Comments on Asset Resolution Space in India during CY2010
Comments on Asset Resolution Space in India during CY2010
It was a year of MISSED OPPORTUNITIES for banks and financial institutions in resolving their NPAs. Many had panic buttons on with restructuring of large realty portfolio, 2G telecom/power funding and lending to micro finance companies. Some banks remained continuously on OTS mode throughout the year like the QEs in the US. ARCs were busy trying to liquidate some of the accounts and generate cash. Some ARCs and waana bes were looking seriously at retail assets acquisition as lead time of resolution is shorter in this category. There was good news with the order from Court that inter-bank sales of NPAs are okay. The noise that ARCs are best suited to handle NPAs (suggesting scarce bank resource should look at only business development) continued throughout the year however, we saw some bank issuing internal directives that asset sale to an ARC should be the last resort (Fittingly so when bids come at 20%-30% and often instead of cash there are SRs). Inflation has been biggest threat hitting and mauling man on the street can push the numbers of low-ticket NPA on the rise.
How did banks fail to use the skill and expertise??
Outsourced resolution expertise is the cheapest mode it does not increase load in the system, you do not have to put extra ACs or laptops for them nor even some cabins or furniture vis-a-vis building up your own asset resolution infrastructure. Let me tell you, an employee with an assured monthly paycheck in a bank can be of no match in terms of animal spirit' of a commissioned agent (every penny of whose is based on success that he brings to the table) to resolve an NPA. But in many of the boardrooms this simple fact is forgotten when go-ahead is given for massive capex and manpower budgets for creating new avatar of asset resolution departments (recently we find one leading bank has gone back from stressed asset nomenclature to age-old recovery department). When resources are scarce and cost of money is going up, all principal lenders must think seriously whether they have been able to understand what resolution expertise is available outside the institution and at what cost. Agents do a lot more thinking than a lender for their NPAs and let that be that way only as this is the least cost and most effective solution if directed rightly. Yes, lenders officials remain busy trying to clear big compromise proposals but even those should be outsourced to skilled and successful agencies with final decision-options getting created for lenders' Okays.
However, are banks capable of handling agents and consultants in resolution areas? Assuming lender needs to have equally good expertise if they have to handle highly skilled agents if you do not have, hire selectively these skilled professionals at market price and you land up saving huge unwanted investment building everything in house. I remember reading about Chairman of SBI talking of having inducted senior leadership talents at market price.
Moreover, use of technology at the backend is also now mustfor building a time efficient technology led operating model for asset resolution. Huge time could be saved if the documents pertaining to a case are put on electronic mode rather than present scene of
files with crumbled up papers. Just by moving to email and putting all records in electronic mode can do a great job of profiting from outsourcing other processes can follow. Hardly any PSU or private bank in India has these things in place and just by this simple step major downtime in resolution could be saved. I am sure this also shall help due diligence by bulk asset buyers in terms of cost and time.
The pride of the agents lie in their helping in building and creating transparency to the nation and help the banks and FIs to contribute further in GDP growth. In one of the meetings with an ex CMD of development financial institution last month, I had shared about how even in remote and insurgency torn areas like the NE India, in the last five years a small agency through its resolution services has contributed in helping banks increasing their lending strength by nearly Rs.2000 cr, assuming 3/4% NPA ratio. These are unsung heroes and their skills will move to other businesses if principals fail to utilize these strengths. If American banks and companies can create India an outsourcing hub which includes even debt collection etc, then why not Indian lenders have plan for their outsourcing and agents in order to cut cost and increase profits specific to debt resolution areas.
To put in bulleted points the opportunities lie in
Understanding the available skill set for asset resolution in-house and outside. Our estimate is that there are more than two million recovery/collection professionals in the subcontinent for billion plus economy it is no way a small number. How many lenders have realized the potential of this segment and work towards benefiting from that??
There has to be resolution targets for the lenders through these outsourced expertise otherwise the easy way of rushing towards compromises and last quarter sales to ARCs shall continue destroying huge amount of wealth in the process.
Complete outsourcing or recovery and resolution over a period of time can reduce huge amount of manpower and infrastructure investments and these can go towards building the lending or non-fund businesses.
The process can be further enhanced by real-time connectivity with the agents which already a part of many financial inclusion programmes.
Cut hardcopies, go to email, put records online, offer selective online access to the agents, online receipt and payment of agents bills, penalties and punishments to officials who takes buffer of manual and non-transparent system to avoid contractual obligations creating payment delays to the agents and remove human intervention as far as possible identifying and understanding the entire process.
The list can continue
The challenge lies in making recovery a successful engine for leveraging lending. Issues are .
Understand the outsourced resolution process to create checks and balances. Use learning of last decade and available outsourced expertise.
Develop contracts reflecting legal rights of both lenders as well as recovery agents. Huge lack of understanding of agents' concerns are reflected across in all lenders' contracts that we have seen in recent years. However, we have been able to help certain institutions to develop near full proof contracts based on our decade long understanding in the ground coupled with lenders priorities.
All value additions by agents must be protected and encouraged in the process.
Lenders move to court against any defaulter should be the last resort and should be based on external input also, so that, such decisions are not clouded by the easy way out by the concerned officials as the legal expenses are not paid out of their salaries - can we develop a policy of penalizing officials who resort to court at the earliest opportunity. This will help to reduce chocking of country's legal system too. Let courts must also put a hefty charge for giving a verdict we welcome recent example of court with a telco.
Like customers have safety net of ombudsman etc, the agents must have a sounding boat so that their grievances are resolved immediately. If unions or associations get formed, it will be solely due to the pain in the system with large number of unresolved issues with the principals.
Since this newsletter is also going to RBI and Ministry of Finance, hope they are listening issues with such a large constituency of recovery agents nationwide sooner be addressed for increasing the results and profits of the lenders. Since there is already a huge number of agents being trained as per regulatory guidelines and rushing to the market every month non-stop, their investment and interest is now a definite concern of those for whom they matter the most.
Some of the unique events we saw in the last calendar year having an impact in resolution of NPAs are-
For the first time I found a DM putting his SARFAESI hearing schedule on the net my alerts picked up the schedule of the DM, Panchkula. It was really exciting as nationally IF all the DM's do the same, resolution under SARFAESI will move much faster.
Then there was strike and Bandhs in one or two districts of Kerala against SARFAESI accusing misuse by bankers.
Many of the online Indian law forums have been getting questions on various provisions of SARFAESI - I keep going to SARFAESI as that is my area of interest.
Then we found that one state in the country has not seen a successful auction of any secured asset since independence and we understand it is a social taboo to bid for your neighbour's property in that state. What message does such situation bring for the lenders? Can a bank outweigh political compulsions??
There had been very low-key participation of Indian practitioners in the social network platforms dedicated for the professionals from this sector of asset/NPA resolution and reconstruction. However, US was highly active in various forums of distressed assets.
Instead of writing a lot, the objective of this newsletter is to sensitize the people connected with lending as well as recovery of NPAs, resolution and reconstruction of assets. As we move ahead in 2011, I write some of the issues, concern for which can make the entire resolution process much more productive and meaningful both for the lenders as well as agents.
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