Paper on NPA recovery Model | Strategies for Recovery

NPA Trigger Points and Recovery Grid

Abstract

The world economies were caught off guard at the shaping of USA mortgage and sub-prime crisis. Be it retail or corporate, all types of accounts were generating non-performing assets (NPA). In this paper, we have categorized different reasons that led to this turmoil by conducting a research on diverse live cases. With an aim to standardize the NPA recovery we have distinguished and differentiated the cases and proposed a grid which could be followed as a strategic tool by the lending institutions. Our analysis has been focused on corporate bad debts; however the solution and strategy developed is applicable for all forms of recovery.
This research and the findings, to our belief, will be very useful for lending institutions to adopt specific protocols for recovery of the NPAs in their books.

Keywords: NPA in banks, NPA collection, NPA recovery, Bad debts, NPA trigger points, Recovery grids, NPA strategy, NPL collection, NPA Grid, Recovery.


Contents
Abstract 1
1. Introduction 3
2. Literature Review 4
3. Case Research 5
1. Proprietary Company / Promoter Group 5
2. Personal Equity 6
3. Profit Margin/ Turnover 7
4. Business Grid 8
5. Industry of the clients 9
4. Discussion 10
5. NPA Recovery Grid 11
Collaboration: 12
Two Face Attack: 14
Silence: 15
Dead: 16
6. Conclusion… 18
7. References 18
8. Annexures 19

Authors - Manish Gadia, Anup Ray
If you need the paper kindly write to - manish.gadia@gmail.com

HIGH, SHOCK, LESSON

For a large number of people around the world the period 2008 - 2009 - 2010 will go down as years of contrast.

Year 2008 -
In 1952 War-ravaged Japan takes off on a spectacular growth path that sees its economy grow at an average of 9.6 per cent per annum for the next 19 years. South Korean strongman Park Chung Hee signals a commitment to an export-led model of growth. The seeds are sown for a remarkable expansion that sees the Korean economy growing at an average of more than 8 per cent per year between 1962 and 1989. In 1990s A huge new economy, China, joins the group. Come 2007 and India had arrived. The Indian economy had recently been notching up some of the highest growth rates in the world and year 2008 was the ultimate flight stage. All the indexes were at Peak. There was a roar in the market which was never seen before. I achieved my career best performance till date in the midst. We entered the year 2009 with double the enthusiasm and optimism. However it’s fair to say that 2009 will go down as easily the most interesting, harried, stressful, and memorable. We were not prepared for what was in-store for financial industry.


Year 2009 -

As we entered 2009, the world mood was somber, the macro economic environment bleak, deflation a real threat, the outlook for asset prices poor and regular news about banks falling. Closer to home in India, the most important Bombay stock exchange was at 10,000 (much below the highs of 2008 which was 20,000). In the days that followed, we learned about the Satyam fraud (India’s Enron like Fraud) post which much soul searching was done by India Inc and us players in the financial services industry. Further globally, Iceland became the first country to default on its obligations; Fortress, a listed hedge fund, saw its stock price down 96%; and the US announced a contraction in 1Q 2009 GDP. It all looked bleak and actually quite scary.

My department had borne the brunt of the global economic slowdown in the form of impairments. With a strong will, we started to confront the tough times. We operated in an industry that is arguably the worst hit. The history of sporting comebacks is replete with stories of great successes and abysmal failures. For every Bjorn Borg (who made an entirely forgettable tennis comeback 8 years after retiring) there is a Lance Armstrong (who overcame cancer to come back and win the Tour de France 6 more times). A Leader’s inherent talent is of little consequence without his team backing him in every step that he takes. I see an interesting analogy here to our business. Luckily we had a Lance Armstrong in form of our department head that not only stood by the department but also turned the tables around.

Year 2010 – The last 2 years are ones which I won’t be able to forget. They have shaped the way I think – “Fly high with feet firmly on ground”. It was like a reality check - to develop more on strengths and work on eliminating any weak links. The 2 contrasting years have taught me a lot at both ends – personal & business. At the personal front, I have learnt to celebrate success and at the same time accept defeats. Four qualities which lead to success in both 2008 & 2009 were discipline, focus, perseverance & enjoyment. It’s very important to have fun in what one does, without which one can never give the best. The recession has provided a moment to step back and contemplate, to come to a truer understanding of life lessons like that happiness is not derived from material things - "Most people really don't need bottled water". At business end, a company should not just be profitable but be strong as well, growth cannot come at the price of compromising basic fundamentals. The fact that cohesive units / teams can win all battles was reinforced in me.

I see years to come as opportunity to learn from our mistakes, to rise from the fall

INDIA - PROBLEM OF PLENTY

Does the doomsday theory hold water? With the kind of news that is hitting the newsstand on daily basis, the answer to my mind is - "MAY BE". From a vehement "NO" I have changed my stance to "MAY BE". Due to the World economic turmoil, The lay-off scared employee set are at faceoff with opportunity cost, be it in terms of low or no bonus, which was a important salary component, or be it in terms of no salary hikes inspite of a high inflation.

Consider this Percentage increase in price data compilation from various ministries of government -

Food products: average price increase of 3.43% (in 2007) to 22.55% in January 2010.
Food commodities: 5.60% (in 2007) to 19.42% in January 2010.
Foodgrains: 6.27% (in 2007) to 17.89% in January 2010.
Pulses: 2.14% (in 2007) to 45.62% in 2007 in January 2010.
Dairy products: 6.08% (in 2007) to 12.87% in January 2010.
Eggs, fish and meat: 6.38% (in 2007) to 30.71% in January 2010.
Sugar: (-)14.69% (in 2007) to 58.94% in January 2010.
(source - rediff.com)

Absorb this: Iceland, Greece and Dubai are already walking on razor sharp edges with Greece being told to sell its islands to reduce mounting debt. Sultans are already eyeing the eponymous "Acropolis". Germany is touted to bailout Greece but Germany itself is facing the worst ever recession (post war). As I write, I hear Spain, Italy & Portugal are slated to join the Island selling club. USA's economy playing hide and seek with a "W" level growth & degrowth is not helping either. Google may be surely eyeing buying a part of Venice to set up a Google resort. 10% budget deficits are talk of the town.


And now absorb this - Nick George use to earn 60000 Indian rupees in 2008 with a five Lacs bonus and now in March 2010 still earns the same with 1 Lac bonus. Nick George use to send his child in a SSC board school but due to education competitiveness now sends his child to a ICSE / CBSE board school having 200% more fees. He has a demanding wife and life, both of which he cannot compromise. Weekends still has to be happening to put brain into proper gear for coming week.

Average Weekly Expenses of Nick George -

Child Fees - 800 Rs
800 Cc Car Weekly installments - 800 Rs
Petrol expenses - 1000
Core Food Bill - 1000
Amnesia Night Club Entry - 2000
2 Vodka Shots - 300
2 Beer Pints - 300
Sunday Brunch - 1000
Holly / Bolly Wood blockbuster ticket cost - 1000
Travel Expense extrapolated /week basis - 1500
Shopping Expense extrapolated /week basis - 500

Around 40,000 rupees from salary are already accounted for, in the expenses above. If Nick George happens to be a migrant from a countryside town to a metropolis in India; he will surely contemplate going back to his MOTHERLAND, with around 3000 Rs of weekly installment towards owning a small nest in metropolis. And if Nick George has dependents, he surely will look for rapid job movements to make his salary touch 75000 Rs in hand at least. (IN HAND salary is the right way to talk to employers these days; As much as 50% of the salary can be variable and in these times variable salary is never paid). Nick George's earlier option to find a job abroad is routed out because of the word "W" earlier stated. Even abroad on last country 1,00,00 Indian students went USA to study in the year 2008 and around 30,000 to UK.

The irony is luxury car manufacturers have rolled out considerably higher number of models this year vis-à-vis earlier years. Though Indian Salary levels have increased, but the kind of population base our country carries, we will always be amongst lower strata in the Human Development Index. Even in upper middleclass levels too much education is leading to too much competition and lower salary base. An African returning to his country also can negotiate salary equivalent to the one he /she would get in say a pound dominated country like "United Kingdom", sadly but Indians can't.

Bottom line - For salaries of Indians as a whole group to rise (taking all classes of Indians) and match salaries of European or even other Asian counterparts, a "TAB" on population needs to be put. Population and salary are always on a seesaw and problem of plenty is the pillar. With every inch of land in metros are being carved into residence space, 25 lacs of vehicles in a 50 sq.km space metro cities, Indians will have to reach Moon soon. This problem is paramount for 'India', above all the fiscal deficits issues, above selling its Islands, and also above Growth. Fundamentals have to be tightened first to create a robust platform for long term growth.

ORGANIZATIONS NEEDS ROCKET SINGHS

ORGANIZATIONS NEEDS ROCKET SINGHS

When I joined Landmark Group Retail (lifestyle) post my MBA, retail was at a nascent stage in India and I saw an opportunity to exponentially grow with the industry. I wanted to start my venture -a country-wide franchisee company. The idea was to start with a few small franchisee outlets and as momentum builds, I will move on to take multiple regional master franchisees.

I prepared a business plan for owning franchise of sales-cum-service workshops of a 2-wheeler company – ‘Bajaj Auto’, did my primary and secondary research for project report to be submitted to the company and banks at later stage. Bajaj accepted my plan but agreed to proceed after I had finalized a property and closed the financing deal with banks. Selecting property required numerous visits and continuous coordination with agents, but my six-day work routine (Sunday mandatory working) at Landmark made these tasks challenging. Real estate prices were on pinnacle at that time (they still are) and demand far exceeded supply in land-locked Mumbai, so, to close any property deal one had to respond very quickly. Concentrating both on my professional career and proposed personal entrepreneurial venture was becoming difficult.

Finally, I decided to concentrate on my profession and dropped the business idea. I had worked hard to secure bank finance and convince the Bajaj team but failed to see the project through at the last stage. With proper time management I would well have been on my way towards my career objective. I learnt valuable lesson in ‘multitasking / time management’ from the experience.

Having learnt lessons and plugging all the gaps, the entrepreneurial fire started burning again when I joined HSBC; An organisation can reap benefits of inculcating a quality of entrepreneurship in employees by giving them enough freedom and room to take their own decisions and to do whatever one can to the benefit of the organization with adherence to the fundamental rules. Infact now I proudly call my self an ‘Entrepreneur in HSBC’ ,as the term holds a broader meaning for me than just someone who is having something of his own. World economies and industries are reeling from the financial crisis, business leaders are struggling to survive and growing means operating on a different plane altogether; this is the time to use entrepreneurship within an organization as the only effective ammunition to combat the same. I am an entrepreneur if I get things done, I am an entrepreneur if I ward off bureaucracy, I am an entrepreneur if I think out of the box and bring something different to the table, I am an entrepreneur if I stand beside my customer and also have guts to take a difficult call. I am an entrepreneur if i have my own way which gives better results, I am an entrepreneur if i can come up with a better way of doing things then just to follow a herd.

Its time for all Rocket Singhs to fly!!!

BANKS RED QUEEN EFFECT

Mere survival in current recessionary times should be lauded. Year 2008-09 went down as one where 'Red Queen Effect' was in full force. The red queen advices Alice (from 'Alice in Wonderland') that "in this place it takes all the running you can do, to keep in the same place" i.e: work twice as hard just to maintain the current position, growing requires a different pace altogether. Further, it would be interesting to see how financial Industry will continue to face market correction, green shoots and recoveries, In a nutshell how will banks 'MANAGE THE CHAOS while maintaining THE SPEED' ?

According to me following should define the speed at which banks will run in the forthcoming year -

BRAND - At the time of recession, customers are looking for a extended support from banks. Trust on banks have taken a hit. More and better products for genuine customers (lost during the recession) is the single most important initiative that will help rebuild the brand. Efforts other than pure advertising are need of the hour for maintaining the brand equity. As Suntzu said "It is a great mistake to waste men in taking a town when the same expenditure of soldiers will gain a province."

BENCHMARK - Banks will have to study other more successful banks (if any) at a very micro level to understand what the successful banks are doing right (at the same time studies of banks which failed to learn from the mistakes should be conducted). Why did we have an NPA and others did not ? What are rival banks selling now to SME/MME vis-a-vis us? Have they been successful?

Every bank should indeed take a decision in isolation but as Suntzu said "If you know the opponent and know yourself, you need not fear the result of a hundred battles.If you know yourself but not the enemy,for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle"

STAKEHOLDERS - While external strategies are required, recession takes a toll on the most valuable resource of organisation - 'The Employees'. Transparency, continued career growth, belief etc will ensure the stakeholders put all pressure to support the bank in any future crisis. As Suntzu said - "A Moral ruler makes the people to be in complete accord with him, so that they will follow the ruler regardless of their lives, undismayed by any danger"

Finally if we say the worst is over, i say it's just a beginning, where lot of gear shifts will be required. Running at controlled speed to grab the green shoots at the same time being vary of falling in same trap again should help to ward off the crisis. "In peace we prepare for war and in war we prepare for peace"

(This article of mine was published in HSBC Journal. I am currently preparing a research paper on this subject which will be sent to MBA business reviews & quarterlys)