Monday, August 3, 2015


In continuation to my previous article on banking industry I have come across few more thought points where I find that we professionals are quite unaware about the approach mechanism and the areas which we should study to become competitive for the industry. We are ignored for several decades and for the past several years tax payers funds are being utilised to re-capitalise the banks.  The ignorance of taking cost accountants are hitting the nation and today in this current global economic situations we cant afford to take the same. This article might be an eye opener provided we accept the same.Bank audit in India is a post-mortem activity carried by the bank where as no real time treatment is not being executed.  Don’t jump to conclusion please read further. I am covering two aspects of risk amendment one in any organization and one for the Banking industry. The article and the analysis clearly show that bank audit is not risk amendment neither risk measurement. I might offend many of my friend s but I can’t help. Further I have clearly shown that we cost accountants are expert in risk measurement since risk nothing but cost of taking risk burden and problems arising from the  system of not taking risk mesurement. This article is also primarily focusing the young accountants who have qualified over the last 3 to 4 years. Risk management have been a theoretical concepts and the final passed candidates read only that portion of the subject linked with the suggested answer provided by the Institute. I would rather get into the areas of failure and blocking loopholes which will make the subject more attractive for becoming a credit risk analysts and managing the NPA of all the industry and not of bank only. But before the economy gets stopped there are many instances where proper credit policy management and NPA management could be implemented. We need to understand the key area of the problem and your expertise knowledge in the subject where you can get placed as a credit risk and NPA management segment.

Company Risk Management & Credit Risk Management
When a banking crisis happens it seizes the common man rights to withdraw money and also the economy gets stopped. At the same time a company or an organization also comes to an end since it does not access or understand the risk management.  Only due prudent dividend and investment policy decision making based on Debt and equity combined strategic project management would not resolve the problem of risk management. Its important for both the company and also the bank to understand the risk. Now we are cost accountants needs to understand this key area of risk management as we are employed by companies as well as bank. This subject is of great importance now as global economic conditions are rapidly changing and India is focusing aggressively on domestic consumption driven manufacturing as well export and Indian companies are also focusing to buy overseas assets for market and product diversification.

Now lets get into the case study of failure of an organization in terms of not having risk and credit analyst in an organization. A company plans to expand its business and hence it invests capital taken from the board of directors. The capital is being invested into new products, new markets and also setting up new product line. The middle management convinces the senior and top level management that competitors are driving their expansion plans and hence we also need to follow the path. Well the 1st seed of failure management is planted. Copying the business strategy of your competitor without knowing the in-depth management policies are the biggest risk. Now your Financial heads took the decision of the strategic managers and developed the WACC model where IPO and Debt were taken into account or only debt taken into account. For the next 2 years the organization shows the shareholders that business is being developed and it’s a growing business hence profitability is not the 1st priority expansion of the business is the first. Bank provides loan either based on the credit profile of parent company or in many cases based on the subsidiary as parent company is backing the same. In most of cases Banks don’t understand the business. They understand the free cash flow from the business and its ROC derived on judicious calculation. Now risk management have been executed. Now a question might come up that what type of risk management needs to be taken into account in these cases. Probability of failure of the business and it affect on the shareholders equity and brand equity. Further the debt component taken based on parent company, if the subsidiary goes for a toll in that case what affect it will have on the same. Opportunity cost is easy to calculate using strategic management but what about the real losses. How much bigger loss can happen if we go ahead with all the projects?. The company needs to find the risk associated with moving ahead with the business plan. This is not cost associated risk but its related to strategic as well as business risk. Credit analyst needs to look into the aftershock affects of the debt burden and the economic risk associated over the credit risk. Well these happened precisely to major companies who left their core business and came into Indian power industry which has the highest NPA in the Indian economy followed with coal blocks.  This happened due to improper risk management policies and credit risk management policies. If all the perspective of risk analysis were taken into account then these companies who are struggling with the debt should not have taken death bed. This part was only of company or organizational risk management failure part now lets get into banking system where we need to figure out the risk management failures.

Bank Risk Management
When every bank competes with loans disbursement race they come up with potentially high-risk retail products for example, tracker mortgages, 100% mortgages for first-time buyers and restructuring of existing books of loans. Banks loan book expands but neither bank nor the borrowers understand the risk of taking such loans. This gives birth to places where cost accountants can work.
Bank management and boards run on the feared that, if they did not yield to the pressure to be as profitable compared to other banks, in particular, they would face loss of long-standing customers, declining bank value, potential takeover and a loss of professional respect. This is the birth place of banking system failure. Banks don’t access risk management properly otherwise power sector and coal block sector would not have become 85% of the Indian banking loan portfolio followed with 75% of the same being NPA. Strategies chosen by Indian banks included concentration on retaining market share, increasing earnings growth and protecting the banks’ franchise.
The Silent Observers: External Auditors where Indian banking system gives much focus and least on risk management.
The biggest drawback of auditors that they are not working full-time in banks, and despite of having all documentation about the way a bank is moving ahead its reports are not on real time basis where risk management and risk measurement of individual projects are carried out. Audit and auditors are doctors who do post-mortem and not treatment on live patients.  Just imagine that the total outstanding credit to the power sector from various banks amounted to Rs 5.83 lakh crore at the end of 2014. This amount was 14.4% higher compared to 2013. Now when the auditors knew that power sector is a big blockage and the auditor demand that their report is a composite report which covers risk management  areas then why the loan book of power sector of banks grew by 14.4% in 2914 compared to 2013.  This Clear shows that risk management and measurement and credit risk measurement is not Bank audit.  Bank audit is complete different subject where as we cost accountants are expert in risk measurement as we measure the cost associated with that risk.

The SIDE chart further points out that if bank audit was so much fruitful then why banking industry exposure to the power sector kept on growing despite of knowing the risk factors within the sector. Why did not bank audit and auditors control the industry from getting into the verge of collapse. Despite of knowing the growing problems and risk factors within the industry audit report failed to act as live doctor treating and saving form risk factors.This also points out the loophole in the system where banks are being recapitalised and also no proper risk management and credit analysis and quality analysis is not being taken into account.

Hence they research clearly nullifies that risk measurement is not bank audit and also cost accountants in built subjects and professional acumen are best for the risk management. In my next part I will conclude the story since it has become too much lengthy and my readers might have lost the patience.


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