SMA BY CHOICE, NPA BY CHANCE

SMA BY CHOICE, NPA BY CHANCE

The biggest challenge for the banks today is ‘containing NPA’. While talking of containing NPA, I sense an amazing string of similarities that exist between NPA and Cricket.  In a cricket match, a team getting all out for “no score” is a theoretical possibility. Likewise, a bank having a “nil NPA” position is almost an impossible possibility. Of course, there are banks that have reported “nil NPA” position. This is done through aggressive provisioning to cover NPAs and not through cash recovery. Ian Chappell often says that the best way to contain a batsman is to send him back to the pavilion! On the same analogy, the best way to contain NPA is “not to create one” in the first place!! Too good to be true. What Chappell sought to convey was that you must always give your best.  Well, the focus must therefore be on containing NPAs. I would suggest that we go about it by bifurcating the loans as under:

1.      Special Monitoring Accounts

2.      NPAs eligible to be covered under SARFAESI Act

3.      Educating the borrowers about SARFAESI Act

4.      Soft NPAs

5.      Other NPAs

1. Special Monitoring Accounts

In order to contain NPA, it is very essential to detect the symptoms of NPA very early. It is exactly for this reason that Special Monitoring Accounts (SMAs) concept was designed. It means focusing on SMAs. This compels us to keep track of each and every installment. It means ‘account-by-account’ monitoring. It is not easy. But not impossible either. When we compare the SMA with NPA, we will realize the importance of SMA concept. These SMAs need special attention for the following reasons:

 

Special Monitoring Account	Non Performing Account
Early stage. It means borrower can be convinced to pay the overdues. Assuming he finds it difficult to pay entire overdues, we can relax to the extent of one installment. The chances are that he would appreciate the bank’s flexible terms and would be more than willing to pay at least half the overdue amount	Once the overdues are allowed to grow and become NPA, borrower would find it tough to regularize. Once it becomes NPA, it can be up graded only on repayment of ENTIRE OVERDUES up to date and we will have no choice in allowing him to pay lesser amount as in SMA. (of course, we must accept whatever recovery that comes along, only the status of NPA remains)

It means more interest income to the bank, as overdue interest is charged on the overdue portion	It reduces the income of the bank by way of interest reversal and provision
Easy to contact/follow up	Difficult proposition
We can still maintain good banking relationship	Strained relationship, more often than not
Position of borrower easily ascertainable	Difficult to ascertain the position due to abandoning of activity, borrower absconding etc.
Borrower is more likely to listen to you	More likely to be hostile and unco-operative
It continues to earn interest	It stops earning interest( we can earn interest only on cash recovery)
No sacrifice of income is involved	NPAs usually end up in sacrifice of income by the bank as most of the recovery is through compromise settlements

Now consider this:

Case 1: A loan installment of Rs 5000/ per month. The first installment fell due yesterday. A gentle reminder over a phone call the next day would be more than sufficient in most cases to ensure repayment. And you keep doing that. The account stays regular.

Case 2: Let us now imagine that the borrower was not reminded at all for what     ever reason. The borrower too does not pay. By the time you realize this, the overdue amount would be Rs 10000/ and it would have become “potential NPA” or SMA. Even at this stage, you can bring the account back to shape by immediately contacting the borrower.

Case 3: The borrower does not pay. No notice was sent. Even before you realize, its overdue is over Rs 15000. It has in fact become NPA. On contacting the defaulter, you discover that he is not doing too well in the business. Whatever he had earned was either utilized for repaying high cost private borrowings or just spent.

Again I am overcome by an infinite temptation to draw comparison between NPA and Cricket. However great the batsman, the bowlers always fancy their chances against him early on in his innings. Even ‘King Richards’ was vulnerable early and a nervous starter and was no exception to this theory.

Cricket	N P A
Batsman is more susceptible to give chances early in his innings. (Get him early) In NPA terms, only Rs 5000/ is overdue-easy to recover	A mere phone call is all it takes to get the installments on time. (Don’t allow even one installment to become overdue). In cricket terms, nervous stage of a batsman-big chance to get him out
ABOVE IS SIMILAR TO CASE 1 MENTIONED ABOVE
Allow batsman to pass 20s-30s, you are asking for trouble. But not in serious trouble. You are still hopeful of getting him out any time. In NPA terms, two installments are overdue-bit of worry	If you wait until the installments become overdue for a month, it would have attained SMA status. No need to press the panic button yet. You can still recover and bring it back to shape. In cricket terms, the batsman is in 20s and 30s-bowlers become wary
ABOVE IS SIMILAR TO CASE 2 MENTIONED ABOVE
If he goes past 50, you are in big trouble. A well-set batsman, seeing the ball like a “football” and the fielders are in for a big leather hunt as they say in cricket. In NPA terms, it has become sticky and NPA-big problem	If you allow the overdues to cross SMA status, you are in serious trouble. It has become NPA and the defaulters look for all the legal loopholes! And find them!! And are giving us a ‘RUN FOR OUR MONEY’. (Remember, we have to run after them, literally and figuratively too). In cricket terms, the batsman is all set to score a century and beyond.
ABOVE IS SIMILAR TO CASE 3 MENTIONED ABOVE

The point is that we need to constantly monitor the account without exception as was the case in situation 1 above. If it slips to situation 2, still the borrower can be persuaded to pay at least one installment if not both. Thus far and NO FURTHER. This is the only way to contain NPA menace. It is difficult, but not impossible.

I suggest that we go about containing NPAs this way. Every employee must ADOPT at least 10 borrowal accounts of his/her choice. It means noting down the entire particulars of the borrowers/guarantors:

• Address
• Phone no
• EMI due dates
• Overdues, if any
• Sending notices
• Contacting them personally or over phone at frequent intervals

Entire servicing of loan should be done by the employee in respect of such ‘adopted’ loan accounts

How to go about it:

• Send letter to all branches about this idea
• Follow it up with a meeting to be addressed by EXECUTIVE
• MAKE IT VOLUNTARY
• Ask the branches to prepare list of SMAs
• Appeal to all employees to voluntarily pick and adopt SMAs
• Create the impression that it is a TEAM WORK
• Give them the freedom to follow up the Special Monitoring Accounts
• Once they adopt the accounts, they must make sure that it is upgraded very quickly and stays that way. Or if it slips to SMA, they must bring it back to shape.

Let’s make use of SMA concept, which is designed exactly to prevent creation of NPAs. Therefore, we must focus on SMAs.

Real life situation at branches:

¨      Staff shortage

¨      Unwillingness of Staff

¨      Expect fringe benefits

¨      Loans and recovery aspect given least priority (forced by circumstances)

How to address the branch problems:

Make a real assessment of staff strength at each branch/administrative offices

Identify staff having special skill in recovery and loans follow up

Request every employee to spare ONE HOUR A DAY on follow up of such adopted accounts

Appeal to the employees to avail LEAVE keeping in mind branch position

Make it clear to employees that they will be rewarded for their achievements through: leave matters, flexible office time, monetary incentive*, transfers and such other fringe benefits. *(Monetary incentive to be devised keeping a practical view).Staff would also be more inclined to take up and adopt such SMAs than the more challenging NPAs

The whole exercise must be spelt out more on a VOLUNTARY mode than on a MANDATORY mode and play on the psychology of the employees.

Even as we are fighting to control NPA, I find a striking similarity between Asset Classification exercise and Cricket match. Consider the table and you will know how:

NPA NORMS	CRICKET MATCH
Initially, there was no uniform procedure. Health code system was too subjective.	There are reports that cricket test match was played until they got a result, win/loss, irrespective of the period.
Enter reforms in 1990-91, spelling an end to the ‘honeymoon’. Fixed ‘free play’ of 24 months. We could tolerate default in repayment of interest or installment up to a period of 24 months	Test match was restricted to five-day affair. If a result (win/loss) was not achieved in five days, it would be declared as ‘draw’.
Free play was further reduced to 12 months. It meant we could tolerate default in repayment of installment/interest up to a period of 12 months	It was in early 1970s that one day format was designed where match was to be over in one day. Each side would get 60 overs to play.
Past due concept removed	Rest day was removed for the tests
It was further shortened to 180 days. Any default in repayment of interest or installment for over 180 days would be treated as NPA	One day format was reduced to 50 overs a side.
To keep us on our toes all the time, 90 day delinquency period was stipulated	50:50(bye, Britannia) is likely to become history soon. Welcome 20:20!
‘Ever greening’, they called- an exercise to camouflage NPA.	Not to be done in, cricket saw its equivalent in ‘match fixing’

The list goes on. Any way, let us get down to business. How to contain NPA? Legal system was not on our side, we grumbled. We probably need a “DOOSRA” to counter NPA, so was our wish. Just as if to answer our prayer, surfaces the “SARFAESI”. In it we saw the cricketing equivalent of ‘DOOSRA’. The collective sigh of relief the bankers heaved on discovering the DOOSRA was short lived, as the defaulters reacted swiftly and went to court terming it as ‘draconian’. (Mardia Chemicals Ltd v/s ICICI Bank Ltd). The similarities between cricket and NPA continue. Remember, ‘DOOSRA’ also faced lot of problems and was put to severe test (Murali and Bhajji were frequently tested). Well, the controversies notwithstanding, we need to employ the cricketing “DOOSRA” to tackle this menace called NPA!! All we need to do is to use it effectively, a la ‘bhajji’ or ‘murali’.

2. NPAs eligible to be covered under SARFAESI Act:

We expect branches to invoke this act systematically. Assuming they do it, and identify eligible accounts. On identification, demand notice is issued duly signed by the authorized officer (after obtaining permission). This is as far as they get, because, more often than not, further action is either delayed or not taken at all. This is not to blame the branches. The real life situation at branches is so different. 60-day period goes unnoticed. Assuming they are able to do it, taking possession is another matter. The whole exercise is being done in a not-too-systematic manner, thereby; the IMPACT on the defaulters is MISSING. The MESSAGE for the defaulters is MISSING. This is why I am suggesting that we set up a DEDICATED TEAM to execute this DOOSRA!! Now that we have SARFAESI, we would look stupid not to take advantage of this Act. It is only logical then that we do it in a professional manner as described below:

Form a team for invoking SARFAESI act.

Branches have to identify the eligible accounts under this act.

Then the team should take over the job of preparing the groundwork for invoking the act, like preparing the notice, seeking permission to issue notice, and all other related work.

¨      Prepare data for notice

¨      Obtain permission to issue DN

¨      Keep track of 60-day period and Issue Possession Notice, if the party fails to respond within 60 days

¨      Similarly keep track of 45 day-period (15 days of PN + 30 days of Sale Notice)

¨      Arrange for sale procedure and the related work if there is no response to sale notice

¨      All other related work.

Team should keep track of the developments like party’s response, and make it a point to unfailingly monitor the accounts-for e.g., if party has promised to make part payment by a certain date, we should follow up on that particular promised day.

Now that mortgage finance is liberalized so much, default probability is likely to go up as well. So, there is a compelling need to create a DEDICATED TEAM to take immediate advantage of the act. SARFAESI Act is a formidable weapon to deal with NPAs and we should unfailingly exploit it.

We may even think of appointing qualified Law Graduates to invoke this act, as the no of accounts eligible to be covered under this act is on the increase. These lawyers may be placed at ARMBs and at places where the cases are in large number. This way we can tackle the NPAs in a very professional manner. Also, they can be used for giving legal opinion on a selective basis, at least in respect of advances of Rs 1 crore and above. This will also eliminate the discomfort faced by borrowers in obtaining legal scrutiny report from panel advocates. This is sure to add value to our service. Should there be any impediment in entrusting the job of legal scrutiny report to our own lawyer-colleagues, it should be sorted out through debate and discussions at appropriate place.

Consider this: let us assume the amount covered under SARFAESI provisions accounts for over Rs 300 crores. Let us further assume, we appoint 20 lawyers to begin with. It means additional cost of about Rs 60 lacs (on the assumption that each lawyer would cost Rs 3 lacs per year). Now even a 1% reduction in these NPAs on account of appointing lawyers in a year would mean Rs 3 crores. It means they take care of themselves!!

3. Educating the borrowers about SARFAESI ACT

It has been sometime since the act was introduced. Banks have been aggressively making use of this act and have been quite successful too. But if you scan the report on the progress of this act, you will know that a great deal more needs to be done.

Our exposure in mortgage finance is increasing, particularly under individual housing. As a result, default is on the rise. Curtailing default is our main concern. Among the various recovery measures, SARFAESI Act is probably the most powerful weapon. We have tried to create awareness about this act among ourselves through circulars, workshops, and trainings. So it should be.

Yet, there is one area, which we have not covered: ‘EDUCATING BORROWERS ABOUT SARFAESI ACT’. We have a large pool of small borrowers who have availed housing loans and other type of mortgage loans ranging from Rs 1 lac to 25 lacs. Awareness level of High value borrowers about this act is much higher than that of small borrowers. Present scenario upon a mortgage loan becoming NPA runs somewhat as under:

We send demand notice. There is every possibility that demand notice is treated by the borrowers (other than high value borrowers) as just another notice from bank. Not much importance is given. Also, there are plenty of self-styled legal advisors who mislead the innocent borrowers on its authority and relevance.

What we can do to counter this trend:

1. Give wide publicity to the act. Explain in great detail about the various provisions of the act, the powers conferred on banks to seize securities without court’s intervention. This can be done through TV, Press, and websites and so on.

2. Form a team who know the act well. They should visit individual borrowers personally and explain the various provisions, powers and its implications on the borrowers.

If we take these steps, probably we can eliminate the possible misconceptions about the act. This will also eliminate the possibility of wrong counseling by self-styled legal advisors to a great extent, as the borrowers will be aware of the powers of the act.

How to go about it:

The first part of publicity could be handled by IBA on banks’ behalf. The banks collectively can appeal to IBA and impress upon the necessity for wide publicity to this act. This can be done through print media, television and electronic media.

And administrative offices and branches can undertake the second part.

Ø  Create a team having good knowledge of SARFAESI Act

Ø  The team must visit borrowers individually and explain the various provisions of the act and the powers the banks have under the act to seize securities without court’s intervention.

Ø  Also, they must explain the avenues available to the borrowers like approaching DRT/DRAT, if for some reason they choose not to repay the loan. Further it must be made clear that approaching DRT/DRAT would only add to the liability by way of court cost, lawyer fees and interest as DRT/DRATs almost always dismiss the petitions of the borrower

Ø  This exercise of educating the borrowers will dispel the misconceptions that they may have.

Let us assume a city branch X has 5 officers and 7 clerks. And the no of accounts eligible for issue of DN under SARFAESI is 50 accounts. Let us further assume that DN is issued in all the 50 accounts. This means there is a waiting period of 60 days before the branch can further proceed. The branch must utilize this 60-day period for ‘EDUCATING THE BORROWERS’. What branch X needs to do:

Ø  A group of staff (may be an officer and a clerk) must contact at least one borrower per day and educate the borrower

Ø  They can easily cover these 50 borrowers within this 60 day period and create awareness about the options before them:

If they regularize in response to DN	If they choose to approach DRT/DRAT
Further steps will not be taken as long as they pay regularly	Ø  It will be a big financial burden. Ø  Mental agony Ø  Defaulter status Ø  Pay upfront 25% of dues for approaching DRAT Ø  After all this there is no guarantee that their case will hold Ø  Even after all this, they are more likely to end up paying bank dues

If we are able to convince the borrowers that they would have to end up paying bank dues finally, the possibility of change in the stance of the borrower is much higher. This is more likely to yield better results and thus save the bank a great deal of efforts in invoking the provisions of the act.

We can at least try this as an experiment in a few select branches and see how it goes.

4. SOFT NPAs:

The next step would be to tackle the most recent NPAs or the SMAs that have just become NPAs. They are Soft NPAs. The chances of upgrading these soft NPAs are much higher than the older and hard core ones as the overdue portion would be considerably less.

5. OTHER NPAs:

Dealing with these hard core / old NPAs is a big challenge for the banks for the following reasons:

1) Absence of security 2) Abandoning of activity 3) Borrowers absconding                       4) In a long drawn legal dispute

If borrowers are available, a negotiated settlement would be the most suitable avenue considering the opportunity cost. In case of rest of the NPAs where neither borrower nor security is available, we will have to take a call on either keeping them in our books or eliminating them after adjusting whatever guarantee claims available if any.

Summing up:

Just imagine the amount of time and energy we spend on NPAs. And compare it with the returns on our efforts. Just for a moment, imagine that we spend equal amount of time and energy on “not creating fresh NPAs”. And visualize the effect!! Follow up and recovery of NPA is REACTIVE. Preventing NPAs is PROACTIVE. We need to be PROACTIVE like never before. Much as I hate to use the cliché, prevention is better than cure!! Or, SMA IS BETTER THAN NPA!! The focus must be on “not creating fresh NPAs”. Or shall we say, SMA BY CHOICE – NPA BY CHANCE!!