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India’s Banking Problem – A Viewpoint

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 playersthe 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.

What’s Next for PSU Banks?

The newspapers and news channels have gone to town about the Punjab National Bank fraud with a potential loss of over 12k crores and counting; these are large numbers by any standard. The debate has veered towards taking political sides and somehow blaming the Reserve Bank of India, the Congress and or the NDA depending who is writing or talking on the news.

Unfortunately the debate has not focused on the real issues. To me there are only two:

First, why are PSU Banks more prone to frauds and unpleasant financial surprises?
And second, will a change in ownership of these Banks or privatization resolve this issue once and for all? Historically two events have shaped the Banking Industry in India.
The nationalization of banks in India in 1969 which led to the evolution of the Public Sector Banking, and the 1991 liberalization leading to the opening of Private Banks in India.

PSU Banks currently provide approximately 70% of the credit in the country, while the private banks provide the rest.

Meanwhile, Private Banks in three decades have attained size, built strong technology infrastructure, have established a workable credit culture, have built capable and durable management bench strength, and have made and learnt from their mistakes in delivering credit.

Their CASA ratios are good and their ability to manage their NPA’s have been well demonstrated. The Private Banks that did not do this well have closed down or have merged with the stronger private banks. Altogether a logical growth story.

The PSU Banks have not had a smooth ride and can be classified in two broad categories: the three large Banks who have been able to demonstrate a slightly better credit culture, have raised funding to meet their capital adequacy requirements, and have been profitable.

They now are grappling with high NPAs and have the management to work their way through the current crisis. The large PNB fraud has brought to the fore some of their management inadequacies and we can only wait to see their response to the current crisis which will provide a good indication as to their capacity to self correct and survive.

Their largest shareholder, the Government of India will need to demonstrate continued support in terms of equity infusion for these Banks to stabilize.

The remaining PSU Banks face an existential threat. They have extremely high NPA’s resulting from a compromised management, inadequate credit analysis capability, poor operational controls and a management which has got compromised over the years influenced by external pressures. With this as as their heritage survival in the present state is going to be difficult.

Finding a Workable Solution
Given the relatively bleak scenario in terms of credit delivery, how do we ensure that Indian industry gets the credit that it needs to grow?
● We must get over our fixation of PSU Banks and let them either be privatized or allow them to die in an orderly manner. They are unlikely to be the change agents who will provide credit to propel our industry. Two or three of the largest PSU Banks may be able to attract capital and grow. For these handful of Banks, we should have a clear disinvestment plan which enables this effort.

For the remaining PSU Banks we must prohibit them from lending, focus them on cleaning up their NPA’s and encourage them to sell whatever assets they can. These Banks will have to be nudged to closure over a period of time during which their only reason of existence will be to clean up the mess that they have created.

● Large Private Banks will automatically step into the space and expand their lending. They are well-positioned to do so. The large market opportunity presented as the PSU Banks retreat and Private Banks take over the credit delivery role will be large and it is reasonable to expect that even the well-run mid-sized Banks will be able to attract the capital required to aggressively grow.

● Large NBFC’s also will step in to provide credit to the customers that are not obtaining credit from Banks. The ecosystem of NBFC’s is well-established and has survived the numerous business cycles and will scale up very rapidly.

● Large Corporates with good credit history have gone out to the capital markets frequently for their long term and working capital requirements. I see this trend becoming more significant.

●  Digital NBFC’s, Banks, and Payment Banks will also change the landscape and provide more niche services as they attain size.

Going ahead the financial framework also has to ensure that there is one effective regulator for the Banks. Logically, the Reserve Bank of India (RBI) is this regulator. Currently, ambiguity exists as the PSU Banks also have dual reporting to the Ministry of Finance.

If we are to have effective governance of the banking industry, it is essential that the entire regulatory responsibility for Banking be vested with the RBI without any interference of the Government.

In Summary

It is time for India to let go of its public sector banks.
The larger public sector banks should be privatized and sold at the earliest to obtain a decent market valuation. Funds received here should be utilized to capitalize the other public sector banks to ensure that they are able to absorb all the losses that they have to incur as the NPA’s go through the resolution process and have to be written off.

The other public sector banks should be restricted from lending, their healthy customers given a chance to find alternative borrowing arrangements and over a period of time closed as operating lending entities.

The private sector banks, NBFC’s and other Fintech start-ups will be happy to take on the onus of meeting the credit requirements of the country. We will also have a healthier financial services sector which will partner industry to provide the growth impetus required.

About the Author
Tushar Kanti Chopra is the founder Chairman of ATS Services Private Ltd, and has been a banker with Citibank and Bank of America for over two decades.

How Can Organizations Manage their Collections Efficiently?

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.

How to Identify Early Risk in Credit?

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. 

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