Reservation System

Friends

Reservation issue for Patels is hotting up in Gujarat. Recently same issue was raised in Rajasthan by Gurjars. We can expect similar agitations in other states too. Typically , this time farmer community is waking up for reservation. This who are already in reserve category are resisting entry of new castes and those out side are trying their level best to enter into the reserved ring. 

I am not against reservation but the format is age old and needs to be revised. The basis should be economic condition not the caste. Why well established Dalits/SC/ST should not opt for non reservation. This will help others. Those in high post of Government Job should do.Every gazetted officer should be asked to opt out of reservation quota.  It is enough now. Think beyond vote politics.Let us Start with All IAS and IPS and other A class Government Officers. 

Also, the reservation should not be given for higher education and promotion. Another suggestion is that reservation benefit should be given once in lifetime to a person. Those economically poor should be given reservation benefit to uplift them. 

C P

Mounting NPAs: What Went Wrong (WWW)? Part-4: Political Compulsions & Corruption

Friends

In addition to the factors analysed in previous posts responsible for disaster in the Banks in the form of NPAs and Stressed accounts i.e. a)Fast development of Banking industry; and b) Sudden Growth in Indian Economy, I would like share my views on one more major cause that led to huge losses to the Banks. This important factor was “Political Compulsions and Corruption”. Congress Government under the leadership of Mr. P.V. Narsimha Rao introduced liberalization to the economy. It was major turning point for the country and helped a lot to this party in ruling the country. They were encashing this very meticulously by branding other parties either communist or dumb in economics.

Under new environment of liberalization, the economy was taking new shape and offering lot of opportunities to the domestic and overseas players. The volume of money was too much and luring the people from all walks. Political parties had started looking at economics as intelligent and smart players. They understood their importance in policy framing, decision making, appointments and fund raising. They started interfering in banking systems, guiding and helping the business community in sourcing finance. These activities were root cause for rampant corruption in the system.

Then in 1999, NDA Govt. came under the leadership of Mr. Vajpayee who inherited the fast growing economy and huge opportunities to develop. Infrastructure was the focus and huge investment was required in Infra, Power and Telecom, which would not have been possible without government support. These developments somewhere not only forced the banks to lend aggressively but also liberally. It was the beginning of corruption and defaults too. The surprise exit of NDA made the new UPA government overconfident. The power to new group was for next 10 years. The failure of opposition parties to control the ruling parties (may be some nexus, I don’t know) was quite visible. It was the public at last who threw away this group from power and again gave opportunity to NDA under Mr. Modi.

Thus developments from 1999-2013, Interference of political parties in lending money, appointments and policy making resulted into sharp increase of lending. This was not done judiciously and hence huge chunk of lending became non performing. Bureaucrats and politicians for their personal benefits put the banks in big problem. Corruption was rampant, we can’t deny its existence today even, which to a great extent is the major factor responsible for NPAs. Compulsion of moving fast and feed the requirement of funds to the economy also lured for lending very liberally.

Government should give serious thought before giving money to the Banks and ensure that necessary precautions are taken as this is poor public’s money which has been given in past too. In fact, large part of such infusion drains out in due course and again the demand for more infusion is raised by the Banks. It gives me the memories of Ram Leela where in Kumbhkaran demands continuously huge quantity of food after waking up. Better the Government wakes up at least now and control this drainage of funds.

CP

Mounting NPAs: What Went Wrong (WWW)? Part-5: Overambitions/Greed of Entrepreneurs

Friends

To conclude my views over mounting NPAs , last but not the least key factor lies with the borrowers. The golden opportunity for Indian entrepreneurs in liberalised economy post 1991 was unprecedented. Suddenly many new sectors particularly with high capital intensive like telecom, finance, infrastructure, global trading, logistics and engineering opened up. The domestic players were further pushed by overseas players and thus the economy started growing day and night. Those who could perform were more greedy to grow faster  and those who were left behind did anything required to manipulate. Lot of borrowers defaulted due to over ambitious planning and miscalculation. Greed of the borrowers sabotaged the  banking system. They were aware of the prevailing legal system which acts as shield for the borrowers. Easy availability of funds, lethargic legal process, manipulative practices of the borrowers, corruption, growing economy and uncontrolled banking growth were the key factors for ever mounting NPAs. 

Unfortunately, we have not yet learned the lesson from this and continue to ignore these facts. We believe in short term vision where infusion of funds in phases to take care of survival of banks is made by the respective governments. 

A detailed Corrective Action Plan (CAP) is required at the highest level to avoid any future growth in NPA which is possible only with honest and intelligent actions. In our country top 20 borrowers have exposure to the extent of 20% of total lending portfolio which in itself very sensitive issue and needs to be handled very judiciously.

I will share my views on various suggestions to control NPAs in next posts.

CP

Mounting NPAs: What Went Wrong (WWW)? Part-3: Sudden Growth in Economy

Friends, In continuation of my earlier post for mounting NPA, I wish to share my views in regard to various factors. Here is the second major factor i.e. Sudden Jump in Economy:

Post liberalization, the economy started vibrating tremendously and this led to freeing various sectors of the Economy particularly Finance , Infrastructure and Industry. Without sufficient Funds, it was not possible to move forward. Funds started flowing from overseas markets, Share Markets witnessed sharp increase in volumes and every penny brought in as Equity was used to raise debt more than 3 times. This made the debt market blast like anything. Now this led to the sharp increase in lending business .  Infrastructure development,  Industrialisation,  Power, Mining, healthcare, hospitality all segments were like hungry demons out to suck the money . The cascading effect was on equity market which boomed like anything and this resulted into more and more need of debt money to the system. Infact it was like a vibrating ring effecting each other to vibrate further.

With new liberalized environment, political parties started demanding more and more growth. They started  taking more and more interest in GDP growth, IIP numbers and Sensex. This probably also ignited the level of corruption in all segments.

We witnessed a decade with highest investment in infrastructure like Port, Power, Road, Buildings, Bridges between 1998 to 2008. This also made our country manufacturing hub and put the country ahead of many countries in Many industrial segments. Obviously, it was not without any flaws, it took away lot of capital from the system. 

Probably, the respective governments were quite confident about the capability of Indian banks to handle this sudden spurt in demand of money. Though governments and institutions were delivering their best, but the good time was not alone, it brought higher level of corruption, high expectations, chaos in the system and mis-management . In the process, politicians took over the reigns of finance and started over ruling the bankers. The situation in banking system was already on fire due to severe competition, this tendency of forcing the bankers to lend more and more further worsened the situation. Even appointments were not free from any allegations. The pressure of performance with in limited time frame caused the deterioration in quality.

To sum up, Both factors i.e. Growth in banking sector and Economic growth resulted into very high defaults at later date. 

Other factors responsible for current level of NPA needs detailed analysis before pumping money into banking system continuously. This is public’s hard earned money and should be used judiciously. Lending institutions should not be allowed to remain corruption breeding stations forever. 

CP

Mounting NPAs: What Went Wrong (WWW)? Part-2: Development in Banking System

Friends

Carrying forward the discussion on four major issues responsible for mounting NPAs, let us dig these issues further. One of the major issue was “Development in Banking System only ” . As mentioned in my previous article, post liberalization, focus on building up capability was meant only adding new employees, new branches and adding new borrowers.  Bankers/lenders never bothered to first build up capacity and then add the business. In fact, it was other way round where aggressive approach to increase business followed by building up capability. To be true, still very least investment is made by the bankers on education and training despite so much hit on the balance sheet. The visible change is due to computerization or digitalization and not due to knowledge development. The appraisal system of loans, funding products, Client due diligence and Project viability studies are still going on the same old pattern.  Prescribed norms of classifying NPA are too rigid and impractical. Same set of standards being applied on all kinds of loan despite huge variations in their characters. Lenders should consider the economic scenario, monsoon situation, too to apply the NPA norms. The norms should be flexible enough to help the genuine borrowers.  Senior employees of Banks presume 100% knowledge of the finance sector which blocks the knowledge inflow. The Ego of officers is another serious factor which needs to be handled properly.

As mentioned by me earlier, the performance parameters should be more quality focused than quantity. Short term view of business growth has caused lot of damages to the Indian banking system. As is well known the pressure of achieving targets is too much on the team and this leads to compromise in the quality of account. Lending banks have to build up capacity of global standard to sustain in the current market. Unreasonable target setting by the authorities should be avoided if banks are really serious to control the NBPAs. It has been widely known fact that every one wanted to reach the height and to achieve this target are key issues. One team does business without proper appraisal and poor monitoring to get the promotions and other teams gets promotion by achieving recovery targets. Most of the business has been achieved by misusing the office or conflict of interest. Banks themselves became consultants and  advisors too and started achieving the set targets in all those segments. The expansions are good but equally dangerous if not handled properly.

In my view there are lot many gaps and weaknesses are still exists in the banking system which will continue to generate more and more NPAs. These issues should be addressed properly before infusion of funds by the Government.  Without building capability, the growth in the banking system will be prone to all kind of drawbacks. However, I agree that only this factor of development in Banking system is not the sole reason for mounting NPAs as other reasons are equally responsible for disastrous situation of NPAs in India.

I shall ponder on the other issues in my next articles.

CP

Mounting NPAs: What Went Wrong (WWW)?

Friends

In last 15 years, Indian Banks have tasted huge jump in non- performing assets. This has grown with the growth in advances which is quite convincing. Currently, NPA are more than Rs. 5.00 Lac Crs. or about 75 billion USD.  Actual figures of NPA and stressed accounts are estimated to cross Rs. 10 Lac Crores, almost 11% of total loan portfolio. 

What went wrong? Why it was not monitored properly? Is it matter of skill or something else? The answer to all these questions can be find out within the problem itself. A critical and unbiased analysis can not only help in understanding the facts but also help in controlling this for future.

A)     Development in Banking system: In the beginning of this millennium, the competition was growing and private banks were just attending the age of adolescence. These banks were flushed with funds, aggressive team and to some extent knowledge. These banks were infact born out of frustration of the public sector banks who were dead slow and politically infected. We can’t deny this even today.  Also these banks were run by the cream of  bankers who were very sharp, intelligent and aggressive but were frustrated in the PSU Banks. These banks with thin organization structure and fast decision making process soon overtake many PSU banks who were just surviving on government support and had become political shop.  Thus the frustration of Bankers who could not perform in the dull atmosphere of PSU Banks and Exciting plans of the new banks joined hands together and exploded the market. Every Bank invented new products to lure the customers to borrow. Very soon private banks accumulated huge business from the market and this hit to the bottom of the PSU Banks. Now the turn was of just awakened PSU banks who not only lost the business but precious manpower too, to grab the market. The PSU Banks joined the rat race of increasing business without considering the GDP growth of the country. Every Bank was out to give Year-On- Year Growth of more than 20%, the pressure mounted at every level and thus the whole system of conservative appraisal, due diligence, Non-deviation from the set rules and strict adherence to end use principles got damaged.

Banks started rewarding Officers i) who could garner more and more business irrespective to the quality; ii)  Who could register better recovery from the stressed accounts ignoring the fact that certain units could have been revived; iii) who could earn more and more fees for the organization even if it was through business executed under conflict of interest; and iv)  who could expand the business left, right and centre without any focused approach.

     B)  Sudden Growth in the Economy: Beginning of the millennium also witnessed sudden jump in the economy. Existing set up was not well equipped to handle the sharp growth of the globalised Indian economy. All they could understand was to lend money in the proportion of 3:1 where Equity was only one third of the total loan and that too in many cases on paper only. No body was ready to listen and understand the hard fact that lending can not be influenced by emotional or political pressures. Systems and Procedures were not in place and by the time one could understand, there was a mountain of NPA before the banks.

    C)   Political Compulsions and Corruption: When NDA regained power in 1999, it was very hard earned by these non congress parties and hence they were aggressive to fuel the growth. Most of the parliament speeches were wrapped into GDP growth and hence the large funding was forced upon the bankers. This process further speed up post 2004 under UPA government. Rampant corruption in appointments and lending resulted into poor decisions. There was no hope for prudent decisions. In this situation, the mistakes of wrong funding was quite obvious and hence huge increase in NPA.

     D) Over Ambitious Entrepreneurs: This is most crucial analysis, either the entrepreneurs were over ambitious and hence asked money or may be vice versa, but the result was same. Easy availability of funds or over confidence of lenders in entrepreneurs too fueled the fire. The cascading effect was in poor appraisal, fast decision making, poor monitoring and competition to surpass the other lenders.

Indian bankers were never equipped to handle the sharp growth as nothing was system driven. It was more people driven minus poor systems and procedures. Human Resource too responsible as there was not sufficient training to the lending employees. Personal habits like Ego, ignorance, over confidence too ignited the process of high NPA.

Detailed analysis of all the above major factors will be discussed soon.

CP

Happy Friendship Day

Friends

Today is Friendship Day and it is being celebrated worldwide. 'Friend' is one of the most touching word which sparks in the mind with some images. More you dig into it, more images will come in mind. This follows with the old and new memories, incidents, events and so on...If we look into the collection of friends during our life we will notice every phase bring in different kind of friend, different character, different motives and different longivity. I wish to explain it further:

a) Phase-I (Between 1-4 years): Very fad memory will be of such friends. Only motive is to play with them, fight for trivial reasons and forget. Such friends are rarely come in mind unless they are continue in next phase. Such friendship is more of a protected environment.

b) Phase-II (Between 5-15 Years): This is the most exciting phase of mental development, education, developing dreams and so on. We make lot of friends during this phase who share our dream, share the challenges of education and of course share the joy of growing age. No one knows what we will do in life, where we will locate, what kind of family we are going to build up. Friendship in this phase is so pious that irrespective to the caste, creed, social status, we blend with the friends very strongly. Though bit immatured, the friends of this phase live in memories forever. So informal talks, useless discussions, sharing of every thing, fighting, criticizing, challenging, playing and what not. These friends are so much attached to us that any suggestion or advise or views by them carry more weight than the parents. Infact, we believe they understand us better than the parents.

c) Phase-III (Between 16-25 Years): Friends of this phase mostly include the second phase friends too. The friendship made in colleges, professional careers and struggle period is more matured, understandable, intelligent but slightly mixed with the motives. It may not be as innocent as the friends of phase-II. However, this friendship decides the direction of career, family and personality. These friends are with us forever during life, may not we meet regularly but always stay in our heart. 

d) Phase-IV (Between 26-50 Years) : By the time this phase starts, we start moving towards career ladder, family creation and most of the time dislocate the habitat. We make many friends in this phase but mostly  with motives. The criteria changes, innocent converts to intelligent, priority changes and thus the friendship made in this phase may last long but only till the motives are served. We become more selfish, conscious of society, purposeful. Even the friends have to be screened out by the family before cementing . In this phase decision of making friend is not taken unilaterally , it has to be vetted by the family.  Parameters like caste, creed, social status, benefit takes over the decision of building up friendship. However, friends of this phase are one who are always with us, well understanding, matured. Very few may be innocent too. 

e) Phase-V (Between 51-65 years) : By this age the kids start growing, their career takes shape and mostly settled in the life. This age gives throws new challenges in life where we are left with life partners only in most cases. The loneliness, frustration, depression, health issues start cropping up. Though this phase give very less friends, the need of new friends is also not much till we are surrounded by the friends of earlier phases or relatives. We pull the life by comparing with others, copying them and settling the kids. This phase also has more or less same character of friendship as of previous phase. 

f) Phase VI ( 66 Years and above) : We become rigid in nature, left out by the kids, become more spiritual, religious and social. Rarely new friendship is built up at this stage. May be some colleagues who are sailing in the same boat. 

A person maintaining friends of every phase will be the happiest friend. As said 'Every Friend is Necessary'. Friends of phase -II and III are the most long term. They may be Kamine, but very lovely and innocent. We never think who came last for these friends , any body can some as much as time without even appointment, can abuse you, can insult you but all this without motive, purpose or bad intentions.

I wish a very happy Friendship day to all my friends who have been associated with me during the journey of my life. May be I could not reciprocate same love and affection to them but still......

CP

PSBs- Oxygen of Rs. 70 K Crores : Serious Flaw in Banking Structure

  Friends

  Indian Economy in last 68 years has seen substantial growth post independence. The Economy got boost in 1991 by way of liberalization. This growth was further fuelled by various political and economical steps taken by Government India under different political parties.

Public Sector Banks have played very crucial role in this growth . The trust and patience displayed by banking authorities in Indian Entrepreneurs has been remarkable. Government has continuously supported PSBs by way of infusion of capital from time to time.  Without this support, Indian banking would not have been in such a healthy position.

Recently GOI announced infusion of Rs. 70 K Crs. in next 4 years. In past GOI has infused huge money into Banking system to keep them live and flourishing. There is nothing wrong to support the Banks owned by GOI but it should also look into certain issues which may be real causes of concern and may be strategic fault lines. In my view GOI should seriously look into these issues:

  1.       Subsidiary Companies: Most of the PSBs are having one or more wholly owned subsidiaries in the field of advisory services, ARCs, housing finance, Insurance, Asset Management, Factoring, Broking etc. Some of the Banks are having key share in rating agencies too. Most of the Rating agencies and Asset Reconstruction Companies are owned by the Banks only. These subsidiaries are surviving on mostly fees from the assignments created by parent company. In my view this is serious issue of conflict of interest.

 Let me explain the issue: ‘A’ Bank who is a major Bank of the country has advisory firm engaged in  capital  market, Restructuring, Debt Syndication, CDR, TEV Study etc.  This advisory firm will take the assignment for loan syndication. Generally assignments are given out of pressure. Being a subsidiary company parent bank will be soft in lending to the client sourced by it.  In my view this activity falls into conflict of interest and probability of wrong decision in lending becomes very high. Similarly, when an account gets stressed and need restructuring, parent bank will give this assignment to this advisory firm. Again this firm will charge heftily to liaise with parent bank on behalf of the client.  Again this is conflict of interest and right decision may severely get affected as there is conflict of interest. In the greed of earning fees, the chance of mistake becomes very high. Other side, if some one does not give the assignment to this subsidiary, parent bank may not appreciate and take wrong decision . In both the cases parent bank and client are sufferer.  Same principle applies for Insurance and Mutual Fund activities.  Further there is frequent transfers from parent to subsidiary and vice versa.

  2.       Investment in ARCs and Rating Agencies: Most of the PSBs are shareholders/promoters of Asset Reconstruction companies and Rating agencies. As it is well known that ARCs play major role in case of stressed accounts, the conflict of interest is quite apparent. If the stressed accounts are being assigned to an ARC, irrespective to whatever level of transparency, the role of a company promoted by a Bank is highly objectionable. Same bank lending and post NPA, being assigned to own company can not be justified and the chances of injustice to either Bank or the Client can not be ruled out.

Suggestions: To make the Banks sustainable and stronger for long time, GOI should look into following suggestions:

   1.       PSBs should not be allowed to enter into various different activities mainly those of conflicting    interest i.e. Capital Advisory Services, Syndication Services, Restructuring Advisory, Insurance ,  ARCs and Rating Agencies. Those already into these activities should be instructed to scrap these  business in near future;

   2.       Fund utilisation by Banks should be monitored by a separate committee of experts, other than  RBI, regularly;

   3.       Transfer from parent bank to subsidiary and vice versa should be immediately stopped as this        makes the institution vulnerable to losses;

   4.       Till the PSBs are out of these subsidiaries, Same Bank should not do any business with    subsidiaries to bring in better decisions and transparency.

   5.       Subsidiary Companies should be immediately headed by GOI nominees and designated team.

   6.       Any business generated by Subsidiaries by way of using the office of parent bank or pressure      should be treated as misuse of office.

 CP