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

Challenges in Running a NPA unit

Friends

It is a very tough job to revive an unit once it falls into the trap of Stress. Financially, such units become NPA and the owners are classified as defaulters in the CIBIL record. Ultimately it has very few avenues open for raising  finance . Thus few hopes of revival amid severe challenges from all the sides. These few hopes need lot of hard work, honesty, patience, focused approach and  tough decisions if the unit has to see itself revived.  

An Stressed/NPA unit has typical characteristic of exhausted  options for raising finance, huge losses,  small and semi-expert management team, low credibility with the suppliers, ongoing legal issues with the lenders, high cost of business operations due to liquidity crunch coupled with long overdue statutory liabilities and labour dues. Overall the life of a stressed unit becomes so tough that for every step there are end number of challenges . 

In this situation what are the ways to not only continue the business operations but also come out of the stress. As per my experience very few units ( not more than 20%) bounce back, rest go into oblivion. Reviving a unit under the tight noose of the lenders, government scrutiny and paucity of funds needs lot of courage and sound strategy. Some of the following suggestions may help in revival process:

1.      The unit can be switched over to job work : this will help in scaling up the operations and also generate revenues without much investment;

2.      Credit period needs to be reduced to the maximum even if it causing some margin hit;

3.      Non core asset, if any, should be immediately disposed off. However this takes some time as proper pricing may not be offered. While disposing of such assets ‘ liquidity’should be preferred than the ‘value of sale’ as the need of the hour is liquidity. It is to some extent emotional issue too but when there is fire at home, one can not be selective in saving the life. However, this step is possible only with the permission of the Lenders if assets are mortgaged.

4.      Change in management team: cost saving is the need of the hour and shall be strictly adhered , this need small team with lowest possible cost. Such units can not afford very high cost team but the talent Can not be compromised . Outsourcing the talent can be good  option to fill the gap .  

5.      Any additional funding into the form of debt should be avoided thought it may not be available too. The cost saving is the earning too. Equity is the most suitable way of raising funds. Management should be always open to the strategic investment even if it transpires into the change in management for the benefit of the unit . There is no better option than reviving the unit. 

6.      Above all, self confidence of the owner is the key to revive the unit as he is the one who created it and has the guts to revive too . Poor market support , tough legal battles and tight financial position are only temporary obstacles need to be addressed with hard and quick  decisions, patience and positive attitude.

It may take 2-3 years to revive  an unit but once the revival happens, promoter can regain the lost image and money.

CP 

Revival of Stressed Account: Employee Participation

Friends

In last some of my posts I had shared my views on one of the most sensitive issue of banking sector currently i.e. Stressed/ NPA accounts. There are lot of discussions, analysis and suggestions in this regard. Infact, this issue has in last three years surpassed all the other issues in banking industry affecting the new businesses severely. As mentioned by me only one side is not to blame for this situation. Lenders are equally responsible for this which they should accept, correct and move forward. Just reprimanding the borrowers and branding them fraudsters will not serve any purpose. Rather this will cause huge financial losses to the lending fraternity alongwith the unemployment of large number of lower class people . The situation deteriorates when there is panic ness to use all the tools available in the rule book. The race to prove intelligency, honesty and dedication by employees from the lending side is proving quite costly to the whole system . Although it is a tough task to revive a unit which is failed and that too if that has happened due to manipulative tactics of the borrowers, but such cases can be segregated and handled in different way . Whereas genuine cases, which are much more in number, shall be handled with care which will not only help the lenders in realising their money in long run but also save  the life of many poor families who are dependent on such units. As per data available more than 4 lac units have become sick causing unemployment to more than 100 lac employees . 

To revive the units lenders should take positive view as they had appraised the units in past. There may be some miscalculations or situations beyond the control of the borrowers which led to sickness. Also, the revival can be with stringent conditions like severe monitoring, management interference , takeover of management if required and pledging full equity. In addition to this the employee participation in management and equity sharing with the employees can prove to be a good idea. The assessment shall be genuine and practical with long term perspective . In my view the revival should be given try to the maximum possible before resorting to the killing of the unit. Let the poor labour / employees who have become job less earn their bread from families and also participate in the ownership of such units. With better participation, no one can stop the sick units from revival.  Also, the period of revival should be sufficient enough based on proper appraisal of the project and situation so that it is not repeated. We have noticed in many cases, particularly infra sector, where the actual cash flow can service the debt in 15 years but to make the proposal attractive, the projections have been manipulated and ultimately debt could not be serviced in time.

CP Jain

NPA / Stress : Disease but Not the End

Friends

Bankers/ Lenders behave differently and rather rudely once the account becomes NPA  it seems they simply want to use all the tools laid down in the rule book. They would Fire, insult and pressurize the borrower to repay loan. They are not wrong but the use of all these tactics is not appreciable. Probably lenders believe that business is without risk and full of certainty. In their view, the business can not go wrong and if goes, it is because of malafide intentions of the borrower. Hence in the process of using all the tools available with them, they forget that the business was properly analysed by themselves only and any drastic action will hurt the poor people most.  They use every tactic of recovery at any cost.

Lenders who  till recently were boasting their lending capabilities by referring the successful borrower, suddenly start distancing themselves from the borrower as if he is swine flu patient. Top to bottom banking officials , politicians , investigative agencies and so on try to reprimand him . They behave as if they don't know him, nobody wants to tell the world that the same borrower was their most sought after golden goose well kept secret . Till recently they were boosting of knowing this high profile borrower and now ???!!! What happened , what went wrong, don't you know business is full of uncertainty . Bankers only appraised the proposal, recommended at various level and sanctioned . If everything is transparent , no need to hide the fact. Help him, take care of him and try to make him stand again. No doubt if the  intentions of the borrower are wrong, fund is diverted, he deserves to be punished . Lenders have no right to sit on securities and take the life of hundreds of people for granted . There should make every effort to revive the unit so the life of thousands of poor people  can be saved. There should not be one sided blame on the borrower only , if we share the earning in good time why not take responsibility in tough time . CIBIL reports should be used for better judgment , it should not be an obstacle. I firmly believe if the lenders behave in matured way and help the NPA borrower, they can recover substantial money which is infact public money.  

CP

Yeh kaha aa Gaye ? This is the question one of my client asked to himself. What went wrong with him suddenly that the achievements of 30 years were questioned. He stared his career in a very humble way. A poor boy who was basically earning  his daily bread by stitching clothes.  Yes you are right , he was tailor with even no ownership of a sewing  machine. Day & Night he was on that rented sewing  machine . Gradually he owned one machine. He was very happy but had a dream of becoming successful businessman as he could not succeed in education . He wanted to remove his poor family tag from all the family members. So to achieve this dream  he started hiring people and doing job work for others. One machine multiplied to 100 and then 500. Now he had full fledged industrial unit with more than 700 ppl under his empire. He did not stop there , and moved, moved and moved. Never he thought of family and the result was that soon he built up the capacity of manufacturing 5000 shirts per day . The dream was much bigger and it led to 20000 shirts per day. Now money was not the issue, success became the dream. He was now surrounded by the people who gained his confidence after he became successful. In life we come across two kind  of people I.e. those who help during journey of success but we forget and those who join after success but we never forget. So these second kind of people stared giving him advise in technical language with jargons. He was not looking back and had overconfidence that all his business decisions of last 40 years were correct and can never go wrong in future too. 

New breed of people started questioning is garment business . Why not chemical, pharma or petrochemicals . The 24*7 money churning machine led to the belief that new sectors are full of money and this old one is too small. This led to jumping into petrochemical and pharma sector. Now this decision was going  to cost him dearly. He lost every thing, even the garment division started  bleeding and soon both the divisions became sick. 

Every body now turned tables and questioned his capability. He was confused and thinking how to handle this situation. Profit gone and money borrowed from bank and others could not be served. He was soon branded failure . The same bankers who used to take his appointment were now asking him questions quite insulting . He was sitting in a Corner answering every body . More than that may be asking himself what he has done ?. Where he has landed now ? This is the life of a business man convincing every body what went wrong but no one was believing . I cud see the pain in his eyes. I could read unanswered questions in his eyes . May be God would reply some  day or may be never. Now the new set of people were guarding him. 

ऐसे  ही बैठे थे कुछ सपनों के साथ, ठंडी हवा नाच रही थी, आते जाते लिपट के अपना अहसास करा रही थी. शायद जानना चाह रही थी कि सपने क्या बुदबुदा रहे हैं. लग रहा था सपने सच हो रहे हैं. 

भूल गये थे कि वक़्त नाराज़ चल रहा है, आजकल अपने आप को ठगा सा महसूस कर रहा है. वो जानता है उसके सामने मेरा वजूद कुछ नहीं फिर भी ख़फ़ा है. 

तभी एक झटका लगा दिल को , सपने टूट गये थे. एक क्षण में वक़्त ने मेरी औक़ात बता दी. टूटे सपने आँखों से आँसू बनके निकल रहे थे. अब तो हवा भी खिसक ली थी.