Page 32 - Banking Finance August 2020

ARTICLE

transform a gloomy situation to a rosy picture - unless their The Banker would constantly keep in touch with such a
Internal Auditors were hand-in-glove, and their External borrower, and probably help him to overcome some serious
Auditors simply lapped up whatever was shown to them, issues in the cash-flow positions (like force de majeure losses
without even the cursory cross-checks, and the regulator’s suffered, etc) with some additional lending ( Garner’s law
– RBI again – officials who vet the reports submitted, in a as per text books, and at most times paradoxically referred
routine manner and without a basic clue. As you can see, to as “working-capital term loans”), where the loss portion
there are too many IF’s and if still is happening according to is crystalized into a term obligation instead of a demand
you, then possibly your pessimism is above some thresholds. obligation, and a more lenient repayment schedule
hammered out to ensure that the borrower is able to ‘keep
Looking at the ‘how was it managed so his head above the water’, survive and come back kicking.

far’: All of the above has nothing to do with the regulators or
To become an NPA a borrower – a real or legal person/ anyone – and it is purely between a bank (and its
entity – has to stop servicing the interest payable (in case philosophies) and the borrower.
of individual borrowers, the EMI’s which has a proportional
interest component that varies with the age of the If even one of them does not understand the mechanics of
borrowing). the ‘why, what and how’ of such engagements, such
schemes become mere figments of hope.
This could be both due to real and malicious reasons.
So where do we go from here?
Real reasons are impaired cash-flows and Malicious reasons
An NPA is not a dead-beat; there is hope of breathing life
are when ab initio you borrowed with no intent to repay!!
back into it, if only the component stakeholders are allowed
to do their bit.
Many examples galore from time immemorial – in banking
history – where real defaults have often translated into Even when the hope of any recovery is lost, the banker has
subsequent recovery, as the borrower knows the importance
to take ‘reasonable measures to recover the dues’ before
of honouring his commitments, as a part of the whole cycle
he can “write off” a debt.
of ‘cash-flows’.
People in the know will understand that writing-off itself has
So, this literally means – in the banking circles – that an two streams – the financial write off, and the ‘technical
SMA-3 could/would become a performing asset tomorrow write off’.
(or in a short while).
Both have a phased procedure to be followed – like the
provisioning for the doubtful-debts, in the financial write-
off, and ‘attempting to salvage any collateral’ in the
‘technical write-off’.

While the financial write-off will impact the Tier-1 capital
of a Bank, and thus its critical parameters like the CRAR,
the technical write-off is more vicious as it will almost close
the door on any recovery potential – due to various reasons
like Legal Decisions, Technology Obsolescence, etc..

If all of this are right, then why is the

media going bonkers?
Media is going bonkers because of the Mallyas, Choksis, et
al – and don’t have the guts to report the correct thing:

32 | 2020 | AUGUST | BANKING FINANCE