Solving India's NPA crisis: The technology way

By Muqbil Ahmar

In the worst ever financial crisis since 1991, bad loans in India grew to Rs 3,41,641 crore in September 2015, striking at the root of India’s Rs 95 trillion banking sector. Total NPAs, as a percentage of the total loans, has grown from 2.11 per cent to 5.08 percent. Eight out of 10 banks featuring on the list are from the public sector. The banking system is veering on the verge of a crisis. Stocks of state-run banks are plummeting. Banking regulator RBI has fixed March 2017 as the deadline for banks to fix their balance sheets. The crisis is huge and there is no end in sight.

Why did it happen?
According to a survey by global research firm Ernst and Young among Indian bankers, 87% said that NPAs occurred due to diversion of funds to unrelated business or fraud, while a further 64% attributed them to lapses in due diligence. Around 72% of the survey respondents were of the view that the crisis is set to get worse.

Most of the bankers feel that the main problem is that banks can’t monitor and check the finances of an enterprise thoroughly as they have no visibility into its operations. Although banks do ask for a number of documents to sanction a loan, they are found fumbling as far as real-time transactions of an enterprise are concerned, since they don’t have access to its financial records or the feasibility of projections. The data that the banks have is not enough to authenticate claims, making them ill equipped to take decisions based on solid facts.

The 7 May 2015 RBI circular on “Framework for dealing with loan frauds” is supposed to bring banks in line with monetary discipline. According to the circular, banks now need to ensure strict monitoring of the finances of an enterprise both pre- and post-sanction. They will have to fortify their internal processes to ensure the funds undergo due diligence. While the RBI and bankers are doing their best to resolve the issue, measures have to be in place to perceive, report and alleviate such risks.

How can technology ensure a fraud-free banking sector
According to the Ernst and Young survey, 56 percent of Indian bankers felt that technology and data analytics should be leveraged to identify red flags and early warning signals. Moreover, 86% opined that there is need for a mechanism to identify hidden NPAs.

Therefore, banks need the technology to monitor enterprises continuously. This can be achieved through a two-pronged approach: ensuring transparency and implementing automation. Banks need to keep a tab on an enterprise’s key financial transactions: invoices, inventory, account receivables, balance sheet, etc. Business resources—cash, raw material, production capacity—and the status of business commitments: orders, purchase orders, and payroll need monitoring as well.
If all this data is made available to the banks, they would be better placed to take informed decisions. Banks would be able predict when and how an enterprise might start losing traction and would be able to weed out wilful defaulters.

For this to happen, banks should make it mandatory for any enterprise seeking loans to install Enterprise Resource Planning (ERP) software. The ERP can be connected to the banks’ own system, helping the financial institution tap into the real-time transactional data of businesses. Information in the ERP could help a bank decide whether the company has been meeting its financial obligations on time. Evidence of monetary discipline might also encourage banks to offer loans at lower interest rates to SMEs, who are usually low on finances. Enterprises could also use the digital platform to apply for loans, which could be quick and hassle-free.

“Due to the comprehensive nature of data in the ERP, a more detailed picture of the customer financial health would be visible to the banks. The access to this information can be authorised by the SME in a controlled environment. Consequently, any loan approval mechanism would get expedited”, said Shashank Dixit, CEO, Deskera, an ERP provider in the Asia-Pacific region.

“For instance, if Sunrise Chemicals is expecting a payment next week but urgently needs money to pay its suppliers and tide over, it is unable to do so as it is a bank holiday. Moreover, the bank authentication process would take a few days to turn around the transaction. Applying through the ERP could lead to a timely approval from the bank,” he added.

Banks too get to benefit in a lot of different ways. “It is an idea that can definitely be tried. Banks can integrate with the existing enterprise software and access their financials. It will rid us also of the tedious process of verifying the claims of individual enterprises time and again,” said a senior bank official of a leading Indian Bank.

Genuine enterprises don’t get enough funding
One significant spin-off of the present crisis is that banks get increasingly more reluctant to grant loans to SMEs, which are already cash-strapped.

“Getting credit for our day-to-day operations is a big hurdle. Financial institutions are reluctant to provide credit due to the record of some enterprises. Availing loans through a software will facilitate the process for us”, said Angad Gupta, an entrepreneur from Lucknow running a Logistics firm.

Post the Mallya debacle and in the darkness of NPAs, there is light at the end of the tunnel and that is technology. It could transform SMEs into an attractive investment destination for banks both in the long term and the short term, leading to more all-round development of the economy—one that is inclusive.

With over 10 years of experience in the field of journalism, the author is a Senior Editor at Deskera, a business software company. 

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Updated Date: Jun 09, 2016 12:31:53 IST