Automation in the banking sector

Financial Stability Report 2014 published by Central Bank shows the Non Performing Loan (NPL) in the Banking sector in Bangladesh around 9.7 per cent as on 31st December 2014. A jump of almost 1.5 per cent from the previous year. Despite the all out approach and efforts by Central Bank to bring in required discipline including management of NPL, why this number has gone up to a dreadful number? This in turn impacts the confidence of investors and other stakeholders on the banking sector in entirety.
The profitability of the banking sector is impacted by the non performing assets due to : 1. The interest is suspended and can't be booked as income after the bad loan matures beyond a certain tenor; 2.
The banks have to pay interest on deposits which they have used to fund these default borrowers hence needs to booked as expenses for the year. 3. The provision required for
these bad loans are directly debited as expense charge off.
On the other hand, these non performing loans are rather creating holes for which the banks face shortfall in capital adequacy. Hence, the banks having non performing loans end up with poor ratings impacting the business growth of these banks. Eventually Central Bank has no option left but to appoint observers in the board of these banks to ensure the depositors’ interests primarily. With all these odds, a bank with high
NPL ratio faces the challenges to stay afloat let alone swim.
Like in any finance books, the borrowers/debtors have two generalized criteria, ability to pay and willingness to pay before any decision on advancing any credit. A grocer selling goods to its customers on credit also goes through the same analysis. It's true that any business may fail but the question remains that whether the debtor/borrower is willing to pay. Using the same simple philosophy, a bank can decide whether to lend money to a particular customer. The cash flow statement is primarily the source where a number of pertinent and relevant questions may rise and plausible response to those queries may assist. But at the very initiation, the bank must have a thorough understanding about the particular customer like the previous track record including repayment behavior, dealing with its employees, it's vendors and suppliers, the
personal background check among many
other criteria.
These background checks are very helpful in getting a clear picture about the willingness to pay. We need to keep this in mind that if the borrower asked money from me, shall I give it to him? This on a very bigger context is depositors’ money and we must act with all prudence needed to safeguard this money and try to utilize the fund to ensure that the money is in the hands of genuine borrowers for genuine and legitimate business needs.
Understanding the cash flow in tandem with authentic balance sheet, income statement is the way to start diagnosis.
Business is dynamic and faces tops and troughs. For example, the recent downward trend in price of commodities has impacted a number of businesses. The lull in the demand for steel due to slowdown in construction along with stringent regulations have resulted many ship breakers to literally fail.
Automation in the banking will help proper monitoring. This certainly helps to manage portfolio proactively. The early diagnosis of weakening signals in accounts help to watch list the accounts and go for early remedial actions.
Recovery itself is a business. The proper management of impaired accounts will help release provision on one hand and take the interest in suspense in income. It will also help the various ratings of the bank to significantly improve. Legal action and negotiation out of court should be adopted simultaneously.
The concerted efforts under the able guidance and stewardship of all the stakeholders will make the NPL to come to a lower level.

The writer, a banker by profession has worked both in local and overseas market with various foreign and local banks in different positions

 

Automation in the banking sector

Financial Stability Report 2014 published by Central Bank shows the Non Performing Loan (NPL) in the Banking sector in Bangladesh around 9.7 per cent as on 31st December 2014. A jump of almost 1.5 per cent from the previous year. Despite the all out approach and efforts by Central Bank to bring in required discipline including management of NPL, why this number has gone up to a dreadful number? This in turn impacts the confidence of investors and other stakeholders on the banking sector in entirety. The profitability of the banking sector is impacted by the non performing assets due to : 1. The interest is suspended and cant be booked as income after the bad loan matures beyond a certain tenor; 2. The banks have to pay interest on deposits which they have used to fund these default borrowers hence needs to booked as expenses for the year. 3. The provision required for these bad loans are directly debited as expense charge off. On the other hand, these non performing loans are rather creating holes for which the banks face shortfall in capital adequacy. Hence, the banks having non performing loans end up with poor ratings impacting the business growth of these banks. Eventually Central Bank has no option left but to appoint observers in the board of these banks to ensure the depositors interests primarily. With all these odds, a bank with high NPL ratio faces the challenges to stay afloat let alone swim. Like in any finance books, the borrowers/debtors have two generalized criteria, ability to pay and willingness to pay before any decision on advancing any credit. A grocer selling goods to its customers on credit also goes through the same analysis. Its true that any business may fail but the question remains that whether the debtor/borrower is willing to pay. Using the same simple philosophy, a bank can decide whether to lend money to a particular customer. The cash flow statement is primarily the source where a number of pertinent and relevant questions may rise and plausible response to those queries may assist. But at the very initiation, the bank must have a thorough understanding about the particular customer like the previous track record including repayment behavior, dealing with its employees, its vendors and suppliers, the personal background check among many other criteria. These background checks are very helpful in getting a clear picture about the willingness to pay. We need to keep this in mind that if the borrower asked money from me, shall I give it to him? This on a very bigger context is depositors money and we must act with all prudence needed to safeguard this money and try to utilize the fund to ensure that the money is in the hands of genuine borrowers for genuine and legitimate business needs. Understanding the cash flow in tandem with authentic balance sheet, income statement is the way to start diagnosis. Business is dynamic and faces tops and troughs. For example, the recent downward trend in price of commodities has impacted a number of businesses. The lull in the demand for steel due to slowdown in construction along with stringent regulations have resulted many ship breakers to literally fail. Automation in the banking will help proper monitoring. This certainly helps to manage portfolio proactively. The early diagnosis of weakening signals in accounts help to watch list the accounts and go for early remedial actions. Recovery itself is a business. The proper management of impaired accounts will help release provision on one hand and take the interest in suspense in income. It will also help the various ratings of the bank to significantly improve. Legal action and negotiation out of court should be adopted simultaneously. The concerted efforts under the able guidance and stewardship of all the stakeholders will make the NPL to come to a lower level. The writer, a banker by profession has worked both in local and overseas market with various foreign and local banks in different positions