Why the Genuine Stressed Account should be Punished by Higher ROI & Penalties?

Friends

My views may not be acceptable to banking people but I fail to understand why a stressed account (not in position to stand properly & needing immediate support) should be punished in this manner. We have noticed that the moment a borrower defaults, he is classified to Special Mention Account (SMA)-1, then SMA-2 and finally NPA. This is the stage where such units who have paid huge amount of interest and other income (LC/BG charges, Processing fees and other banking charges) during their long good days to their lenders. Is it not unfair on the part of lenders to instantly punish them with penal interests, higher rate of interest, higher margins on working capital funds, higher charges towards various inspections, audits, due-diligence  and so on?  Is it not criminal to push the stressed accounts further into stress from where they can’t even think of coming out?

I don’t agree that defaulting accounts should be treated with iron hands with the sole objective of recovery and killing them. This way even recovery will be adversely affected. In many cases we have noticed that the stake holders are not the borrower only. There are large number of other stake holders like employees, laborers, suppliers, small agencies providing various services etc. All these stake holders are the worst hit by the improper actions of the lenders. These poor service providers should be given due priority over the secured lenders. Such attitude or policy for the established long standing clients is not justified as these banks are mainly surviving on the small depositors’ money. Secured lenders should not behave in such manner that interest of all other stake holders get into flames.

In good times if a borrower had been cash cow, it should not be slaughtered so mercilessly immediately after finding difficulty in giving milk.  

There should be proper mechanism  of dealing with the stressed accounts. Theoretically, lot of steps have been taken by the authorities but mostly are either impractical or diverted for personal benefits. The concept of Asset Reconstruction Companies   has also miserably failed due to the commercialization  and huge entry barrier.

There should be detailed study as to how the lenders behaved post stress, how many units were revived and how the handholding happened. At least for the well established borrowers, the rehabilitation and concessions should be automatically extended. In recent past millions of people have been thrown out of job due to mishandling of stressed/defaulting accounts by the lenders in our country. Similarly millions of other people who were involved indirectly by providing goods and services to these units have suffered badly.  

CP

Handling of Defaulting / Stressed Accounts by Lenders: Serious Faults

Friends

Stressed accounts who have defaulted are given almost same treatment irrespective of the issues involved. It is just like giving electric shock of same volts and frequency to every patient visiting mental hospital without judging the level of disease , intensity and age. Here is how they are treated and the effect thereof:

1.       Stage  I -Lenders: Flooding  of notices related to irregularity, warnings, threatening.  The moment panic button of stress is pressed lenders run for recovering their money forgetting that they are major financial partners. To prove their capability, lenders flood the borrower lot many letters, notices, warnings etc. Instead they should try to find the reason behind this.

Effect of the Action:  The borrower first tries to convince the lenders humbly. Then becomes defensive and in final stage after convincing self that now he may be thrown out of the business, and loose every penny , starts avoiding the lenders. Lenders start calling them so often that the borrower gets scared and resorts to avoid.

2.       Stage II-Lenders : Further pressurize the borrower by giving warnings, threatening and levying penalties, higher rate of interests and non cooperation with the borrower. Lenders  Never discuss why it happened, only concern is pay money even if you lost every thing. They never show any interest in knowing the facts.

Effect of Action:  The borrower starts hiding the facts as he feels , lenders are not interested  in helping to revive but only in their money. He starts avoiding the lenders, and simultaneously try to safeguard his own interest. Thus the unit becomes orphan and gradually moved towards sinking.

3.       Legal Actions by Lenders:  Still lenders feel that their actions of recovery were right. They further burden him with legal notices. Here, the lenders feels that if they threaten the borrower with stringent actions, money will come. They forget, this theory is suicidal and will result in huge losses but the lenders in the race of proving themselves honest and shrewd (which is very rare) they virtually kill all the hopes of revival.

Effect of Action: Gradually the issue between lender and borrower turns into lawyer and lawyer. Result can be immediately expected as two lawyers are more interested in winning the fight not in win-win situation.

4.       Settlement, write-off and  provisioning by Lenders: Lenders by this time believe that the borrower is cheater, mafia, dishonest, criminal, non professional and so on. He has siphoned off money and now enjoying life . Also that their seniors or predecessor  were not capable enough and they did mistake. So the lending institution has to suffer the loss. They have tried their best and nothing can be done.

Effect of Action: Borrower and Lenders settle the account on the basis of the security available as the business by now is dead. In most cases Lenders loose money.

5.       Conclusion: Finally the fight between layers does not lead anywhere and behind the curtain, negotiation starts to settle the dues and disputes. No body wins and poor stake holders loose heavily.

 In my view this set trend of handling the account is absolutely ridiculous as it does not help any one. Lenders and borrowers behave differently depending  on the loan amount, security pledged and  mistakes done in handling the accounts. An urgent attention is required to look into the strategy and methods of handling the defaulting /stressed accounts, particularly at the initial stage. The action should be to help in bringing back the stressed accounts to normal and revive instead of just killing to recover the money.

On one side the borrower is in problem . The strategy of pushing the borrower to corner with sole objective of recovery is not only dangerous but pathetic too. How can an unit where the major financing partner is the bank suddenly become untouchable. Sometime we feel pity of such policy. Pushing, punishing, criticising , reprimanding the borrower is in no case going to serve the purpose. This strategy is no where can be termed as intelligent. Do we punish our body when it is getting in stress? Do we punish our kids when they do not perform as per our wish or they fail in something? Even in private sector whenever some borrower gets into stress the lender tries to save him so the money can be recovered. 
Current situation of NPA in banks in our country is mainly due to this reason  where no Banker could think other way of handling the stressed accounts. Mistrust between the lender and borrower causes the maximum loss and that too to the lender. By punishing the borrower or trying to Finnish him or throwing in dust may give some satisfaction of revenge but not money.

CP 

NPA - How to turn the Failure into Success

Friends

It is not a welcome situation to turn into NPA where you default in all the commitments and face the legal issues. At stake is the complete career, wealth and reputation of the borrowers. In a situation of stress or default, there would be very few options left to move forward and that too at very dear cost. 

It is not easy to survive once you default in making payments. I fact, this is the beginning of the dark future ahead where your capabilities, achievements are put to question. No one believes that once you were the achiever, fighter, survivor and visionary. A single situation washes out the image built up in decades. In most of the cases the borrower surrenders and starts withdrawing himself from the stage. Instead of focusing on business he moves towards legal and finance angles. It is necessary too but the thought process should not be fully concentrated on these. One must not forget that it is the business which is real domain of the borrower which need to sharpen again. It is only the business which can bring back the lost shine. 

The speed with which the situation deteriorates and actions are initiated against the borrowers, it becomes imperative to face and fight with full force. Equally important is the zeal to bounce back. 

I wish to share my views how this situation can be turned into opportunity. A situation of stress can be really turned into a lifetime opportunity if properly handled. The accounts become NPA and the credibility of the borrower is in negative zone. What we forget is the fact that the borrower knows his Business very well and has climbed to the top due to his expertise, hard work and vision. Only certain decisions went wrong and he fell down. Since he had the guts to climb on top , means he is expert, hard working and visionary. This can not be debated unless the success was with manipulation so or other objectionable methods. May be certain decisions went wrong or mismanaged the business or overconfidence or may be certain factors beyond his control resulted into this situation. 

But, in new phase, if opportunity is given again, he is not going to repeat the same mistakes. Also, he will work with more concentration and hard work as he has seen the life nearing to death. Without any emotions to the failed business if he decides to restart from scratch and rebuild., believe me, it would not take even 25% of the time invested in building up earlier. This is because the entrepreneur has learned a lot in stress. He would be more successful. Particularly first generation entrepreneurs have better chance to rebuild.  
C P