HEY! PROMPT BORROWERS, REJOICE
Settling NPAs
with some sacrifice has now become a common practice. So much so that we find
it very difficult to recover NPA without sacrifice. Also, it has become public
knowledge that banks are prepared to settle NPAs offering interest concessions.
Besides, the government announces various schemes for various sections of the
customers like agriculturists, SSIs, SMEs etc in which the defaulters can
settle their dues by availing some concessions, including write off.
All this has prompted the prompt and honest borrowers to comment on
these schemes. They feel that they are let down and that there is no reward for
making prompt repayment, while defaulters enjoy concessions. See, the irony!
This is where I would like to suggest that we design a scheme where
prompt borrowers are rewarded. Here is what I have in mind:
CASE I:
X avails a loan of Rs 10000/ on 01.01.05 @ 140% repayable in 20
installments of Rs 500/
If X pays the dues promptly, and as on 31.12.05, if the loan is a
standard asset, he is eligible for a half percent cut in ROI, i.e., his loan
will carry interest @ 13.50% with effect from 01.01.06 for a further one year.
Effect of this on the bottom-line of the bank:
Total interest @ 14% for the entire period of loan tenure assuming
prompt repayment: Rs 1224=00
Total interest @ 14% for the first year and @ 13.50% in the second
year: Rs 1217=00
Net loss for the bank: Rs 7=00
CASE II:
X avails a loan of Rs 10000/ on 01.01.05 @ 14% repayable in 40
installments
Total interest @ 14% for the entire period of loan: Rs 2385=00
Total interest @ 14% for the first year, 13.50% for the 2nd
year, 13% for 3rd year and 12.50% for the balance 5 months in final
year: Rs 2328=00
Net loss for the bank: Rs 57=00
Let us look at it this way:
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Case I – 20 installments
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Case II – 40 installments
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A net loss of only Rs
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7 for every Rs 10000
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57 for every Rs 10000
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A net loss of only Rs
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70 for every Rs 1 lac
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570 for every Rs 1 lac
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A net loss of only Rs
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350 for every Rs 5 lacs
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2850 for every Rs 5 lacs
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A net loss of only Rs
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700 for every Rs 10 lacs
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5700 for every Rs 10 lacs
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Let us say a Net Loss of Rs 6000 for every Rs 10 lacs over a period
of 4 years. It means a yearly loss of just Rs 1500. The following assumptions
are made in calculation:
-
repayments are made on first of
every month
-
no defaults occur
WHY WE NEED THIS:
-
Defaulters are getting
concessions, which in effect means we are encouraging default
-
Prompt repayment is not
rewarded which may lead to cynicism among prompt borrowers and may further lead
to possible shift to default category
-
A small sacrifice now will
eliminate a bigger loss later
-
Offering concessions to
defaulters is a negative publicity > credibility / integrity at stake. On
the other hand, rewarding prompt repayment is a very healthy trend >
encourage prompt customers > our morale will be high and will draw public /
media support
-
Play on the psychology of the
borrowers. It is a universal truth that 8 out of 10 always look for
discounts/concessions/freebies in every activity
-
Poetic justice for prompt
borrowers
Advantages to Banks:
-
This will encourage prompt
borrowers to remain in that category
-
Even potential defaulters
(SMAs) can be lured to regularize their dues and keep it that way
-
We will save on follow up,
provisioning and bigger income loss
Eligible Loans:
All performing loans up to Rs 10 lacs could be considered. As the
number of loan accounts up to Rs 10 lacs is quite high, the incidence of NPA
under this category is also on the rise.
Ineligible Loans:
1)Staff loans 2) Housing Loans 3) Loans where finer rate of interest
is already sanctioned 4) Loans / Overdrafts on deposits
Let us assume Mr X in the above example defaults. It becomes NPA for
June 05. Let us assume the balance as on 31.03.06 is Rs 11000=00
It means interest reversal of Rs 1000. Further, provision of at
least Rs 1000 (assuming it is SSA – secured exposure). Total loss for the Bank:
Rs 2000=00
In this case, supposing we make an offer to reduce the interest rate
by a half percent for keeping the account regular and further assume that it is
accepted and the loan is kept regular. The net loss for the Bank would be Rs
57=00 only!
Let us rely on the power of publicity. ‘PAY YOUR ISNTALMENTS
REGULARLY AND EARN HALF PERCENT CUT IN INTEREST ON YOUR LOANS’ is sure to
become popular among regular borrowers and is likely to lure the SMAs to bring
their loans back to shape.
Just for studying the implications of the suggestion let us assume
the NPAs to be Rs.200 crores. Let us
further assume that we are able to avoid 1% of the fresh NPAs by offering half
percent cut in interest. Let us study
the impact of this on the balance sheet of the bank.
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MEASURE
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IMPACT
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If we are able to reduce our fresh NPAs by 1% by offering half
percent interest cut
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The net effect of all these : Net gain of Rs.19.70 lakhs (provision
of Rs.20 lakhs less interest loss of Rs.30000)
How to implement this.
Loan sanctioning authority shall have the powers to sanction reduced
interest. Supposing the borrower in the
above example keeps the loan regular for a year and sanctioned reduced interest
with effect from 01.01.2006. If the
borrower defaults and the account becomes NPA on 31.03.2006, the benefit of
reduced interest should be immediately withdrawn. The interest difference should also be
debited to the loan.
Summing up:
This is only intended to generate a debate on
these lines. Probably when we discuss
and debate on this, may be we will be able to come out with a very attractive
offer that they cannot refuse. It is a
win-win situation for both. On the flip
side is the possibility that it may never be really put to practice. But just look at the enormous publicity the
bank gets on account of this. A PSB
OFFERING INTEREST CUT TO ITS PROMPT BORROWERS “ is sure to make waves in the
banking industry. And Syndicate Bank
will make headlines for being the first PSB to set the trend.
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