Professor
Ghoshal had immense faith in the ability of Indian corporates to compete in
global markets. As if to catch up with his prophecy, there is a lot of ‘new
found confidence’ on display among the Indian companies. They have mustered
enough strength to take on globalization confidently. The rising demand for
consumer credit from banking sector is a sure pointer towards the growing
demand in the country for industrial output. The corporates are even resorting
to financial engineering: Companies are today enthusiastically moving forward
to cash in on the prevailing historically low interest rates by borrowing
afresh to retire high cost old loans. They are gung-ho on restructuring their
debt portfolios with a mix of foreign currency and rupee-denominated loans so
as to reduce capital cost and stay competitive in the market.
Amidst the “feel good”
atmosphere we also have a distressing phenomenon demanding explanation from the
nation as a whole. Recently, the Reserve Bank of India gave a stern warning to
banks against attempt to “evergreen” their balance sheets for the current
financial year ending March 31, 2004. The RBI’s warning is directed against the
Non-Performing Assets (NPAs) of banks that have become a nightmare for bank
managements. Reserve Bank wants banks to rightly classify assets as bad debts
instead of trying to camouflage the balance sheets.
But, the real tragedy
behind the whole episode is that no one is willing to look at the root cause of
the NPAs. It is the failure of the businesses to generate the anticipated cash
flows as projected at the time of committing fresh investment either for
expansion of existing line of business or creation of new capacities, to
service the debt. There are multiple reasons for such failures: Lack of
entrepreneurship at the top in executing the project as envisaged; undertaking ambitious
projects all in the anxiety of garnering the early bird advantage or to prevent
others from entering the competition that too with no matching owned-funds or
internal accruals to realize the projected sales volume; unanticipated
liquidity crisis owing to either non-receipt of own-funds in time or hiccups in
the release of loan by banks; blatant misuse of funds meant for execution of
the project; deliberate default in repaying the debt and so on.
There could also be
instances where banks and financial institutions might have themselves
contributed their mite, though unwittingly, towards NPA’s accretion. They might
not have displayed matching skills to assess the multivariate projects that
have sought finances effectively, allowing the embedded risks to creep into
their balance sheets as NPAs. Or, it could be that banks have not exhibited the
requisite resilience in locating the incipient weaknesses of projects well in
time and initiate appropriate action in terms of restructuring the debt etc.,
that could have seen the project through with a little or no damage to the
core.
It is in fitness of
things that we must also examine the role of “character” of all those involved
in the episode. Be it individuals or corporates, all live with reference to
their “character.” It is the character that defines the fate of a person or a
corporate. It is the character of a corporate which encourages unchecked greed
for wealth resulting in irrational expansion of existing lines of activities or
diversion into an altogether new line of business, with no matching intrinsic
strength. Such irrational commitment of investments to fresh projects coupled
with lack of ‘sincerity of purpose’ obviously leads to failure in accomplishing
the envisaged business objectives. It is the very character of the company that
drives it either to deliberately misuse the cash flows or willfully default
from repaying the debt. In the final analysis, it is the “character” of the
corporates that defines the level of NPAs in banks and the subsequent need for
“evergreening” of banks.
As seen above, the
vexatious problem of NPAs has been defying solution. Against this backdrop, the
article “Effective Management of NPAs” by T V Gopalakrishnan, has taken an
altogether different approach to find a solution to management of NPAs. The
model developed in the article suggests the creation of a “Precautionary Margin
Reserve” (PMR) @ 0.10% for category A; 0.25% for category B; 0.50% for category
C and 0.75% for category D loans. This automatically strengthens the balance
sheets of banks. Such accretion of strength automatically establishes
credibility.
This is followed by the
article titled “Banking Sector Reforms:
An Impact Analysis” by Amita S Kantawala, which examines the impact of the
reforms on credit deposit ratio, credit GDP ratio, investment in government
securities to deposits, and the findings reveal a significantly lower interest
income to total assets ratio and other income to total asset ratio among
nationalized banks.
The competitiveness of
Indian commercial banks, in a deregulated market scenario during the period
1996-2002, has been examined in the article titled “Banking Sector
Liberalization and Efficiency of Indian Banks” by A Amarender Reddy by using the statistical tool data
envelopment analysis and window analysis. The main findings indicate that there
is an increase in technical efficiency and scale efficiency of most of the
banks in deregulated period. Most of the foreign banks exhibited most
productive scale size while most of the public sector banks are working under
decreasing returns to scale. Capital adequacy ratio was found negatively
influencing the scale efficiency while its influence on pure technical
efficiency was positive.
The last article
titled “Market Microstructure Effects of
the Transparency of Indian Banks” by Niranjan Chipalkatti, investigates whether
enhanced transparency imposed on Indian banks under the reforms launched is
indeed rewarded with increased market liquidity by way of reduced bid-ask
spreads. The results reveal that the enhanced transparency depicted by the
Indian banks had no significant impact on the market liquidity of private
sector banks, while in the case of public sector banks, the enhanced
transparency reduced their market liquidity. The paper ultimately suggests that
public sector banks should strengthen their corporate governance and risk
management practices.
All this suggest that
banks have to change their hardware as well as software to catch up with the
demands from the changing market dynamics. In the words of Prof. Ghoshal, these
organizations need to make some radical, even transformational changes to their
well embedded organizational and management models—something akin to a
caterpillar transforming itself into a butterfly.
-- IJBM Vol. 3. No.2
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