Credit decisions

The assurance given by the prime minister “bankers will be allowed to work without fear..” and subsequent statement by Finance Minister  coveys the feeling that the ailment is diagnosed  and  government is taking corrective measures to reinstate the credit decision making process. What prompted the decision? Let us have a look in to the recent credit growth.   (Source RBI- In percentage)

It is imperative that the stunted credit  growth causes higher growth of NPA in percentage since there is no growth in the denominator, i.e,  credit deployment. Growth is evident in food credit, which is in fact borrowing by government.

Personal loan is considered less risky, but growth in personal loan appear to have slowed down. Recent data suggests stickiness in personal loan segment also, presumably because  slow down in industries affected the employment, which had a spiraling effect on personal loans. Credit growth in industrial sector virtually came to a halt, which ,inter alia, could be attributed to the risk averse attitude  of the bank officers responsible for credit  decision. As assured by the prime minister “….legitimate business decisions and lending would not be questioned.” He also acknowledged that “the public sector banking industry felt it was under pressure”, but asserted that government would not let it down. Why such pressures are coming? Why the process is affecting the morale of the decision makers.

Default occurs in an account due to variety of reasons. It could be cyclical factors, management failure, raw material crisis, competition, national and international policy etc. Whenever account goes bad the authorities try to identify the reason and take disciplinary action against the erring officials. Internally bank engages officers of higher grade (than the accused officer) to enquire and take action against the officer. In case of exposure beyond certain cut off limits and if authority feels that there is some malafide intention, reference is made to outside agencies for investigation. Credit sanctions as well as monitoring require expertise in assessing the business , market, management intentions. Business is subject to fluctuation. Whenever there is adverse situation, obligor used to approach bank, and bank offered support at difficult times based on own experience. Although in most of the cases borrower regularizes the account when the business position is better, but there is also a possibility that the borrower may not recover. Further, as rightly mentioned by Mr Rajnish Kumar, Chairman of State Bank of India(ET Dec 16, 2019),” lenders are not policeman, can’t catch fraud” referring to too much onus on lenders being held responsible for loans which turned bad or in case of fund misappropriation by companies.

Generally the fault lies in the process, not in any organization. Credit management is an extremely critical area where knowledge and experience are both necessary to understand the underlying factors in a transaction. A person with many years of experience in taking credit decision can realize the constraints faced by the decision maker. It is also difficult to assess in hindsight. Investigating agencies normally engage people specialized in their area of function. They require considerable time to understand the transaction. It is difficult for them to ascertain the basis of the sanction. As such the concerned officer has to visit the office many times. In addition to agony there is social prestige, which concerns the officer.  By the time the investigation is complete and decision is communicated, the concerned officer used to have  many sleepless nights.

Developing skill in credit management requires many years of hard work and the decision maker’s concern can only be realized  by another specialist in the field. The officers engaged in identifying staff accountability are from inspection or other departments, who can only examine the variation in compliance. Bank cannot spare credit specialists to work in any other segment unless there is any allegation. Since sanctioning powers are vested on head of branches etc, and based on the exposure and skill developed, these specialists  in course of time become head of zones/divisions etc where they have more administrative functions. As against private sector banks where credit is alienated from administration, in public sector banks such segmentations do not exist. In case of impairment of accounts the responsibility of identification of staff accountability is vested on inspection/vigilance department officials. They are bound by the rule book, without considering the fact that the responsibility of arresting the account from slippage lies on the branch incumbent / regional head, which is in the general interest of the organization.

The approach of the external investigating agencies also has the same issue. The very fact that the concerned person had to work with very less supporting staff and had to deliver in a short time span are often goes unnoticed. There is also pressure built up based on the proximity of the borrower with various higher authorities. Not all can withstand the pressure keeping career, family in view. Investigating agencies has to discharge their duties for which they have to understand the transaction and then decide about the case. The briefing is done by the departments of the bank who may not have enough skill to understand the criticality of the account, neither they have the responsibility to arrest slippage of the account. Presently Institute like NIBM is organizing training program for inspecting officials on identification of staff accountability, especially because it is weakening credit decision making.

There are designated departments which are responsible for reporting fraud and referring the account to investigating agencies. While making reference these departments are expected to examine the genuineness of the allegations and brief the investigating agencies. General practice is to  ascertain accountability by mapping the compliance against policy prescriptions. These mapping do not consider the condition in which decision was taken. Most of the functional departments do not have clear job design identifying each responsibility assigned. As a result the entire responsibility is vested on certain functionaries who were signatories in the transaction. While making reference to the investigating agencies, the concerned officer is generally not consulted. In such situation the concerned officer is informed when the reference has been made. The task of the investigation agencies could be easier if , prior to making reference , some officials with long experience in taking credit decision are consulted. In absence of proper clarification , the investigating agencies start from the scratch and spend considerable time by calling all the officers (along with all the files , documents etc) who were signatories in the transaction. In this process the bank has to spend considerable amount of money and time , which could have been utilized efficiently.

The solution to the problem is a thorough overhauling of the systems and procedures. Prior to making reference the bank should internally engage competent officials who should independently decide the accountability and justify with records and documents. The concerned officer should be provided with the opportunity to justify the action, keeping in mind the organizational objectives. It should be ensured that the internal progression is not affected by the investigation process  and unless accused the normal working of the concerned official should not be affected. This call for intervention of professional HR professionals. The entire manpower planning should be effectively controlled by professional HR persons.

Credit Monitoring is a scapegoat in the entire credit chain. This is true for small loans also. Risk management principles introduced by Basel committee have been effective in restraining defaults in many countries. An essential prerequisite is to inculcate risk culture in the entire chain of credit sanction and dispensation. Credit administration and Risk management should be interwoven, for which changes in systems and procedures are essential. Comprehensive job design is absent in most of the banks. While credit sanction and monitoring are separated at the corporate level, there is no such segregation at the credit dispensation level. Inputs for credit rating are sourced from the centers where the entire account is controlled by relationship managers. The information generated is normally influenced by business objectives. The account is reviewed annually, but during the interim period the monitoring is not adequate, unless the account becomes critical.

The task before the government is stupendous. The mindset of the decision makers can be made positive by making transformation of the entire process. The wisdom of the officials with ability to take decision should be honored. In this process the malafide intentions will automatically be manifested. There are persons whose intentions are doubted. This is true in every organization. The process of identification of such persons should be carried out carefully in such a manner that genuine decisions are not prejudiced. The banks are in the process of merger. The new set up should hire professional HR persons to create a set up where the genuine decision makers do not live in fear and can work for the betterment of the organization. Credit is like blood in business, without which the entire economy will collapse. It is time to bring back the economy by restoring the credit decision making and risk taking attitude.