STORY OF AN NPA
Once upon a time, he was a bright young engineer full of patriotic zeal. He had graduated from the country's most prestigious institute and while his classmates were preparing for migrating to USA, he had decided to serve his country. Twenty years later, he has been converted to an NPA (Non-Performing Asset) and he spends his time reading law books to save his skin in the court case that will haunt him for the rest of his life.
He had started as an employee in a blue-chip company but gave up job to be an entrepreneur. After spending five years to gather some initial capital, he started a small industry with a loan from the largest Bank of India. This was 1987 and the beginning of the tragedy. He had planned the unit based on commitment from a large scale industry who it turned out had given written commitments without being serious about what it committed. The baby was born sick and it was clear to the engineer-entrepreneur that there was no hope. There was just no exit route and he was forced to keep the new-born alive. As soon as the production started in 1988, he thought of various ways of saving the baby and discussed the same with the Bank with who asked him to write it all out in hundred different ways. He did that and also followed it up with personal visits to officers of the Bank. Every day he would spend half the day shunting from one office of the Bank to the other where more often than not he was treated as a dignified beggar. On the rarest of rare occasions when he displayed some sense of self-respect, he was insulted beyond imagination. Reports of such bad behaviour to higher officers were answered with sermons on learning to behave like a businessman.
Bank refused to help him out by giving additional finance. Bank also refused to take over his unit or to help him find a buyer for the unit. In fact they pleaded that they had no such provision. Bank can only take over a unit after a Court orders it to and that may take a few years if not decades. Bank froze his account and insisted that he keep running the unit with a frozen account. He committed his first illegal act by opening an account in another bank. This started a witch-hunt with the Bank using all means at its disposal to pressurize the other bank to close his account. All this while he kept pleading with the Bank to settle the matter amicably, but they were not interested. In 1993, the Bank filed a court case. Seven years later he is still pleading with the Bank to take over his unit on as-is-where-is basis and recover the best value possible. But the Bank believes that a dead horse is more valuable than a live one and they would take over the assets (or what remains of the assets) a few years down the line after being ordered so by Debt Recovery Tribunal. He has offered to pay some money based on his paying capacity and settle the matter out-of-court. Bank is not even interested in talking. The case drags on and he keeps cursing the day he decided to serve the country.
A long story that is boring because everyone likes to read about success and forget about failures. Yet, there is no denying that failure is an essential part of entrepreneurship. Accepting failures gracefully is the key to success and a society that cannot accept failures is doomed.
For a long time, India tried to follow socialism treating all businessmen as crooks and looking at entrepreneurs with suspicion. All talk of liberalization and economic reforms has not changed the mindset of Indian bankers and powers that control the bankers. The legacy of the British raj has survived and flourished in the form of India's gigantic cancerous bureaucracy. The tentacles of this cancer have spread to almost all fields in India including banking. Indian banks and financial institutions (FI's) are crying hoarse about their large Non-Performing Assets portfolio and are blaming the entrepreneurs, businessmen, Government, judicial system, courts - practically everybody except themselves for the mess that has been created primarily by them.
Any lending involves the following three stages where discretion needs to be exercised (a) Evaluation and assessment of the proposal (b) Continuing Support during the currency of the loan by additional loan or by non-fund based activities (c) Exit decision and modality. Indian Banks and FI's exhibit extremes of behaviour at each of the above stages. A rule-based approach precludes reasonable application of mind. Evaluation of project idea and the management is something that most Indian banks and FI's are least equipped for. This leads to the banker acting too liberal on all projects that are related to the flavor-of-the-month as well as to insisting on collaterals from everyone without taking into consideration any other competencies of the entrepreneur. For example if wind is blowing in favour of software, all projects involving software will be supported. On the other hand if foods is not being favored, a genuinely good proposal in foods will be rejected by all banks. This naturally encourages crooks to keep smelling for the flavor-of-the-month. As soon as they smell it out, the next step is to get a readymix 'bankable' project report from a con-man (also called consultant). Banks and FI's are too willing to finance against such reports to shady businessmen who may also sometimes grease their palms instead of looking for genuine project ideas backed by competent men of integrity. Herd mentality of the bankers and FI's creates excess capacity in any industry that they choose to finance thereby laying the seeds of sickness of that industry. Coupled with the incompetency of the entrepreneurs and the shady intentions with which the projects were set up, the sickness spreads like wild fire.
After a loan has been disbursed, it is an accepted norm that the Bank and FI's have a duty to keep smelling for and to act promptly on key signals that indicate the health of the recipient of the loan. Rule-bound bankers in India do collect all the necessary information and pile it up in neat reports and files. It is not unusual for bankers to even advise their clients to cook up their accounts to either satisfy the Banker's Health Code requirements or to get their unit classified as sick under the relevant laws. This having been done, the banker can sleep peacefully. Acting on the signals that emanate from these reports is none of his business. It is the entrepreneur who has to exercise to convince a long chain of stubborn bank and FI officers to rise from their slumber. This long chain operates on a veto system. Each and every member of the chain has a right to delay and veto and no one, howsoever senior, has a right to over-ride a veto or to ask someone to expedite. So the entrepreneur is now caught in a game where almost every petty Bank and FI officer satisfies his ego by kicking him where it hurts most before obliging him by moving the file to the next officer. Bank's and FI's key decisions about nursing versus exit get influenced by this merry-go-round ego trip of the officers. The attitude that the Bank will lose more than the entrepreneur by a delay in such key decisions is completely missing in Indian bankers and FI's who see themselves as demi-gods waiting for the right 'puja' (rites of worship) to be performed by the faithful before granting the boons.
Honourable exit is something that is an alien concept to the Indian bankers and FI's. The only exit route known to banks and FI's in India is to issue a Recall of Loan letter. The letter is just a stepping stone to filing a suit and has no other practical utility. As soon as a Recall letter is issued, the banker is relaxed because his headaches are now over. He will pass the necessary entries in his books classifying the loan as Non-Performing Asset (NPA). He can now blame everybody else for all his omissions and commissions with the entrepreneur being the key accused. In any other part of the world, the first option that a banker is supposed to exercise with the support and consent of the entrepreneur is a change in ownership. It always makes more sense to sell a business as a going concern rather than sell it as a dead horse. In any business there are intangibles like goodwill, key customers, key employees who may be lost as soon as a court case is filed. Sometimes such intangible assets may be more valuable than tangibles like land, building, plant & machinery etc. Indian banks and financial institutions live in a fool's paradise thinking that a court or tribunal can get them all that they need. What they do not realize is that no judicial body can help them get possession of a running unit without sacrificing its vitality.
The bureaucratic attitude of Indian banks and FI's has had two negative effects. On one hand it has fed and strengthened a generation of shady businessmen and con-men who know how to fool the banks for a multitude of projects - some of which even turn profitable. On the other hand it has killed a new generation of capable entrepreneurs. Indian Banks and FI's have looked at balance sheets and financial statements for too often. It is time that they learn to look at human capabilities. It is time that they learn to evaluate ideas rather than run in herd-like manner. Tribunals and Courts are like surgeons who can cut and operate but cannot give life and good health. Unless Indian banks and FI's learn to build their health as well as the health of their clients, they will keep converting useful assets of the country into NPA's.
14 January, 2000
Please write to me your comments about the above article.
ANIL CHAWLA is an engineer by qualification but a philosopher by vocation and a management consultant by profession.
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