In view of the steep rise in NPA accounts, banks must monitor the end use of loans. This will act as a deterrent for borrowers who misuse loans
The banking sector cannot grow with so many rules and regulations, checks and control systems. These boundaries have not only made banking a tough task but they have become far more expensive than before. One can’t direct the banks to put in place state-of-the-art audit, control system, supervision and monitoring mechanisms and sit quietly in a cozy air-conditioned chamber. Responsibility ought to be shared by all stakeholders. Tackling Non-Performing Assets needs combined efforts on the part of bankers, supervisors, political leaders, media as also borrowers. Any laxity in disposing of one’s responsibility will deepen the banking crisis further.
Periodic health check up of the banks are a must. Health checkup does not mean intensive investigation to know every bit of its operational, administrative and business deficiencies, but to pin-point the areas that need urgent action and remedy. Instead of aimlessly examining all parts of the banks, the supervisors, auditors, banks’ top management and the Board of Directors should focus on the areas that are the worst-affected.
Credit end use is one among those areas which the banks must focus on in the next two years. The country’s economy largely depends on credit end use. If this area is not monitored right from the receipt of the application to the asset creation, it is bound to create credit delinquencies. Had the banking sector addressed this area effectively, it would not have amassed amassed its pile of non-performing loans.
Top officials in the banks, board of directors and supervising banks should share the responsibility in monitoring the credit end use. They should own the responsibility of credit performance in different sectors at the ground level. Even after the high growth of Non-Performing Assets, many banks have given loans for housing and small economic activities in the unorganised sector in urban and rural areas.
Now these sectors, particularly the housing sector, are show high Non-Performing Assets. The question is: Which area should the banks finance when no sector is free from Non-Performing Assets riskIJ Energy, infrastructure, realty, education, aviation, mining and steel have the major chunk of Non-Performing Assets that has now also spilled over to small economic activities. In fact, the growth of the bank alone is not responsible for Non-Performing Assets. If the Government does not create credit absorption capacity and gives banks a credit target to achieve, it is bound to create Non-Performing Assets.
Take for example, if a river is dry, the farm land along its side will not get access to water; the ground water will go dry and biodiversity will deplete. It will not charge the wells and create drinking water shortage. If the Government activates the river with peoples’ participation, it will enhance credit absorption capacity which will ultimately keep the bank’s credit cycle healthy. If the credit cycle is healthy, it will create good economic assets for the people.
Banks’ loan account will always generate interest income. Media reporting on the health of natural infrastructure is very essential for sustainable growth. The environment, culture, local administration, political will, performance of police and media coverage of ground reality have a indirect impact on credit end use.
So, credit end use review is something that all board meetings of banks must do. Sector-wise monitoring of credit end use should be given to experienced senior officials in banks who should keep detailed information about it. Supervising banks should also share sector-wise credit end use monitoring task with its top officials. Each official should be given one or two sectors to monitor credit end use on their own without delegating the responsibility to lower ranks.
Credit end use monitoring will give the bankers the much-needed skill and knowledge to know the physical assets that are created with bank loans. It may be a loan for a bicycle, or a tube well or a hydro-electric project, the end use of each and every account should be monitored meticulously. Monitoring credit end use is a huge challenge but it is an effective remedy to rein in the Non-Performing Assets growth. Since there are thousands of accounts in banks under different heads, those accounts should be regrouped under different sectors. Once the accounts are regrouped, those groups can be shared among top executives who will can be made in-charge to monitor the credit end use.
Desk monitoring of credit end use is easy but matching the desk monitoring output with the physical assets created is a risky job that needs a positive attitude of the local administration and public representatives. When big loans go to a rich influential local person, it is very difficult to verify whether or not he has created economic assets with the bank loan. Effective credit end use always fuels growth and help achieve inclusive growth.
(The writer is a freelance commentator)
