| Topic : Life on Credit |
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Banking & Insurance Professionals |
ICICI Bank |
Corporate & Business Banking |
13 more ...
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Activity:
19 views;
last activity : 05 23 2011 02:31:02 +0000
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Defining Risks of Lending
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Continuous Monitoring
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Lending is an activity of providing short term exposure of your funds into others' pockets. I would call it short term, as long term lending must encompass the lifetime of the lending entity, which is never the case. While we assess the lending risks, we fail or ignore to register the key risks of lending; Is the borrower truly in need of funds? Will the funds impact postive results? Is it a value add or a real time fund crisis? (Most lending entities do value add by part financing the borrower, expecting him to manage the balance; while we do look at sources of Equity for the borrower, no template/tool measures the cost & similar interest burden of the Equity!) Primary & Collateral Security : Too much water has flowed on this issue; yet Credit & Risk counterparts fail to see the picture straight (my apologies to my friends around - but this is a general trend). WHat has happened to the assets of Lehman & Goldman & Bear Sterns...or for that matter the huge Non performing Assets lying with our public sector banks? Many feel security should be collected with adequate bundles of documentation. What I feel is more prime importance is the willingness to repay & past historical trait of repayment & empirical evidence of positive DSCR/ISCR (This again is an area to ideate!) |
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I worked in an all India Financial Institution. In one of the joint meetings, where we discussed settlement proposal for a sick case, we called the promoter to explain the institutions stand in the case. The promoter, who was in the eighties, informed the bankers that he took over the company from somebody and things did not work for him properly in running the company. He wanted to settle the loan outstandings when he was alive. Such was the attitue of the promoters to repay the loan outstandings.
The attitude to repay the loans is slowly evaporating. Institutions/Banks remove the herd attitude to sanction the loans in order to show the vertical growth. Post sanction follow up and when the company starts defaulting Employees PF remittances to Statutory authorities, it is an alarm bell. Thereafter close monitoring is needed on the the company's activities and cash flows. Right steps to be taken in case any reliefs are required, for which most of the lenders are not willing. A stitch in time save the whole thing.
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As a person who move with bankers day in and day out, I feel that constant and continuous monitoring is the only way to arrest NPAs. Ratios, DSCR apart, the account gives signals much earlier about becoming sick (just the way our body sends signals about impending sickness). Any negligence in identifying the signals and follow-up action invariably results in a bad debt. Except few, no entrepreneur wants to become a defaulter. In Hyderabad I have seen a new trend. Identify disputed lands and offer them as collateral. i.e If a person is having a land worth Rs.1.00 Cr and it is in dispute, he will pledge it to bank and borrow Rs.80 Lakhs and becomes a willful defaulter. The banker will be struggling with courts and the borrower is happy since he derived 80% of the value of the property.
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Interesting!!! truly an eye opener!! |
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