Resolving India’s banking or NPA crisis: Use Technology and Digital Integration

By Muqbil Ahmar

According to a survey by global research firm Ernst and Young (E&Y) among Indian bankers, 87% said that Non-Performing Assets (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.

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 have plummeted. Banking regulator RBI had fixed March 2017 as the deadline for banks to fix their balance sheets; however, little has changed on the ground.

According to the Ernst and Young survey, 56% 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.

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How technology can curb India’s NPA crisis

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.

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 willful 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 authorized by the SME in a controlled environment. Consequently, any loan approval mechanism would get expedited,” said Shashank Dixit, CEO, Deskera, a global cloud ERP provider.

Banks too benefit from the digital integration

“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.

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