CBI Also Says Bank Officers Are Also Responsible For High Value NPA

RBI must lay out exhaustive directions mandating detailed procedures and the process of the conduct and content stock audit of borrowers preferably with a detailed checklist to ensure no step is overlooked. This only would help reduce the bad loans of NPAs

Ranjit Singh, the chief of Central Bureau of Investigation (CBI) laments
, “bank frauds above Rs50 crore have grown almost 10 times in the last two years. Bulk of the non-performing assets (NPAs) related to just 30 defaulter accounts. The CBI has initiated inquiries
 – banks need to realise that delays in reporting frauds affect recovery proceedings.”

This indicates the laxity at all levels in addressing this serious concern. In India the bad loans are designated NPAs while in the West they are termed
‘stressed assets
’ that have led to the inglorious end of great banking institutions across the world.

There are two reports in the Hindu Business Line: “Strengthen inspection of units financed, FinMin tells banks” and (Secretary Financial Services MoF) “Takru’s tough talk: Banks must seek management change before recasting corporate loans”. The belated reaction of our union ministry of finance (MoF) and the Reserve Bank of India (RBI), our banking regulator, being a mute spectator now waking up, appear to be acts of
‘locking the stable after the horse has bolted
’. It is hoped that Raghuram Rajan, the new governor of RBI, will usher in urgent modifications in the archaic procedures and processes.

In India, when there is a banking regulator in the form of RBI for over half a century, why  the MoF and not the RBI is reacting to sharp deteriorations in the quality of loan asset portfolio of banking sector as a whole. This is indeed an extremely alarming worry for all, which if not addressed on a priority basis, will lead India to the Cyprus or Greece type bank collapses.

Today Indian banking sector is on an expansion spree
, with 26 applicants waiting in a queue  for new banking licences to add to the present 1,700 commercial banks of various descriptions comprising 27 state owned, 21 private and 3 dozen foreign plus smaller regional rural and urban co-operative banks.

There is an urgent need to totally overhaul the banking sector by upgrading the systems of on-site audit of compliances with laid out checks and balances. It is rather disturbing to see both the MoF and the RBI now belatedly waking up to the reality of increasing wilful defaulters on their advances portfolios. The ratio of the gross NPAs to gross advances has risen to 3.8% in 2013 from 3.2% in 2012. The ratio of restructured standard assets versus gross advances of public sector banks (PSBs) shot up to 7.1% from 5.7% and for the banking sector as a whole, the gross NPAs to gross advances ratio rose to 3.4% from 2.9%. The ratio of restructured standard assets and gross advances increased to 5.7% from 4.7%. Further, according to the RBI’s latest Finance Stability Report, the macro stress test of sectoral credit risk among seven select sectors that include construction, agriculture, iron and steel and engineering is expected to register higher NPA ratio of 4.7% to 4.8% by 2014.

It is noticed that there is absolute laxity on the part of the RBI, as the banking regulator on the one hand and the top managements of the banks across the board on the other. Especially, when it comes to having in place effective steps to pre-empt and prevent slippages in the asset quality well in time long before the advances begin slippage and are even considered ‘distressed’ and turn out to be ‘bad’ or ‘NPA’.

As a statutory auditor of banks on the RBI panel for long, it is my experience that advances just do not turn bad overnight. They always tend to incubate over a period of time during which time they invariably subtly indicate, show prompt visible signs of impending or incipient delinquency which the officials at the branch level conveniently choose to give a go-bye by claiming ‘pressure of work’.

It is the officials at branch levels who ought to effectively monitor the delinquent advances on a day-to-day basis. More particularly when the borrowers approach branch management to accommodate them by granting temporary overdraft facility by clearing cheques that they have issued without adequate balance or in excess of their borrowing limits. These acts undoubtedly represent clear-cut cases of the borrowers’ bad financial management leading to an impending doom.

When the customers’ default in the timely submission of their monthly stock and receivables statement, it is sure sign that they do it simply because they have neither the inventories nor debtors that provide them with drawing limits to justify the collaterals for the following month. In the absence of fixation of fresh drawing limits based on security available as represented by statements, they wrongly continue to enjoy limits far in excess of the securities that are on offer. The officials permitting such irregularities should then be deemed to be in connivance with the borrower to defraud the bank and their filing of routine post facto condonation requests to their controlling office should not be permitted to regularize this gross irregularity.

What is not strictly adhered to is the strict compliance by banks of the requirements of periodic on-site inspections by carrying out physical verification of the inventories and receivables to confirm their existence and ascertain their realisability in case they are to be realised when the borrower is in default.

This on-site inspection has necessarily to be carried out by independent professionals or experts. The third party professionals have the expertise and work force to visit the client any number of times, which is not always possible for the bank officials or employees, who can be fobbed off by the delinquent borrowers with much to hide or in possible connivance. Under no circumstances should it be left to any bank employee particularly those dealing with the advances and their monitoring.

A stock audit has also to include inspection of records to ascertain the mode of valuations of the inventories, their stacking conditions and movements to detect overvaluations and shortages in stocks. For verifications of debtors, a plain and simple scrutiny of transactions in the accounts will go a long way in ascertaining realisability. Similarly, recording of fictitious invoices for purchases and sales or siphoning away of funds for unrelated activities by wrong diversions can also come to light well in time. 

The scope of the special stock audit exercise should also include in-depth procedure for improper or inadequate under pressure credit appraisals and sanctions as well as deficient post-disbursal monitoring, fake title deeds, multiple finance for the same security, inflated valuation reports, genuine business problems, diversion of working capital for unplanned capital and personal expenditure.

In cases of high-ticket large consortium advances, it is a practice for the lead banks to initially carry out the inspection to be followed up by the smaller lending partners carrying the audit independently in the subsequent period. It is noticed that those with a smaller share tend to act complacent by following the earlier report and not observe the standard verification procedures that the earlier verification may have overlooked.  It has to be ensured that each verification has to be a standalone exercise and not ‘follow the leader’ type.

Indian businessmen also have in their midst quite a few wilful defaulters, who are invariably past-masters in swindling banks. The banks need to effectively monitor such high-risk individuals or entities with hawk eyes. The advances imposed from the top need to be put on the extremely highest risk category. It should be ensured that all communications relating to sanction and disbursement and the original title deeds as well as all other relevant documents are safely sealed and inspected annually. Much more care is called for before considering any proposal for restructuring of debts.

MoF Secretary Rajiv Takru very rightly pointed out that banks must insist on management change before considering restructure of loans by companies. “Half the time they are in a mess because of poor decisions of management. They now have no moral right to continue. More and more cases are seen of people taking advantage of distress by going back on their obligations by trying to negotiate deals for moratorium, reduction in interest rates and waivers. The banking system has been ‘too tolerant’ of such misbehaviour and this is not required. Companies cannot sit back and expect the banks to continue to take the hits.”

Talking tough must necessarily be followed up with the RBI laying out exhaustive directions  mandating detailed procedures and the process of the conduct and content stock audit  preferably with a detailed check list to ensure no step is overlooked.  It is the actual on-site verification and not merely going by copying data files for non-existent securities that can uncover malpractices and will go a long way in preventing slippages.

(Nagesh Kini is a Mumbai-based chartered accountant turned activist.)

Yet ad hocism still rules the roost in the selection process, and most public sector bank chiefs have a short tenure of two years or a little more. This means many of them spend the first few quarters cleaning up the balance sheet to prove that their predecessor was not a prudent banker - but as their retirement approaches, they fall into the same trap and stop declaring bad assets to show better profits.

http://importantbankingnews.blogspot.in/2013/09/non-performing-managers-creat-non.html

NAMASTE HUM KUCH NAHI SAMAZTE.........

THE MORON LIST............

.

Sharad Pawar doesnt know what went wrong with Onion !!

Defence Minister doesnt  know what went wrong in submarine !!

External Affair Minister doesnt know what went wrong with PAK and CHINA !!

Home Minister doesnt know what went wrong at Bodhgaya and Hyderabad !!

Finance Minister doesnt know what went wrong with Rupee !!

Coal Minister doesnt  know who robbed the files from the ministry!!

Prime Minister doesnt  know what went wrong with all of above !!

And then you see full page ads in the name of

some Mr. Rajiv Gandhi in all major papers by various ministries using our well earned

money that we had paid in the

name of taxes to this useless government!!

HO RAHA BHARAT NIRMAN.... !!