Ananthan Gets Shot

It was just another boring day in office.

After completing my rural assignment at Kursela I was posted to the Zonal Office, Purnea, where I was attached to the Development Officer in the DGM’s secretariat. Apart from writing a few letters and collating some statistics, I had very little else to do. Time hung heavily on my hands and we spent our time going down to drink tea at least 4-5 times in a day, discussing office politics day and night, and desperately seeking some excitement.

One morning, as usual, we had reached office by about 10 am and till about 10.30 people were still settling in with their morning cup of tea, when the Personnel Officer walked in. He used to commute daily from Katihar, which was 40 kms away, but invariably used to reach office on time. Therefore, his reaching late was a little unusual.

After reaching office, he immediately called for me. Since I had been awaiting transfer to Patna for quite some time, even though my transfer orders had come but there was no sign of any replacement joining, I had not been relieved. With the happy feeling that my long-awaited replacement had come I sauntered into his chamber trying hard not to let the anticipation of being relieved show on my face.

What awaited me there was quite different and totally unexpected. With a very grave face he informed me that my friend Ananthan had been shot and was presently admitted at the District Hospital in Katihar. He had very little details beyond this, which he had gathered at the Katihar bus-stand while coming to Purnea. After passing on this information, he practically washed his hands of this affair.

Chokalingam Ananthan was a batch junior to me, and posted at some rural branch around Purnea. I was aware that he had accompanied Pawan, another batchmate of his and the two had gone to Patna, which was about 300 kms away, to purchase a motorcycle for Pawan. My mind was in a twirl and for a few moments could not make out what I could or should do. On instinct I went to the branch, withdrew all the money I had (a little less than Rs.1000/-), informed one or two of my colleagues, picked up my mobike and drove down to Katihar.

I reached Katihar District hospital by about 11.30 am where I found a big crowd of people, quite a few of whom were bank staff, both from SBI and other banks, milling around the place and just adding to the confusion. No one seemed to have any details except that some bank official had been shot on the Katihar-Purnea highway that morning and the person was still alive. After some time, I was able to establish contact with the doctor on duty who in a matter-of-fact voice informed that luckily the bullet had missed Ananthan’s heart and spine, and they had been able to stitch up the wound. However, for further medical assistance and follow-up he should be taken to Patna. Ananthan was at that point under deep sedation.

I then chanced upon Pawan in the crowd. Pawan seemed to be in a complete state of shock, with wide open blank eyes complemented with an equally blank look on his face. I took him away from the crowd and tried to piece together what had happened. By this time, my friend and batchmate, Mohit Sinha who was also posted at Katihar had joined us.

Pawan had purchased the bike the previous day in Patna and he and Ananthan had taken the night train to Katihar with the brand-new bike booked in the luggage van. The train journey was quite uneventful and on reaching Katihar early next morning had got the bike released from the railway authorities. Since, Pawan was not sure of his driving skills, Ananthan was driving it with Pawan in pillion as they drove down from Katihar to Purnea. At around 8 am while they were somewhere midway between Katihar and Purnea they encountered a couple of young men who signalled them to stop. The decided to ignore them but had to slow down a little. It was then that one of these young men whipped out a country made pistol and shot at Ananthan. Even though hit, Ananthan kept driving for a little distance before collapsing.

This being Bihar, things took an interesting turn here. Some local villagers who had witnessed the incident immediately came to their rescue. They first caught hold of the assailants. Then they stopped a passenger bus going from Katihar to Purnea, got all the passenger to get down, got the driver to turn the bus around, loaded Ananthan and Pawan on to the bus and brought them to the Katihar District Hospital where Ananthan was admitted. Meanwhile some other villagers took the two assailants and lodged them at the local police station.

The dilemma now was how to take Ananthan to Patna. Though there were crowds of people, including some from the Officer’s Association, no one was willing to involve themselves. Katihar is about 300 kms from Patna by road and there used to be a pot-holed apology of a national highway connecting the two which it took a minimum of 10 hours to cover and could easily stretch to 14 hours. No ambulance or private vehicle was available and carrying Ananthan in that condition by bus was out of question.

The only other alternative was to take a train which left Katihar at about 4 pm and reached Patna by 11 pm and consisted only of second-class sleeper coaches. One of those slow trains meant for ferrying cheap Bihari labour to Punjab. We decided on taking the train as through the good offices of the local Officers Association we were able to get tickets and reservation in sleeper class. Ananthan was coming in and out of drug induced coma and was on oxygen support. In one of his lucid moments, we asked him of how could we inform his folks of this incident. He was clear that his parents should be informed only if he became well or died. They lived somewhere in the interior of Tamil Nadu, knew no Hindi or English, and would have no clue as to how to handle the situation. However, he had a brother who worked somewhere in the armed forces and should be informed.

So, we boarded the train - Ananthan on a stretcher under oxygen support, my friend Mohit, a young lad who was some private doctor’s assistant and knew how to handle the oxygen cylinder, and myself. Thanks to a friendly coach conductor we got decent berths and the train was not too crowded.

As we were approaching Patna, a fresh dilemma struck us. What were we to do after reaching Patna. How to get Ananthan off the train, what hospital to take him to etc. etc. However, luck was with us. LHO had been informed about the incident and the SBI fraternity, both from the Personnel Department and the Association, were present in full force on Patna station. The Personnel Department was led from the front by the First Officer, Yashi Sinha, himself.

They were aware of the train we were coming on, but had no clue as to in which coach we were in. Yashi had therefore stationed people all along the entire platform. He had also arranged for a doctor, ambulance, cash, police assistance etc. and we were immediately whisked to Patna Medical College Hospital. For the two days Ananthan was admitted there he received virtually no medical attention. Then it was decided to shift him to the private hospital of Dr. Abdul Hai, one of Patna’s leading surgeons where Ananthan was operated upon and over the next ten days slowly recovered and was back on his feet in about two weeks.

There are some interesting sidelights to the episode. Since Mohit and myself had moved directly from office we had no change of clothes, toiletries etc. Since my brother lived in Patna, I managed by borrowing his clothes. With the money Mohit was carrying, he purchased a ridiculous looking orange T Shirt and trousers from some pavement shop and lived in it for the next one week.

Once Ananthan’s condition stabilised, Mohit and myself returned to Purnea. The first thing the Personnel Officer asked me was, "how come I was away from office for some ten odd days without a leave application". Mind you, this is the same guy who did not lift his little finger to help even though he was physically present in Katihar when the incident happened and he was aware of the situation and was fully aware of where and why I had gone!

Every dark cloud has a silver lining. Ananthan had been desperately seeking an Inter Circle Transfer to Madras Circle. He got it on priority soon after he was well enough. And all our other friends who were seeking ICTs from Patna Circle thereafter plotted to seek out someone who would be willing to give them a glancing shot, not life threatening but just enough to get them an ICT. Ananthan got married soon after getting his ICT to a medical doctor.

Pawan did not fare as well. Being the sole witness to the attempt to murder he remained under constant police and societal pressure for a long time. At the same time, he kept on getting transferred from one forsaken branch to another in Purnea Module over the next 3-4 years. He got caught up again in a highway hold up and his bike was snatched never to be returned. After a long time he got an ICT to his home state, Hyderabad. He was one of the brightest and most upright officers I have known. Typical Hyderabadi, absolutely unflappable but with nerves of steel. He recently retired as a DGM.

What is Wrong in the Risk Management Process in Indian Banks?

The hard truth is that every loan has both a borrower and a lender. If the loan is inherently bad, the lender is as much at fault as the borrower.

The literature on managing the “NPA” problems of Indian PSU Banks keeps growing, but the “NPA” problem keeps growing even faster! Somehow, the weak, archaic, and anachronistic conceptual framework under which most commercial bank lending is done in India, and its associated processes, rarely find mention - other than exhortations that banks should improve their risk management systems.

In a manufacturing organisation to have low levels of rejects not only should the technology and design of manufacturing process be in tune with the product being manufactured, but also the quality control process should monitor the level of bad parts being produced. Accordingly, indications of larger than permitted number of rejects suggests that entire manufacturing process needs to be re-tolled and / or fine-tuned.

For banks to have low levels of NPAs, their entire lending process from initial appraisal, to detailed due diligence, to monitoring, to detection of incipient sickness, to recovery has to be under control. The key to this is an appropriate conceptual framework for lending, ie, the technology of lending. Recurrent high NPA levels clearly indicates that debt capacities are being overestimated by the appraisal process and the relevant monitoring parameters are not doing their job. The responsibility for rectifying this rests squarely on the lender.

Along with this there should be low tolerance for NPAs. Banks are highly leveraged entities and start making operating losses if gross NPA levels are more than 4-5%. The ground level situation is that gross NPA levels of PSU Banks was as high as 24.8% for the year ended March 1998, before slowly falling down to a low of 2% by March 2009 before bouncing back to a high of 14.8% by the end of March 2018, suggesting high tolerance to NPAs.

That the conceptual framework for commercial bank lending is a major impediment in making good quality lending is reflected not only in recurring bouts of high NPAs, but inter alia, in constant complaints by industry that credit decision making in banks is slow and cumbersome, getting credit, especially by the MSME sector is extremely difficult, involves humongous amounts of paperwork, the extremely long appraisal notes, the low level of credit as a percentage of GDP, the over-emphasis on availability of tangible collateral security, the preference of making investments in SLR securities than in making loans and advances etc. etc.

Let me try and substantiate my contention.

Modern banking in India evolved out of Calcutta Agency Houses which were trading firms which undertook banking operations for the benefit of their constituents (Tannan’s Banking Law and Practice in India). Naturally, the methodology which developed was geared for lending for trading in commodities. This is a natural outcome, since the evolution of capital markets through the introduction and diffusion of financial innovations is largely dependent on occupational specialisation of financial intermediaries (V V Bhatt EPW May 1987).

The credit risk in such cases was substantially covered by the cash credit system and its associated practices of stock statements, its verification and calculation of drawing power. Moral hazard being eliminated by having goods under lock and key of the banker, and by periodically inspecting stocks to ensure that they confirmed in terms of specified quantity and quality. Adverse selection was controlled by keeping a margin over market value of security. This was easy as long as valuation of the underlying assets was straightforward and simple.

This credit risk management framework starts breaking down if it is extended for lending for industry. First, the dichotomy between working capital and term finance is artificial since most borrowers need both to continue as a going concern, and only a going-concern can service its debt.

Second, in a manufacturing concern it is difficult to identify and easily value the various components of current assets. The more complex the manufacturing process, the more difficult it is to value the underlying security. This system breaks down completely while evaluating the borrowing capacity of borrowers operating in the services sector – where most of the earning assets are intangible. Currently the services sector contributes more than 55% of the country’s GDP while its borrowing levels have been hovering around 30% of bank credit over the last few decades – and most of the exposure is predicated against tangible security.

Third, the holy methods of lending laid down by Tandon, Chore, Nayak Committee et al, and still being followed in various avatars are essentially credit rationing devices. The background for setting up the Tandon Committee (1974) was the need to curb the use of bank credit for hoarding of commodities in short supply. The mandate given to them was for framing guidelines for commercial banks for follow-up and supervision of bank credit for ensuring proper end use of funds.

Similarly, the mandate of the Chore Committee (1979) was to review the operation of the cash credit system of lending, particularly with reference to the gap between the sanctioned credit limits and the extent of their utilisation.

These methods of lending were never designed or meant to be credit risk management tools. The fact that credit rationing implied some kind of credit risk control is only incidental. Debt repayment capacity under methods of lending is predicated on underlying security rather than debt servicing capacity. This leads to the primacy of the Current Ratio, while leaving estimation of leverage and interest coverage ratios or designing processes for entrapment of cash flows, as after-thoughts. The possibility and need for amortisation of working capital borrowings, including the ubiquitous large permanent cash credit component is wholly missing. 

It also leads to much avoidable confusion on the concept of leverage and its calculation. For some it is Total Term Liabilities / Tangible Net Worth (TTL/TNW) – which was used typically by term lenders. For “working capital” bankers, it is generally calculated as Total Borrowings (Term plus Working Capital) / Tangible Net Worth. Other use the concept of Total Outside Borrowings (say including Trade Credit) / TNW.

If leverage is to be considered as a measure of extent of (a) Moral Hazard (the extent of the borrower’s stake in the business as a proportion of total capital employed by the business) and (b) Debt Servicing Capacity, it is the third measure which is more appropriate for banks. In fact, TOL should include contingent financial liabilities (say, Financial Guarantees, Outstanding LCs, Bills discounted etc), ie everything which is taken at more than 0% risk weight in calculation of CRAR.

Fourth, methods of lending, such as MPBF, creates entitlements on the amount of borrowing. What is lost sight of is the kind of risk involved. In this process, the credit exposure comprises both equity as well as debt risk, while the pricing is wholly related to debt risk. It is natural that the overall portfolio is sub-optimally priced - result NPAs. The fact that at times bank finance substitutes equity is acknowledged by various authorities (e.g., Dr. C Rangarajan in the TTK Memorial Lecture (11/11/1997; Dr. Raghuram Rajan, Note to Parliamentary Estimates Committee on Bank NPAs dated 06/09/2018;).

The comfort that entitlements of the amount of borrowing is covered by security (current or fixed assets as the case may be) is misplaced. No bank can run its business on foreclosure of security as the primary means of recovery, especially in India with its slow and cranky legal processes. The transaction costs would be too high, especially since banks survive on high leverage with thin operating margins. The predominant consideration of tangible security in lending, not only limits the volume of good loans which can be made but also low recovery in case the loans go bad.

The primary value the banker brings to the societal table is ability to evaluate and manage all kinds of risks in the lending process. As such, the risk management processes in banks should be able to handle all kinds of risk, including credit risk. This realisation is also conspicuous by its absence. The view that the latest round of high NPAs resulted inter alia from falling commodity prices and exuberance in lending for infrastructure is a reflection of lack of skills in handling such risks. Classifying it as a reason for creation of NPAs from this perspective makes it sound more like an excuse.

An oft heard reason for high levels of NPAs in bank exposure to the infrastructure sector is that such lending created large asset liability mismatches. But then this should have first led banks to breach their asset/liability prudential norms. There is no mention of this ever having happened.

The main factor for non-evolution of viable and cogent lending mechanisms is the complete break-down in governance in PSU banks, essentially due to the extremely corrosive influence of the DFS in their functioning. While the mandarins in DFS exercise large control rents they have effectively no equity stake. The pathological effects of such control have been documented time and again starting with the Note by Prof M Datta Chaudhury and Shri M R Shroff in the report of CFS (Narasimham I), to the Nayak Committee Recommendations, and by Viral Acharya and Raghuram Rajan in their paper, Indian Banks: A Time to Reform, wherein they have strongly recommended for abolition of DFS. The end result of this hegemony of DFS is the slow but steady deterioration in the levels of professionalism of our banks with all its negative consequences, including non-evolution of workable processes to handle credit risk. 

A pernicious aspect of the control by DOFS is reflected in their interference in transfers, postings, and appointments, especially senior level positions.  There is no reason that DOFS had to issue a clarification wide Office Memo dated 13/01/2015 to the effect that, “Each Bank/FI should have their own objective, well laid out transfer and posting rules which should be followed strictly. No exception, should be made in such rules at the behest of any recommendation given by anyone including anybody from the Ministry of Finance.”

The poor governance of PSU banks is reflected not only in the recurrence of high NPA levels but also other aspects of their functioning – witness the steady decline in their market share in all aspects over the last 30 years. To give just one example, the complete neglect of the importance of providing safe, convenient, remunerative deposit services. The opportunity offered by the PMJDY has been all but squandered away.

Most policy prescriptions on managing NPAs seem to be focused only on timely recognition of NPAs and actions to be taken after the loan has gone bad or at the most likely to go bad. There is very little discussion on how to make good loans. After all, prevention is better than cure.

Was it Einstein who said that "It is insanity doing the same thing over and over again, and expecting different results"?

 

 

The Hollow Men

We are the hollow men

We are the stuffed men

Leaning together

Headpiece filled with straw. Alas!

(W H Auden - The Hollow Men)

 

Think of an Indian banker and the picture which invariably comes to mind is of a man wearing a suit and a tie and looking quite uncomfortable doing so. It is worn more like a uniform rather than a smart piece of clothing which enhances one’s personality. The irony is that our women bankers, and there are quite a few in the top echelons, appear quite comfortably in command in a saree!

Dress codes in every society are essentially a function of local living conditions and available material for making apparel. I fail to understand as to why we men in India still insist in worshiping European apparel standards which evolved for much colder climes, considering that we are a tropical country!

A western suit, except when worn during winter months in North India, not only keeps the wearer uncomfortable but is also requires much higher levels of air-conditioning (where available) with its ill consequences on energy consumption and environment. Though, in India some concession was made in the form of a Safari Suit.

Most of us have been subtly conditioned through centuries of colonisation to believe that while the traditional Indian clothes is acceptable attire for home or ceremonial gatherings, for formal or informal occasions the correct dress code is trousers and shirt (preferably full sleeves).

Apparel also helps in fixing one’s identity to some preconceived notions. For example, Massey Saheb started wearing a coat and tie to help freeze his identity as a Christian in the film by the same name. Again, we have a lot of Indian women who start wearing a frock to delineate their Christian identity. Or there are plenty of born-again Hindus who sing paeans on the myriad benefits of wearing saffron clothes.

Banking is a service organisation, and being well groomed at all times in public, even outside work is highly desirable if for nothing else than for maintaining the look of stolidity of the profession.

For some strange reason, which I have been unable to fathom inspite of pondering over it for the last 36 odd years, the western suit preferably with a tie is the accepted attire for bankers. Concession to that is made on 'casual occasions', say on working Saturdays where the garb, more often than not changes to jeans, T Shirt, and sneakers. And most folks wearing it look quite smug and contented doing so.

It is a rare business executive (and never a banker on duty) that one can find wearing any kind of Indian formal attire - say a pyjama-kurta / dhoti-kurta combo, especially considering it is one of the most comfortable clothes to wear. It is not very expensive, easy to maintain, covers you well, goes well in casual, informal, and formal settings too, and the most important aspect is that it is very comfortable for Indian weather conditions – in summer, monsoon, or winter.

The fascination of wearing western style lounge suits with a tie can be found in most countries which were under European colonial occupation for long. I was most surprised while traveling through the Middle East to see many prominent Arab bankers and business executives continuing to work and function well wearing their traditional thobes.

And contrary to what Wikipedia says, the seminal contribution of the Arabs to the banking profession cannot be discounted. For over 3000 years they managed the bulk of the trade between Europe and Asia (along with Indian merchants) and developed the basics of what is now known as commercial banking, such as, deposit keeping, promissory notes, and bills of exchange.

The clearest evidence of the contribution of Arabs to commerce is the fact that Arab merchants picked up and adopted Indian number system. While the Arabic language is written from right to left, they write their numbers from left to right and still refer to it as "Indian numerals". They then passed on the number systems to Europe, who used to labour with their calculations using the cumbersome Roman numerals. Till recently, international numerals were widely referred to as Arabic numerals.

Indian bankers need to get out of their fixed modes of thinking and what easier and better way to do so but to do away with the highly restrictive western lounge suit!