Banking Issues

Branch profitability

Normally First line managers will be worried about their bottom line figures.   They have to deliver, fulfill the management expectations and show results month after month.

Yes; even a ‘panwala’ will not continue his business if it incurs losses continuously for six months.  So it is all the more important that a financial institution should be run profitably.    Nobody will enter in to sinking ship. 

Customers are not interested in individual branch performance and they look at macro level – bank as a whole.   If clients start analyzing individual branch performance, it is doubtful whether business will be as usual.   This is applicable to all banks.

Nowadays younger generation people (Gen Y) head many of the branches who are not much experienced as well as do not have much exposure, due to various reasons.   But they have a lot of potential, innovative ideas and experimenting attitude, which can be used in the business to achieve the required goal.

Banks have different products for different customers, all contributing to profit.   It is normal to say that curtailing expenses will increase the profit.   True; but fixed expenses and inelastic items like Rent, Staff cost, etc. cannot be tinkered with.   Reduction of staff can be done; but at what cost?   They should be considered as human capital and can be used for marketing, customer service, recovery, etc.

Hence increasing the income portfolio is the only solution to stay in the business.   Let us see some of the ways:

1. For banks, interest income is the main source, which will also deploy the funds mobilized at the branch level earning higher interest.   A good mix of Retails loans, Term loans, Working capital loans, etc. will give continuous income.    Self liquidating ones like Bill finance, assured return giving Liquirent, highly secured ones like Jewel loan, employer-tied up personal loans, etc. will improve the bottom line.

2. The above should be supplemented by fee based / non interest income like issuing LG; LC, issuing DD; NEFT; RTGS, collecting Locker rent, sale of third party products like insurance, mutual fund, etc.     But it should be ensured that branch earns majority of its income only through core banking business and not from third party products.     This product should be used to attract new clients and making them as our customers.  (In reality many branches sell such products only to the existing clients).

3. There are other areas like keeping minimum balance in ‘account with other banks’, optimum cash retention, reduction in advertisement cost by ‘being in the news’, etc.

4. Recovery of NPA, overdue, etc. will also result in increased income.

5. Another important source is reduction in Term Deposits.   These deposits may improve the top line but will be costly for the branch, even though they stay for a fixed term.  Instead, CASA will be better, even if it is withdrawn at the ‘right’ time.   In CASA, end figures are not important; average CASA balance each day is important.

It will be helpful to prepare branch-wise balance sheet to see where each branch stands.  It will also help the branch staff to improve customer happiness, indulge in cross selling and to involve them in bank development.

Ultimately, any commercial establishment has to earn profit and branches are not exempted.

Banking Issues

Frequent transfer of funds devoid of genuine trade

Senior bankers know the issue of ‘kite flying’, a loose term referring to issue of cheques on sister concerns without any underlying trade transactions (similar to accommodation bills) and meeting the payment obligations by issuing another cheque on the same entity or using bills / LC limits without genuine movement of goods.

There were days when clearing of cheques took a few days to clear and the fraudsters used to enjoy this gap to their advantage.

Nowadays, with the introduction of High Value Clearing, RTGS, etc., it has been brought under control.   However, still some clients find loopholes in the system.  Pending RTGS credit in the evening, they send out money by RTGS to other accounts to make ‘rotation’.   Some make payment of bills to use the available LC limits again.

They create money out of thin air to:

-       Inflate turnover in their account, so that they can further increase the limits of working capital facilities.   One may observe such clients avail adhoc limits, excesses, and enhancements in limits very often without waiting for normal review period of their facilities.

-    Avoid account becoming NPA due to overdue bills, unadjusted excess drawings, devolvement of LC / LG, etc.

-       Avail the usance bills facility which is otherwise lying idle

-       Create a record that they are prompt in honoring their commitment on due dates

Care:

This bubble has to be busted by bankers by taking some precautions while handling the accounts of such unethical customers.

-       Periodic stock verification for outstanding in all facilities (secured by stocks) in ALL BANKS

-    Cross checking the account turnover in ALL BANKS with sales volume, sales tax paid, customs duty paid (wherever applicable), etc.

-       Correlation between income earned and the sales turnover

-       Curtailing deals with sister concerns

-       Discreetly enquiring with company employees about the activities of the company

-       Verifying the company’s balance sheet, P&L account, etc. with the one filed with Registrar of companies

Banking Issues – Accommodation bills

Generally banks discount bills raised by companies on their clients to provide much needed working capital finance to continue their operations.   In doing so, banks consider that they facilitate their corporate customers’ trade cycle, without suspecting much on the underlying transaction.

But some fraudulent companies are misusing ‘bill finance’, by drawing accommodation bills and thereby defrauding banks.    The company connives with the drawees to raise finance, which otherwise they will not be eligible for.

Such accommodation bills do not contain ‘document of title to goods’; even if it is available, it will be a fake one.   Many companies indulge in submitting ‘accepted delivery challans’ with the documents.   Normally, when a bank discounts bills and parts with funds, it is obvious that the stocks procured with the finance secure the finance.    However in such accommodation bills the finance becomes naked, as there is no movement of goods taking place.   This is the first sign of the account becoming NPA later.

Such practices by some unscrupulous clients even cross the border and reflect in export import trade.

Though bank staff is not trained to suspect everybody, they have to exercise some due diligence while extending bill finance.

-       Customer due diligence should be reviewed every year / two years

-       Credit opinion / due diligence report on the drawees by reputed agencies should be obtained periodically

-       LR / BL should be verified with the issuers at random intervals for its genuineness

-       In the case of bill finance against ‘accepted delivery challans’ surprise inspection of materials received is a must

-       It is also advisable to visit the other bank involved to discuss transactions to ensure genuineness

If the bankers tighten their vigilance, proactively, frauds and NPA can be reduced.

Happy Diwali wishes to all!!   

Let the new year bring abundant income to everybody!

Imports - Exports related issues

Dealing with fake companies abroad

Small exporters - importers, especially in SME sector, get in to trouble with fake companies abroad when they undertake transactions without making proper due diligence on the counter parties. This results in financial loss to the client as well as to the country.  Though this is not unique to India, bankers have a moral responsibility to educate the customers to take precautions while dealing with unknown clients, mostly sourced through internet.

Exports:

The fraudster buyer abroad demands goods first before sending the payment, which does not come either fully or part.   They neither send advance remittance or open Letter of Credit.  May be in some cases, clients in both the countries like to avoid bank charges.

To mitigate this, exporters are to be advised to get the credit opinion and due diligence report from reputed service providers like Dun and Bradstreet.   Even Export Credit Guarantee Corporation (ECGC) in India is doing such help by keeping a database.   Such service providers give the payment history also along with the report.

Imports:

In the case of imports, such cases are far and few.   However many fly-by-night operators abroad, some of them are hand-in-gloves with the importers in India, indulge in un-ethical activities, thus siphoning precious foreign exchange from the country.

In such cases also, bankers should insist on due diligence report before undertaking transactions, so that they will not be abetting such wrongdoers.  This will eliminate transactions with shell companies.

Care:

While the incidence of loss may befall on the customers in most of the cases, ultimately any hit on the balance sheet of customers will indirectly reflect on the balance sheet of the banks, if not immediately.   Hence it is prudent for bankers to insist the customers on proper risk management while dealing with unknown clients as well as new clients in other centres.