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What a paradox?

banking

In any society, banks are the primary agency/organisation, engaged in the business of lending money. In a most critical function that they perform, they pool in and aggregate domestic household savings (thus enabling them to earn interest), which they then lend to various borrowers, which could be individuals, small traders or large corporates, thus providing credit/funds to the economy. Both these functions viz. savings and lending are crucial for the growth and prosperity of a nation. The lending function of the bank, needs the expertise, experience and skills of risk analysis, by way of credit appraisal and due diligence. The purpose is to minimise errors of judgement and lend to a creditworthy borrower only. It ensures the provision of funds to the most deserving borrowers, such that bank loans do not go bad. The key expertise of a banker in his lending responsibilities thus lies in his ability to appraise and spot creditworthy borrowers, who do not default/defraud bank loans.

This ability of bankers to do credit appraisal and risk analysis, has clearly diminished in recent years. With state-owned banks, which monopolise the Indian banking industry, being willing victims of political/bureaucratic meddling in their state of affairs, lending decisions of banks as have often been dictated by babus/netas and not by an impartial and objective assessment of the credibility of the borrowers and their credit needs by the borrowers, by the bankers per se. In many big ticket loans, bankers have taken orders from their political masters, rather than do detailed credit appraisals and then decide, whether to lend or not. It has been often found that papers were cooked up by bankers thereafter, to justify loans given to unworthy crooked borrowers in this manner. It was thus not a reasoned credit decision to lend, but was a mere execution of a corrupt politicians order. In this process, the infectious bug of corruption, widely infected the bankers too, collectively resulting in the giant mountain of over Rs. 10 lakh crores of bank NPAs. This huge banking crisis stands as a loud shameful testimony to the degradation and deterioration of the skills of bankers in India.

India thus faces a deficit of professional skills among its banking fraternity. Lending decisions have come to a grinding halt in banks, reflecting in the below 10% bank credit growth in India this year. Banks cannot refrain from the lending responsibility or else the liquidity in the economy runs dry. So we are witnessing a strange paradox in the Indian banking & finance industry. Instead of doing direct lending to borrowers, banks are buying the loan portfolios of NBFCs. SBI itself has earmarked a sum of Rs. 45000 crores towards purchasing NBFC loan portfolios this year. It means that the credit appraisal and decision to lend to borrowers, at the inception has been that of the NBFC whose skills have been relied upon/trusted by the banks. On the other hand, banks are desperately seeking to sell their rotten NPA loans to NBFCs at huge discounts, again betraying their poor lending skills. Interestingly while NBFCs sell their loan portfolio to banks, they have been demanding a premium, but when they purchase the loan portfolio of banks, they demand a discount. That’s the sorry state of banks in India, and the denuded skills of bankers.

 

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