Page 42 - Banking Finance November 2020

ARTICLE

Change in Govt. & its Policy: India is a Republic country ; Unjustified and continuous excesses / ad-hoc sanctions.
and each Govt. has its own agenda. Eventually Policies and ; Non inspection of prime securities at regular intervals.
rules have been framed or changed by each government;
; Failure to identify early warning signals at the right time
these changes directly or indirectly impact on the business
and take remedial measures.
houses. For example, Ban of particular items for export or
import from any country, Increase of Taxes, Demonetization ; Failure in due diligence (especially new / taken over
etc. Our interaction and on the above, it reveals that overall accounts).
business has impacted a lot due to change of government ; Business failures and other external reasons.
and hence account turns to NPA.
; Willful default
Lack of effective Monitoring: In various audit and Vigilance
Challenges to Banks/FIs - The Banks/financial institutions
cases in PSB, it is observed that in most of the NPA/Frauds
face severe challenges that limit their ability to provide
accounts, post inspection either has not been done or if
financing solutions to MSMEs:
done then with casual approach. Had the Monitoring done
properly, the account could have been saved. High transaction cost and lower margins - For banks and
NBFCs, financing MSMEs is both an expensive and a high-
Inappropriate technology: Technology needs to be risk proposition. Constantly monitoring and engaging with
upgraded. Further, it is observed that a person is availing MSMEs monitoring and engaging with MSMEs is considered
loans from different banks/branches with same documents. too high a cost of business. The average size of credit
Hence, Technology may be upgraded so that he cannot cheat extended by formal financial institutions based on assessed
the bank. repayment capacity is even lower. On account of factors
such as smaller ticket size, high cost of due diligence and
Industrial sickness: Industrial Sickness is one of the most collections, the profit margin from MSME loans is generally
affected root causes for NPA for MSME sector and recently low, especially for traditional financial institutions. These are
this is nearly increased by 27%. therefore inherent challenges for these institutions from
pursuing MSME accounts actively.
Reasons for large slippages-
; Poor / ineffective monitoring especially in accounts up Low-risk appetite - Financial institutions typically perceive
MSMEs as a high-risk segment on account of their
to Rs.10.00 lacs.
incomplete understanding of MSME businesses. Given their
; Non adherence to sanction terms & conditions.
limited operations and resources, when banks do invest in
providing loans to enterprises, they prefer to work with
medium enterprises. That is because these businesses have
more stable cash flows, formalized operational processes,
and adequate collateral, affording a greater margin of
safety and less resource-intensive due diligence to
understand their business model. Risk aversion is topmost
concern in the case of Public Sector banks due to the
prospect of officers facing investigation from the Central
Vigilance Commission and Central Bureau of Investigation
when loans go bad.

Conservative Underwriting Process - The issue of higher
risk aversion in the case of MSME loans, especially loans to
micro and small enterprises, is further exacerbated by
conservative credit evaluation that places too much

42 | 2020 | NOVEMBER | BANKING FINANCE