very common topic, openly discussed, yet never considered seriously, is this aspect of reporting of NPAs. Bank Officials ranging from a low level staff to a Senior people in the Management, are in a hurry to brush this aside. The external agents like the Auditors are also happy accomplices to this act of consented omission. People don't seem to realize the significance of this reporting mechanism. Even the persons to whom it is reported to live a life of denial.
What is NPA?
A lecture on what is NPA with all the technical words thrown around would invite more wrath than a para full of expletives. I'll try explaining it in simple language.
 |
| Results of Reckless Lending and Opaque Business Practices |
These low scoring students can be equalled to an NPA. A loan which is not performing at all. Regularity in interest payment, and payment of all dues is what performance is all about.
Why NPA?
Its a signal, to keep a watch, and take corrective action at a very early stage. Or atleast as early as possible. It may become a terminal illness if not attended to at an early stage.
No business in this world runs without money, and most, not just many, of them run only with the support of banks and financial institutions. Without adequate money, business will be royally screwed. And banks and financial institutions lend on a belief that it will be put into use productively, and the same will be refunded with all the interest dues. Most of the banks fund their money from Public Deposits and External Borrowings and the capital contributions of the investors. Which means that when somebody borrows money from a Bank, it is not just Banks who are interested in the eventual collection of money, but some many other people ranging from investors, lenders and the Government.
 |
| The Most Meaningful Symbol For The Rupee |
We all know that you can't really do anything once the patient is dead, nor can you do anything realistically when the patient is in terminal stages, you look out for some early symptoms, based on which we can avert most, even if not all, eventualities. Unless the symptoms are observed and noted, nothing can be done.
Non Payment of Interest and / or principal components of a loan is a signal that the borrower is in some sort of trouble, or intends to create one for the bank. These are the symptoms which are to be looked into by the Bankers, and to take corrective action. These are the information which they are required to pass on to the policy level decision makers such as the RBI and Central Government. This aspect is understood and accepted by everybody.
The Challenge
The difficulty is in recognizing its significance, and actually reporting the symptoms to the powers than can make a difference. Even more difficult is to convince the people, who are aware of the acuteness of the issue, but reluctant to put down on paper.
The usual response to the insistence of their disclosure is that such loans are definitely recoverable or such disclosure would adversely affect their performance and promotion opportunities etc. In many cases the Auditors too lack the will to ignore the persuasions of the Bankers. Including yours truly, who has played sometimes Dr. Jekyll and sometimes Mr. Hyde to perfection over the past ten years.
And funnily both the Bankers and external Auditors blame each other for the mess and send conflicting signals to one another. For instance, the Bankers, while addressing the Auditors in a meeting, will insist on accuracy and transparency. They do insist that all reporting may please be done as per the actual records available. Auditors also respond saying that there is often no or little support from the bank in these regard.
Fast forward to the actual audit activity. The staff at the Bank / Financial Institution do keep on feeding the Auditor's mouth to ensure that their mouth is otherwise engaged. Over a few days of effective blocking and selecting release of documents, the entire audit is often rendered ineffective.
And strangely, despite this, the external fellows do make some real interesting and hard hitting observations. Thats is when they get the maximum attention and are asked to tone down the reports. When you refuse, the holy cow which first addressed you with all the moral high handedness will literally lick your boot to ignore the observations on NPAs and documentary deficiencies. And the sucker of the external auditor, either cows down to the demand fearing future loss of income or tones down thinking he has won the battle of wits.
End of the day, very few instances are actually reported. And thereby the signals that reach the critical decision makers of the country / economy are one of camp fire rather than forest fire.
Nipping in the Bud
And then there are instances when loans are sanctioned to unjust and financially not feasible projects. I am not referring to the start ups and novel ideas floated by unknown individuals and group of first generation entrepreneurs. Such proposals definitely will have risks due to various known and unknown factors. There banks and venture capital investors do take a chance. Have to take a chance. One can't argue too much against such investments.
I am referring to people who are already in business and their very proposals for expansion and / or investment in related business, is an amalgam of too many "ifs" and "buts" rather than hard facts. And the hard facts are such that investment into their proposals is doomed from day one.
 |
| Best Business Practices of the World (Quoting past FM of India) (Out of Context, Of Course!) |
How do these projects get funded then? Fudging of records. Optimistic projections in to the future. Tactfully and fraudulently convincing the powers that influence the disbursement. Bribing the sanctioning authority. End of the day, one person's indiscretion pulls down the wealth of lot many individuals.
The Solution
There are two aspects to the solution. First one is integrity and independence of those involved. Starting from the Banker first, to the Statutory / External Auditors. If these two people are strong enough in their field, and stand by their observations to follow the rule come what may, not worrying about possibility of losing out on future income or promotions, as the case may be, the larger part of the trouble will be over.
This would most certainly mean, some of the loan proposals never cross the banking red tape, but then it would eliminate almost 90% of the bad debts, which brings down the entire economy. The proposals with greater degree of uncertainty may be funded / financed by either Venture Capital Companies or other forms of Financial Institutions, who do not involve the general public as part of their source of financing. Banks need not fund such high risk projects as a social obligations. With such high risks, they are not of any benefits to the society either.
People involved should stop this holy cow posturing and start acting properly. This applies to both the Bankers and External Auditors. They should be given a lesson on all the world economy collapses, and made to realize their role in the entire affair. They should be made to understand the philosophy of "Garbage In Garbage Out". When you give poor inputs to the decision maker, the decision is definitely going to be wrong. You need not wait for the results to know that it is wrong.
Second, lets make the banking as stale and sober as possible. As Paul Krugman, Economist and Nobel Laureate, once noted in a column in a magazine, "Banking should be boring business."
 |
| Money can sink. And It'll take you along. |
The above two need not be the only solution. There can others, with lot more validity. But the bottom line, whatever be the solution, should be aimed at transparency and responsibility in core banking activities, without which I wouldn't be surprised if India is also pushed to the doors of international bankers begging for alms and financial support.
Note: The trigger for the above post are two - (a) Personal experiences at various bank branch audits and work done for financial institutions over the past decade, both as a professional and a student. (b) An input from known person, who was witness to almost a crore of rupees being exchanged for sanctioning of a loan which every body knew would turn bad.
Comments
Actually, mere concentration on core banking activity alone will not solve the problem. (Even though I would like to believe it will) Most bankers these days are not trained on banking at all. They are just treasury managers or cash collectors.
2. Also, Knowing a person from audit office of a bank, our people are simply put unwilling to work in the banking sector. "U tell this, i do only that, u dont tell anything, I dont do anything, U tell everything, still I do only what i wish" attitude is a general attitude that is going to hurt this country as a whole big time. Especially in audit offices where the data gets diluted in translation.
3. Ppl join banks thinking, their job imagining 7.5 hrs of freetime. That sucks!
4. Promotions are given to ppl irrespective of their performance. I ve seen a few Chief Managers of banks, who do all notorious things to sanction facilities and pass on the burden to their successors to fix.