Tuesday, August 4, 2015

BANKS TO SOCIETY ....COST OF IGNORING COST ACCOUNTANTS

 Everyone has limitation and that’s what needs to be identified. Basel norms were imposed for better risk management but it failed as major big giants of the US economy went for a wild spin. Only maintaining liquidity levels dose not guide the risk being taken by an industry at the cost of tax payers funds. Ignorance of Cost Accountants is going to be a high cost for the society in the long term. We are unable to block the leakage and also we are unable to bring efficiency in resource management. If we were efficient in resource management then we should not be having NPA as such high levels.  In continuation to my previous two articles its being found that concurrent audit and all other regular checks up of the banking industry has failed to stop the PSU banks from crossing the threshold of rules and regulation of risk management and they have taken more risk where Government of India has to liquidate them.  This article will accentuate that over the long term taxes are going to increases, inflation and cost of production across all segments are going to increase which would result more pressure on the common people across society. Indian might not be low cost of production country. Its vicious cycle created over the years by ignoring cost accountants. Price competition and price escalation will be high in the coming years and India might not be a low cost productive country. Yes the logical reasoning and analytics speaks the same that prices will increase taxes will increase and if these don’t increase then product price to the end user will increase stupendously.  

Don’t forget that under Basel III norms Indian banking industry needs   $37 billion in external capital to meet Basel-III norms by March 2019. Well don’t be shocked. Under Basel III Indian Banks will have to raise Rs 1.5 - Rs2.2 trillion ($26 - $37 billion) in Tier 1 capital externally between FY'15 and full implementation of Basel III in FY' 19. The estimate is equivalent to 42%-61% of public-sector banks' aggregate market cap (as of 12 September 2014),  Hence its clearly shows that Indian Banks needs to extensively cautious since they will going through two segment one where they have to fill up their pockets as well run the economy through disbursement of loans. This also means that the Indian banking industry is set for an huge change over in its process, management system and risk measurement policies. Why I am hammering continuously on risk measurement and risk management will get a more clear shape form here.

Now to provide this funds taxes and duties will increase. Service tax currently has been hiked. Further the government has to work hard to get the fiscal imbalances to come down. Banks will try to tap the IPO market but overstretched valuations would result lackluster performance. Don’t forget the current disinvestment itself is n headache for the government.  Only option left to the government to fill the pockets of Basel III is through high auction prices of coal blocks,4G and 3G brothers and all those resources where government can fetch high prices. This results to a significant increase to the end user who is going to use the services or products. Further cost of acquisition and intensive expensive price would create more burdens on the society at large. Prices would never come down as corporate are already squeezed with interest cost and high debt burdens. Don’t forget that you currently have debt pile up on the bank books which is under NPA and restructuring process further you need a capital to inject into the Basel III norm. Total debt of India’s top 100 companies (except subsidiaries of multinational corporations) stood at Rs.24 lac cr. from 433 companies which are a part of the BSE-500 stock market index by 31 March 2014, this debt had shot up by 8.1 times to Rs 28,43,155 crore  Over and above The Non Performing Assets (NPAs) of the banks in the country stood at Rs 3,00,611 crore as on December 2014. Of the total NPAs, Rs 2,62,402 crore belonged to nationalized banks, Rs 38,209 belonged to private sector banks. Over that you have Basel III norms. Form where do you think that Indian government would get funds to inject within the system. This is the prime reason why Indian government wants Make in India and other investments doors to be opened up so that tax revenues and other things starts moving. But it’s too late. Our cost of production is going to increase and debt to equity ratio is going to force the corporate to increase prices.

The costs of ignoring cost accountants are going to be vicious cycle for the India economy in the long term. One of the key mistakes which in the process of credit risk management is being that at the pre-disbursement stage, appraisal techniques of bank need to be sharpened. While doing my research I drilled into few key areas where it being found that a major cause for NPA is fixation of unrealistic repayment schedule. Repayment schedule may be fixed taking into account gestation or moratorium period, harvesting season, income generation, surplus available etc. If the repayment schedule is defective both with reference to quantum of installment and period of recovery, assets have a tendency to become NPA.

Further those who are thinking that Indian government would manage and Indian banks will manage their NPA well if US interest rate increases and geo-political tension intensifies then benefit of low crude price and flow of investments would dry up. Further export market of India is under slow down and with the ongoing problem of Europe and U.S economy entering into a election year many things will be under severe pressure. Even after the land acquisition bill gets passed don’t expect a Rome to be built in one day.

Now a question might come up that will employing cost accountants in credit and risk management and concurrent audit will this current problem will be resolved. Well it will never be resolved but only losses can be limited. Further the cost of ignoring have to be paid and its due for its own course. I don’t find prices coming down. It will move further only just like your current mobile internet cost which has jumped substantially after service tax and tariff rate were hiked.Moreover if their is 2nd time recession then situation for Indian banks and its corporates would be unexplainable.

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