IF
I WERE A BRANCH MANAGER OF A BANK TODAY
Recently, I got the
opportunity to interact, over phone, with a few branch managers of PSBs/private
banks in Chennai, Coimbatore and Hyderabad.
All of them are reconciled to attend to banking activities physically
(not online) in the COVID period, with no symptoms of even the end of its beginning
in sight. Since no ‘new normal’ is available to banking activity in the COVID
prone environment, the bankers
fine-tuned themselves to conduct the daily branch operations, meet the
requirements of the customers visiting branches and interact with them at their
work-places/homes, as if the business is as usual. However, apprehension is
writ large in their faces when they appraise/sanction new/emergency/additional
loans, restructure credit facilities and sell third party products like bancassurance,
mutual funds etc. This is because the beneficiaries have not yet climbed up to
the ‘new normal’ level, leave alone operating at their normal level.
I,
with a banking career of more than three decades, as well as my predecessor
bankers, never faced a situation like this in our country at least in the last
70 years.
Of course, bigger challenges like
1. Bank failures every now and then in the 1950s and 1960s (leading to the birth of DICGC) and mergers of failed banks with PSBs, after that period, till 2014
2. Massive branch expansion in the 1970s and 1980, consequent to nationalisation, with mass banking as the focus and compulsion to work in totally remote places (where transportation, living conditions and language posed enormous personal inconveniences)
3. Liberalisation Norms in the 1990s paving way for new income recognition and asset classification norms coupled with aggressive lending in both corporate and consumer segment by all including deposit oriented branches
4. Adoption of Universal Banking norms, where both commercial and development banks entered into unknown areas for them(project finance by commercial banks and retail lending by development banks) in the new millennium
5. Transforming one self and the bank from a manual to a totally computerised environment and now expanding into digital banking
6. The stressed assets scenario of six years in the late 1990s stretching into the new millennium and the same story repeating itself in the 2010s going well up till now (only the name changed to asset quality review, etc.)
7. The massive PMJDY exercises in 2015 and demonetisation exercise of 2016
were all faced by the bankers successfully in the post-independence period.
When one can adapt and be resilient to the innumerable changes in the banking space as above, there is no reason why he cannot weather this short term (any period upto 12 months is short term in banking parlance) yet gruelling COVID and post COVID to be defined ‘new-normal’ situations. This will also pass through, but what I would have done, had I been a branch manager of a bank today. Here are some thoughts.
Sanction of New/ Additional/Emergency Facilities:
a. Certainty/reasonable certainty of projected cash flows to repay scheduled/rescheduled interest/instalments shall be the main criteria for all facilities including personal and consumption loans. Receivables, orders executed, orders on hand, credit sales, debt to be raised and everything else projected from external sources should pass through this criteria ‘certainty/reasonable certainty’. Availability of credit guarantee for existing/emergency facility or additional collateral should be treated as comfort to fall back in case of stress and shall never be the ‘only one factor’ in decision making. Failure to assess cash flows properly will result in the account getting stressed and classified as NPA subsequently. Invocation of credit guarantee/SARFAESI does not assure immediate conversion of NPA into recovery and there is a substantial time lag before the money is received into the account. Availability of Credit Guarantee does not absolve accountability also for not assessing the prospects properly in the first place.
b. Rescheduling/rephasing the instalments should be tried out before venturing into restructuring. As normal levels are likely to be achieved over 2-3 years period, the ‘new normal’ sales/income levels should be assessed while rephasing or restructuring.
ü Moratorium
on instalments should be extended till the ‘new-normal’ period is reached and
only the interest dues on the loans, shall be fixed for repayment during the
pre ‘new-normal’ period. Where repayment
of the entire interest dues is not possible, a portion/fraction of the same can
be stipulated as monthly instalments, to ensure activity monitoring/customer
contact on a regular basis.
ü When
the ‘new normal’ level is expected to be reached, the interest dues shall be
recovered fully but the instalment on principal amount should be kept to the
minimum in the beginning. This will
ensure that the customer do not run into liquidity crunch or the account entering
into default mode. From the ‘new-normal’ period till reaching normal levels,
the instalments on principal should be enhanced gradually to reflect the
increase in projected internal accruals/cash flows.
ü Pre
COVID instalments should be stipulated 6-12 months after the projected time
period in which ‘Pre COVID normalcy’ is expected to be achieved to avoid
unforeseen disruptions in the activity/revenue/repayments
ü In
all cases involving this exercise, the accrued and non-paid interest should be
culled out into a separate term loan at a lower rate of interest. While fixing
instalments as described above, priority shall be given for clearing the term
loan representing interest not-paid portion as that will give the customer the
mental satisfaction that the overall debts has not gone up on account of
interest not paid.
ü The restructuring/rephasement should not be uniform even within the same industry/segment/geography and has to be customised for each account.
c. While considering additional facilities or restructure existing facilities, the customer’s assets and the investments in financial/non-financial assets shall be gone through. A discussion should take place with the customer for disposal of assets, which do not affect his business activity. This will help the customer to raise interest-free funds which carry no repayment obligation also. Collaterals including land, which have no bearing on the activity shall be taken for this purpose. Genuineness of the banker’s intention can be established if the proceeds of the collateral are used for meeting the additional cash requirements/reducing the debts and the existing collateral backed loan is replaced with credit guarantee backed collateral free loan.
d. Sanction of new loans/additional loans for expansion are undoubtedly the most critical decision factors in this uncertain period.
·
In respect of personal loans,
- salaried class might get a preference due to certainty of cash flows in the near future. However, in addition to existing conditions like salary credits into the account in the past/check off facility available/salary slips for six months, etc. an assessment of the likely continuity of the past in the future shall be made. There will be several situations like employer ceasing to exist, job reductions, salary cuts and so on. The scoring models, enabling sanction of personal loans physically in branches/on-line, needs to include mandatory manual-intervention columns to incorporate the likely changes in future cash accruals.
· In respect of non-personal loans,
- guidance
from the controlling offices (and not head office circulars alone as conditions
differ from centre to centre) is desirable to identify sectors in which new
connection/expansion of existing facility can be encouraged. Neither all trade activities nor all service
sector activities promise the same prospects. For example, in auto segment,
while tractor sales promise growth, used cars might have better prospects than
new ones, smaller vehicles carrying more demand than SUVs/high ends. In
housing, affordable housing and second purchases might have more demand than
new big houses.
- After
getting the guidance from the controlling offices, the appraisal should be done
by the branch for every customer individually based on his prospects, rather
than relying on scoring models.
- As
a matter of principle, only existing entrepreneurs (need not be existing
borrower/customer) who are in the field at least for one year should be
considered.
- Takeover
of facilities should be kept to the minimum and controller approval shall be
mandatory for any takeover.
- Enhancement
of working capital facility should be encouraged in sectors which offer bright
prospects in the present scenario; however sanction of additional term loans
for capacity expansion needs to factor in whether the increased cash flows in
the present situation is likely to continue in the post COVID period as the
repayments are likely to extend beyond the short term.
Cross-Selling
Ø Hitherto,
loan customers were the targets both for insurance and mutual funds. Now is the time to sell these products to
depositors who remit their surplus funds in bank accounts.
Ø Covering
for uncertainties should be the business that should be looked for.
Ø Life
cover, health insurance and SIPs in Mutual Fund Schemes offer the best bet to
approach the depositors. Persistency
level is bound to go up as depositors invest money from their surplus into
schemes which offer higher return than bank deposits. In respect of loan
customers, the focus should be on covering the outstanding in the loan due to
unforeseen circumstances like the death cover available for housing loan
outstanding.
Coimbatore
25.08.2020 V.Viswanathan
The point on Gold Loan and repayment is enlightening, given the new LTV norms. If the prices come down suddenly the loan will lose the security cover.
ReplyDeleteEducative read Sir.