THE DAILY POST

I believe that the NPA story has been well documented and debated.

We all know how ex-Reserve Bank of India Governor Rajan, proactively recognised bad debts in banks and other financial institutions. Under his leadership, for the first time, there was a formal recognition of bad loans.  Quickly followed up with the legislation of The Bankruptcy Act, the government showed its commitment to put in place financial infrastructure to deal with this deluge of bad debts.  

The logical next step is to sell or restructure these distressed assets through NCLT.  Wouldn’t you think this would take place seamlessly?   Normally speaking, yes. In an ideal world, banks would write off the loan losses and fresh lending would re-commence once the bad loans are purged from the system.

Let’s stop for a second here: Will this happen in India?

To understand the delay in implementation, we need to know the players, the pressures, and the politics.  In India, these translate to the Public sector banks, the Private sector banks, and Government pressure.

While the Public Sector Banks provide about 70% of the loans in the Indian financial market they also contribute the largest amount of Non- Performing Assets. Their current capital and reserves are grossly inadequate to absorb the losses that are in their bad-loans portfolios.

Public Sector Banks’ genesis reveals a heritage that began with the nationalization of Imperial Bank in 1955 which transformed to become the State Bank of India. The next phase came in 1969 when Indira Gandhi nationalized 14 private Banks, followed by another 6 in 1980. Today, these Public Sector Banks are the repository of the bulk of the distressed assets within the banking sector.

The rot had set in decades ago. Although the State Bank of India inherited a skilled and dedicated management cadre, it was unable to resist political pressure when it came to taking a decision whom to lend to and under which terms. Many will recall, State Bank of India’s Managing Director R K Talwar resigning under pressure from Sanjay Gandhi.  The pressures exerted by politicians and businessmen has dominated the credit -decisioning in most PSU banks.

And the other player…

Manmohan Singh as the finance minister licensed a number of private banks. These banks have grown like weeds and constitute a mix of Corporate and Retail Lending with a robust deposit base. Without government support, they are conscious that they have to fend for themselves to deal with distressed assets. This has made them more agile and vigilant than their PSU peers.  

They require little support to rapidly grow in size and scope. The key to their success has been their independent credit and underwriting capability, adoption of technology and their ability to market their products to retail customers. The challenge for them is to grow to a size where they are equal to their international competitors.

Unlocking the potential of PSUs: Divide and Conquer

The key to the current NPA problem has been:

• Weak underwriting standards,
• Lack of independent credit decision making, and
• Opaque management actions.

Unless this is resolved in a radical manner, new lending will continue to result in ballooning bad credits.

To achieve a sustainable transformation, consider identifying two or three large PSU Banks and strengthen their credit underwriting capabilities. There is abundant talent available in India to provide the leadership.

Eliminate undue political pressure and make the management remuneration in line with private banks. This will encourage the Banks to lend in an ethical and rule-based manner while attracting top class talent.

Adoption of Technology is already underway in PSU Banks and can be used to build the necessary transparency required to manage credit growth reflecting international parameters. The recapitalization Bonds to be issued should also go to these Banks.

The remaining PSU Banks should transfer their healthy assets to the above large PSU Banks. They should not be permitted to lend but must focus only on the resolution of their Bad Loans. As they work through this we will find that their balance sheets will start shrinking. It is likely that their deposits will also move to other Banks. The possibility of merging all these unviable PSU Banks into one Bad Bank also exists.

The tough decisions to be also considered are: closure of their Branches, dealing with the redundant staff via Voluntary Retirement Schemes and sale of all their assets including any unhealthy assets which can be sold off.  There will be some capital required to make up the difference between the actual losses and the remaining capital of the Bad Bank. At least a framework emerges which will result in solving this problem over a three to five year period.

What about Non-Banking Finance Companies?

These have been long ignored both by regulators as well as the capital markets.  Most NBFCs do not take deposits which makes their funding cost higher than Banks. This forces them to seek riskier loans which enable them to get higher returns.  This structural design has resulted in numerous large NBFCs getting into credit problems and facing closure.  Interestingly, NBFCs actually play a critical role in delivering credit to the less creditworthy. 

With demand from first-time borrowers – both SMEs and individuals – increasingly NBFCs will have the market to grow rapidly.

They are largely privately owned, many listed on the stock market and the better run entities outstrip the Private Banks in terms of growth. The key risk they need to manage is their cost structure and the quality of credit delivered.

This segment is pivotal in providing credit where Banks fear to tread.

Fintech companies a variant to the NBFC story

By integrating customer information online and using surrogates to monitor the flow of sales Fintech companies are nimble and quick in terms of their capability to lend to SME’s and Individuals, currently unable to formally borrow. The Fintech companies could tie up with large Banks and NBFCs could become a force multiplier for the economy.

Quo Vadis

PSU Banks are the largest component of the Banking mosaic today. They are unhealthy and have to undergo a detox that revives their well-being through deep cleansing, nips and tucks, splicing and dicing. The methodology to repair their capital structures via recapitalization bonds has been enunciated but will need a drastic facelift of the credit delivery system and elimination of errant entities.

And the Award goes to…

The Private Banks and NBFCs who are willing and ready to step to meet the credit requirements of the economy.

About the Author

Tushar Kanti Chopra

Tushar is the founder Chairman of ATS Services Private Ltd, and has been a banker for over two decades.

No one wants to spend the extra money and sometimes, your clients may forget to pay the dues they owe you but this is the real world. Companies in India face several organizational challenges that get in the way of effectively managing their collections receivables. During these trying times in a pandemic, companies need to stay on top of their finances as a lot of small-owned businesses are going under.

India is still a developing nation and the companies in India are still in their budding stages and they need to be calibrated to meet the demands of the clients while maintaining a profit margin for the companies. There are a lot of challenges to work through, included but not limited to, a lack of efficient infrastructure, limited capital, and outdated technology. Owing to these reasons, no wonder these challenges also get in the way of overall operations and result in disturbed cash flow.

Small and Medium Enterprises (SMEs) are not exempted from these problems and are impacted by these challenges. Banks are not ready to give SMEs adequate loans and approvals are hard to come by. The lack of funds and a great degree of ambivalence prohibits the growth of SMEs. 

Looking for an alternate route of funds, SMEs opt for private funding. They are faced with high-interest rates. The payback process will be cumbersome for SMEs in the face of outstanding receivables, especially when they are trying to break even. It’s easy for this to become a vicious cycle for organizations of all sizes, especially when the inflow of money is tight.

Common Collections Mistakes made by SMEs

Let us explain this issue of SMEs with an example. Let’s assume that we have 100 clients with payments due. Of these 100 clients, 70 always make payments on time. 20 of these clients might be habitually late with payments and 10 of these have gone into deep lapse, i.e. a customer base that has become completely unresponsive with significant payment delays (90 days or more). This will put a dent in the finances and the checkbooks of any small business trying to stay afloat during the pandemic.

“A very important concept to understand is that all customers are not cut from the same cloth,” says Aditya Bhushan, Managing Director at ATS. “If the loyalists are approached with the same tactics as the stragglers, you risk delaying your payments even further. In 17 years, we’ve seen this occur many times.”

A delayed payment loop will be a detrimental outcome we want or need. Following up with the basic psychology of understanding the mindset of the client’s payment behaviors, dispute resolution procedures, efficient follow-up and escalation, and proper monitoring.

Can a Collections Receivable Backlog be Prevented?

With a combination of intelligent segmentation, analytics, and timely outreach, collections receivables backlogs can be prevented.

1. Segment Your Data The crucial first step involves the segmentation of data and labeling the data. Setting up an efficient reminder system will ensure that the clients will be paying money which saves you a lot of time and money. Having them on autopay will be even better! Autopay is a great tool to have in your arsenal if you deal with a lot of high profile clients or lack the manpower to make calls to the client every month. If there is such an arrangement, you don’t need to disturb them with repetitive reminders and messaging during a time where everyone is stressed out.

2. Identify Risk The dual strategies used to identify risks are strong analytics and experience. Once you have a window into an established payment or behavior pattern – e.g. some people avoid calls from collectors – you can determine the risk of non-payment. This is the crucial step where we come in and recommend the next step. When we identify the segment perpetually in deep lapse, our experts look into each case selectively and approach towards a negotiated settlement, that largely depends on the demographic of your clientele. 

3. Prioritize Human Intervention What would you prefer – A phone call or an automated message? What is the better way of communication – An email or a text? How many reminders do we need to send our clients – One message or a series of reminders until the payment comes in? The answer to all these questions can be gauged after you have segmented your target audience and identified the risk. Then you can conclude how much human interaction is necessary.  In the example we’ve mentioned above, 80% of the clients make timely or slightly overdue payments. In our experience, these clients do not require special intervention for payment reminders. Moreover, the time and effort saved here can be invested into tougher accounts to improve the efficacy of the overall collection system making it a good option for those who frequently default on payments or need reminders to pay their dues. In short, it is a great way to ensure that you get your dues on time in order to balance the sheets.

4. Implementing Digital Outreach automation and digitization of your customer outreach process will be much easier once you have decided on the mode of communication with your clients. Again, this is where we come in. To make your life easier, we have developed processes and software for you that allow CRMs to integrate with emails and dealer’s payback. Once you’ve decided your mode of communication (text, email, phone call), you must automate and digitize your outreach process. We’ve built processes and software for our Most often, a full human resource is not required for this outreach.  

A digitized and analytics-based follow-up isn’t just the way forward; it’s the most efficient and economical way forward. Talk to us about how we can set up this process for you.

No one wants to disturb the delicate balance involved in working credit. But, management of timely collections is a tricky business and even essential, and even more important because of the impact it has on working capital. 

To be as efficient as possible, you must have a system of checks and balances to identify early credit risks from customers. Minimizing losses is a core value in any business to ensure the financial health of your company and can be achieved by mitigating losses.

An additional benefit of checking early credit risk is that you can effectively facilitate early intervention and take corrective actions. Since false signals are possible, risk identifiers are generally integrated with credit risk management as well, the process for which weighs in several variables. But that’s a different story.

As a company is in its nascent stages, they often wonder which signs to be on the active lookout for, which ones indicate towards a potential pitfall, or which indicators need more attention than others and may lead to losses. 

Early risk identifiers focus on individual borrower behaviors, and your client servicing teams may have already begun to notice them. If you already have a systematic address process in place, chances are you’re in good shape.

In case you don’t have a process in place, this first set of identifiers will help you establish a launchpad for the right conversations to gather your resources.

Key Early Risk Identifiers

1. Credentials of Your Borrower
   The approval or pre-approval stages are a great indicator of future risk or liability. This can be true of loan sanction or premium renewal scenarios. To gauge a client’s credit risk can be assessed initially by looking closely at their credit history and their balance sheets. That being said, these signs are very subtle and can be easy to miss, buried beneath heaps of paperwork, in the grand scheme of things. 
2. Early Payment Defaults
   A payment default or a bounced cheque early on in the repayment cycle is usually not a good sign. The degree of urgency, amount of aggression, and the intimidation tactics used may be addressed later and have to undergo a process of fine-tuning, but this signal should not be ignored. 
3. Customer Response
   The behaviors and the actions of your customers are a good indicator of what their credit situation is like, after all, actions do speak louder than words. Telltale signs include ignoring calls, being evasive of their availability, or in extreme cases, they are verbally abusive towards your representatives. Other red flags include repeated calls for extensions in quick succession. Getting their attention is also difficult and you might have to consider alternative forms of communication, not in their preferred way of communication, like a targeted ad to make them respond to you.

Experience makes you better at recognizing a sign of early risk in credit, but this takes a long time to master. Also, humans are prone to make mistakes. Instinct may guide you incorrectly. So, your organization cannot rely solely on human instinct and experience. Similarly, technology cannot fully rely on either – they can falsely identify cases and flag them. We have seen that happening. Timely intervention and a well-adjusted course of action could mean the difference between on-track payments or a non-performing portfolio.

Therefore, you must enable your servicing teams to respond effectively to early warning signs. This is the area of expertise for ATS. We combine significant human experience and state-of-the-art technical skills to help your company spot early signs of risk in credit to minimize losses and capitalize on profit.  

We’ve worked with numerous clients over the years to help them manage their credit risks successfully. We can work together to customize your solutions based on the needs of your firm and the demographic of your clients.

If you’re interested in learning more about our Risk Management services, please contact us and our Sales team will get back to you.