Friday, April 15, 2016

Non Performing Assets in Banking Sector - Impacting Economic Growth Need for credit monitoring mechanism

The cases and overall quantum of Non Performing Assets in Banking Sector have reached alarming levels. RBI has specially brought out a list of 150 extra large borrowers having weak financial health. The size of borrowings by certain borrowers has grown geometrically impacting debt-equity ratio, large and risky financial leverage and risk to financial market system. In view of large NPA, the Banking system has become averse to further lending, thereby negatively impacting Make in India, New projects, expansion, working capital and growth and growth momentum of economy.

An In-depth research into the issues involved clearly bring out following major issues:-

  • The Assessment of credit need, strength and sources of promoters, viability of the project, estimated time for completion, risk of contingency, regulatory and policy risk is inefficient and ineffective. The systems are not commensurate to the need and there is significant lack of appropriate skills within the banking sector. 
  • The professional integrity, ethics, professional business friendly approach need commitment and strengthening. 
  • The terms of sanction including pre-disbursal and post disbursal conditions are not complied with in majority of the cases, including in respect of 
  • Promoter's contribution
  • End use of funds
  • Prior approval before further borrowing
  • Major capital expenditure commitment by borrower and the group companies.
  • Share transfer/pledge by promoters including borrowing against the same and its end use
  •  Investment in associates, subsidiaries etc.
  • Extending advances not in the ordinary course of business
No effective action is taken by the banks in case of non compliance and in most of large cases, a relaxed view is taken
  • Monitoring of audited accounts and quarterly results of the borrowers, their subsidiary companies, associates and other group companies and related parties is seriously weak
  • The drawing power allowed to borrowers on the basis of inventory and debtors is not supported by credible and verified information.
  • The Issues highlighted in the borrower's Audit Report and Notes to Accounts are ignored.
  • Diversion of funds or improper end use is not monitored by detailed scrutiny of Annual/Quarterly financial statements. The break up schedules and actual facts behind the published figures are ignored.
  • Related party transactions, overdue debtors, non moving stocks, advances not relating to business, unapproved investments are all ignored.
  • Increase in Current liabilities, Secured loans of borrower from third parties, Borrowings from other banks, NBFCs, Commercial paper, Debentures and Deposits are not taken into consideration while monitoring credit. 
  • The bank's Board of Directors, Top management and Middle management have a big dearth of knowledge and skill to analyse borrower's financials, notes and their qualification in their Audit Reports. There is hardly any system to monitor financial statements and actual physical operations of even very large borrowers on an ongoing basis or even during disbursements.
  • Early warning signals are not captured for necessary action.
  • The appointment of auditors has been left in the hands of top management of banks, adversely impacting quality and depth of audit 
  • Even branch audits appointments has been restricted to 20% large branches and appointments are made very late towards end of March, while expecting and insisting reports in 7 to 10 days, leaving hardly any time for detailed review. The appointment is being made by management and not by independent persons.
  • Inadequate action is taken on audit reports by bank auditors including account wise comments in long form Audit Reports. Even there is no focus on credit monitoring through a specialized Audit keeping in view that internal credit monitoring is very weak.
  • The concurrent audit's scope coverage and reporting requirements are mis-directed to routine verification's
  • There is a need for major overhaul in the Indian Banking system including:
  •  Strengthening of the Board of directors, top management and key positions by capable and rightly qualified persons. Employment of qualified Chartered Accountants in larger numbers will significantly help.
  • Borrowers have to have the fear of judiciary and legal action including loosing of management and control of the entity itself
  • The time spent on judiciary process needs to be curtailed drastically. 
  •  Credit Monitoring within the bank and from outside experts of high quality need to be institutionalized. There is a need to appoint 2 independent professional Directors as selected by Banks to monitor day to day operations and fund management
  • A regular Bank Information System is to be put in place so that periodical updates of borrower, Group companies, subsidiaries, associates, related party transactions and specific areas and nature of transactions is duly reported to the bank as certified by an Independent firm of Chartered Accountants.
  • The Bank Auditors need to bring out all cases of misfeasance, diversion of funds, potential sickness and lack of financial discipline among borrowers, independently in an efficient and excellent manner
  • The appointment of auditors needs to be undertaken independent of Bank's management.
  • RBI has been one of the most effective regulator and banking supervision and guidance has to be revamped significantly by RBI. Even RBI annual inspection report should be an open public document at least for all levels of bank management and all Auditors and consultants.
  • A comparative study of status of NPA in Private sector banks & Public sector bank need to be done to understand the real reasons of high NPA in public sector banks
  • The role of politicians, ministry of finance and administrators in the working of public sector banks.
  • Industry specific factors shall be considered before declaration of an account as NPA. Every industry has its distinctive features. Let the NPA norms be formulated and modified accordingly. 


  1. I’m so glad I found this site…Keep up the good work I read a lot of blogs on a daily basis and for the most part, people lack substance but, I just wanted to make a quick comment to say GREAT blog. Non performing asset