FINANCIAL TSUNAMI

Non Performing Assets have hit the Indian Banking scene like an epidemic. Faced with mounting NPAs  almost all the banks in India are battling for survival. Profitability has been badly mauled.  The equity market keeps on punishing banking stocks.

How did such a scenario come about?

There was a time when banks adhered to time tested norms in granting loans and advances. Loans and advances were granted only after careful evaluation. Populism of successive governments diluted the norms for scrutiny of the loan applications without any concern on the recovery aspect. It was evident that a time bomb was ticking to explode without any warning. Though brilliant critics have analyzed threadbare what has gone wrong, here is a modest attempt to view it from a different angle.

The biggest joke is the Cash Credit granted by the banks. Though it has been stated in the agreement that the account will be brought to credit at least once in a year, it never happens in most of the cases. Overdrafts are no different. Ultimately the borrower keeps on asking for enhancement every now and then. Since a large quantum of bank’s resources is tied up with the borrower the limits are raised temporarily with or without the concurrence of the controllers. Such temporary enhancements may or may not be supported with documentation. When everything goes well the branch manager is hailed for his brilliance in his achievements of targets. The branch head and the controllers are showered with accelerated promotions. The flouting of the norms is met with Nelson’s eye.

While the depositor entrusts his funds with banks in trust as long term fixed deposits, many banks have ended up tying up their funds as long term deposits in the form of loans advances with the borrowers. The interest on the advances is accounted as profits. But how much has been realized is a matter for debate.

The populist policies of the government in power made disbursal of DIR, IRDP, PMRY, Education Loans, Vehicle Loans, Personal Loans, Housing Loans and several other schemes mandatory for banks. Though these schemes ensured that money reached the poor, the middle class and the new generation rich the disbursal had never given a thought to the recovery aspect.  Loans were disbursed very often violating the time tested safety features. Branch heads were forced to disburse the loans the moment an applicant had stepped into the bank. If there had been a slight delay for making even a cursory scrutiny, the controllers encouraged the applicant to file complaints against the branch head. And if the cursory scrutiny had revealed the motives of the applicant suspect, the branch head had been taken to task for carrying out the cursory scrutiny. The controllers went on punishing the upright and rewarding those who had merrily granted the loans without any thought on the recovery.

No doubt many of the DIR, IRDP, PMRY, Vehicle Loans, Personal Loans and Education Loans, Housing Loans have ended up irrecoverable. Add these to the burgeoning Cash Credits and overdrafts where the limits are enhanced gaily, the NPAs mount threatening the banking system.

When financial discipline is given the go by, financial tsunami would envelop and destroy us.

God forbid such an eventuality.