[The writer is a retired bank officer in senior management with four decades of past service in one of the leading nationalised banks. He has overseen working of branches of the bank as Chief Inspector for three years and as Development Managers for two terms. He had had occasion to study in-depth working of a number of branches big and small, as well as regional and zonal offices of the bank at the closest range with analytical precision. He has also served as Manager/Sr. Manager/Chief Manager in six large/very large branches in his tenure. He was extensively engaged in multi-agency sponsored projects of social banking in two States in the South. His propositions in this article are based on his field experience. Please also refer to pages titled "My Encounters with Corporate Corruption in my service" in this context]

NPA can be defined as failed credit. The service product has turned into scrap. Credit delivered is not put to productive application, but sunk into dead assets. But where has the process gone wrong? Has the credit delivered correctly, properly and sincerely? Search objectively for an answer examining credit delivery processes sequentially from within the branch. Select a few branches with high-density NPA for your study and start methodically from the scratch. Has NPA surfaced due to defective product engineering by the designer (Banker) or due to misapplication of the product by the user (credit-customer), or due to effects of the violently changing economic/ industrial /commercial environment?

The exact stage at which the failure has occurred, which causes NPA in the life cycle of a project-finance can be identified in a post-mortem review. How a credit given to an eligible and deserving customer for a viable project can ever become NPA, if it was efficiently assessed and disbursed resulting in its successful completion and realisation of project objectives? Can it be only due to 'willful default' by a credit customer at the last stage? Obviously if the credit is not allowed to a deserving, or eligible customer and it turns sticky, the financing bank is as much to be blamed as the customer. Similarly if the project financed is deficient and not viable or credit-worthy, it is a mistake of judicious assessment by the bank. The disbursement of project finance is not done efficiently, it may result in time/cost over runs and lead to trouble to the financing institution. In all these cases it is deficiency of job talents on the part of the banker, which creates NPAs. NPA can be arrested only through internal remedies, i.e. improving efficiency of credit assessment and credit delivery operations at the point of the financing bank in the first instance. Followed by efficient utilisation credit disbursement by industry and trade.

Looking next at the customer what is the benefit or motive of the corporate customer to willfully default repayment? And why this tendency has surfaced amongst Indian corporates in the last two decades? A project is deemed implemented successfully when it not only attains profitable turnover but also discharges the project-debt as per schedule. Debt default and successful entrepreneurship in business promotion do not go together. The assets created in the project are encumbered to the lender and discharging the debt releases the assets from the banker's charge. The corporate customer proves his capacity and financial integrity and he commands better recognition by the banker for his future credit needs only when the project is shown as self repaying its debts. Still why default takes place and that too willfully? This is apparently against the laws of economics and law of human nature.

Credit a is product of financial service, which provides redeemable capital to industry and business. Commencing with borrowed capital a viable project generates the source for its repayment and reaches the stand-alone or self-sustaining status. Primarily there are three stages in credit extension, its productive use and its repatriation. These are, credit delivery, credit utilization and loan liquidation. Unless you are successful in the earlier stage, you do not reach the next stage. Thus if the project report and the terms of loan sanction are not handled realistically, the credit cycle will not pass on to the next stage of successful project implementation. If the project is not effectively implemented it is futile to aspire for repayment in the normal course, without the loan becoming an NPA.

The credit customer need not have to search for a source to repay the loan. The source for repayment is self-generated from within and made available in time schedules coinciding with the repayment terms. The provision is in-built in the project structure. The bank-credit should be for productive and self-redeemable projects and should thus be self-liquidating. This then is the test for a viable project and the grounds on which the banker accepts to finance the same. The banker has to possess different knowledge resources and talents to efficiently handle credit-management at each stage. In particular the banker needs to have two primary attributes for successful credit extension. These are talent (appropriate knowledge and foresight) and integrity. The customer must possess entrepreneur ability and integrity. We may call it as two 'C's (character and capacity) to be present commonly with the financier and promoter. These are the human factors. Additionally the project financed needs to possess two characteristics, technical feasibility and financial viability.

If the basic ingredients are lacking in the banker, the loan released by him will not be productively employed and it may result in potential NPA. Decades back credit risk was not so extensive, when banking was operated purely on a security-oriented approach. Accept and hold in your custody a marketable security and release the advance. Allow the activity to be carried out by the customer. Release the security when repayment is made, and in case of non-repayment dispose of the security and reimburse your exposure. It is almost zero risk oriented.

Subsequently when the country was industrialised in the 60s industry was protected by the government policies. Imports were discouraged. Units enjoyed a captive demand without competition and hence there was no problem for the banker. But it is not so today, when banks are called upon to extend multiple types finance for diverse needs of capital for industry, business and other economic activities open to global competition. Character and capacity are still the basic ingredient, but essence of these terms has acquired substantial additional content and meaning.

The action or initiative is with the customer at the stage of the preparation of the project. It is with the banker in project appraisal and loan sanction including the setting up of terms and conditions. If both act prudently the first stage is passed. In the second stage the implementation responsibility is with the customer and controlling responsibility with the banker. In the final stage it is mainly the responsibility of the customer. A healthy joint approach promotes the cause of both, the absence of which can ruin either or both.

Your analysis of NPA study should indicate whether the roots of NPA lie in the first, second or third stages of the life span of the service product. Wrong handling at any stage can obviously create NPA. Credit, which undergoes infant-mortality at the outset itself or after a short span of time after trial production, is on account of deficiency in credit assessment and credit delivery. The loan is released, but not utilised for the purpose it was allowed and no assets are held or only negligible assets are seen. The seeds are sown but the plants never sprout and there is no question of the crops to harvest. This can be attributed to gross negligence, inefficiency or lack of training and knowledge and finally lack of integrity in respect of the person(s) involved. These are the within factors responsible for accretion to the pool of Bank's NPA burden- lack of talent and lack of integrity.

Failure in the second stage is generally on account of default on the part of the banker in carrying out his functions with foresight and wisdom. This goose will lay the golden eggs, but without waiting, if you cut the goose out of eagerness for a quick meal, it results in a sordid plight for the person of hasty action. There are two manifestos for the branch manager, i.e. the Project Report and the Memorandum Of Loan Sanction by a higher authority stipulating terms and conditions. In other words this is the outer limit of the delegated authority for the Bank Manager in the exercise of credit management with reference to this customer. It is also a contract between the financing bank and the borrowing customer. The project report is the source document and the loan sanction record is a derived instrument. The sanction should be based on the project report, and if this is not so and if the sanction is at variance, the project report must be revised and approved/accepted by all. Once a letter of sanction is received, the existence of the project report is forgotten and the assumptions contained therein are totally ignored. No doubt the sanctioned terms represent the legal contract between the credit customer and the banker, but the project report alone contains nucleus for the successful culmination of the activity and creating the source for repayment. During implementation of the project in the second stage involving disbursement of funds progress may not take place as scheduled in the project. The situation needs a flexible attitude on the part of the Bank manager, but if rigid adherence is resorted to the terms of sanction, it brings adverse effects to the detriment of the interests of both the banker and the credit customer. These problems were not felt so much earlier, when in the inflationary economy, when the security financed was regularly appreciating in value, and marketing the products produced, even of inferior quality was never felt a problem in a captive and protected market.

A concrete example can explain this. The project outlay is Rs.5 Lacs. Credit customer equity is Rs.2.0 Lacs and Bank loan Rs.3.0 Lacs. Credit customer's equity includes margin for working capital Rs.50,000/-.The Loan was to be released in January 1998 and the project to be completed in the same year. The interest and first installment to be repaid before March 1999. Now there is delay initially in the bank completing the documents and other legal formalities and the loan was released only in March 1998. On the credit customers part there is delay of three months in the completion of the project. However the credit customer on his part did bring Rs.25000 additionally. Now events as they have unfolded are at variance with the assumptions in the project report. Thus the implementation report is different from the project in certain details. As at 31st March 1999, when the project is still incomplete, the bank manager arbitrarily recovers the first installment and interest, as per the terms of sanction. If this happens, it is then woe to the project, which is still incomplete. The unit financed faces liquidity crunch due to contraction in working capital caused by term loan repayment therefrom and is unable to either complete the project or provide the margin and avail the working capital. Here the bankers switche to the 3rd stage in the life cycle, while the second stage is still incomplete. Recovery can come only from generated funds and not from the source of finance for the project.

Two decades of regimented banking and directed approach to credit delivery has deprived bank managers of the instinct skill and knowledge. Lack of structured career path and restricted experience through vertical movement in the hierarchical ladder without a horizontal exposure and without imparting training in organisation and business management needed for a understanding and for the interpretation of the current business environment, are the sins of a blind promotion policy more oriented on subjectivity than objective merit assessment. Nationalised banking did not produce a spring of talent resources from within. Directive Inputs and course-direction came externally from RBI and Finance Ministry. Execution responsibility was delegated to the nationalised banks. The system did not promote initiative and talent, but bred corruption and nepotism.

Before nationalisation banks were in the private sector. Indian banking developed on ethnic and regional set-up. Every community and every section wanted to start a bank. The entire social set up was based on the joint Hindu family culture and the business looked to class banking for a select segment of society. Banking was not professionalised, as was major business and industry, which utilized bank finance. The trader in the Mandi, the rice and cotton and oil miller did not believe that professional education is necessary for doing business. So too did bankers. The average bank employee, including a part of the top executives did have no professional education or education in modern management techniques.

Bureaucratic approach and lack of talent in the service provider can also generate NPA. That happens when a project is grossly under-financed. It will also happen when the project initially is scrutinised at the lower level and found viable based on well-defined assumptions, but when finally sanctioned at a higher level, several stipulations like higher rate of interest or higher margin requirement on the credit customer stipulated like condition to raise additional internal finance by way of unsecured loans were included without looking into the feasibility and sensitivity of the variations on the overall viability of the project.

Loyalty to the top man (CEO) and understandings his mind and acting as per his dictates and desires is considered as a main service-ethics. Corporate management in India is generally a one-man dominated show. This is the legacy of the spirit of the patriarch in the decade-old joint-family culture, which however has vastly dismantled. This management philosophy is against modern management concepts of defining a goal and mission for the organization. An individual is fragile and fickle minded. In the modern world, where consumerist motives predominates in the minds of all, his value systems are not dependable. Instead of loyalty to the mission and goals of the organization, it turns to be loalty to the top boss, and to every top boss changing in intervals of 3 to 5 years.