Banking Efficiency (version 2016) – Uniform formats for Assessment

Banks in India follow practice of financing under Multiple Banking Arrangement (MBA) or under Consortium for Working Capital (WC) finance. Similar practice is followed for project/term loans on achievement of financial closures. Borrowers approach the lead bank in WC Consortium every year for assessment/renewal of WC limits. This process takes on an average 2-3 months time for a mid/large scale corporate borrower. After detailed appraisal/assessment, the lead bank shares its assessment note with the other member banks in the Consortium. The member banks use this note for renewal/enhancement assessment at their end. But when? If the note is received say in January, when will the member banks use it for assessment at their end? The answer is : in normal circumstances, they will use it only when the limits are due for renewal at their end, and if such due date is say in May, then it will be May only when the note will be used. Surprisingly the renewal exercise at each member bank, takes average 1-2 months time even after assessment by lead bank, and lead bank shares its assessment note! But why? The first reason being of course is that all member banks do not maintain a common date for renewal, which leads to information in lead bank note becoming obsolete or requires updation by the time limits are due for renewal at their end. The second issue is that all banks individually also undertake the same full assessment exercise i.e. management study, analysis of financials, ratios, industry/market research, limits assessment, risk, mitigants, KYC etc, however in different formats. Each bank has its own devised formats which more or less contain similar information. But since the formats are not uniform and there is no written unanimous guideline for computation of ratios etc., each bank takes the support of lead bank note and prepares it own assessment/appraisal note.

In case of term loans the appraisal note is shared by bank if borrower pays a huge appraisal fee for such sharing. As mentioned above, even if it shared, it is of limited use in terms of efficiency in swiftly completing the assessment by other banks due to the issue of different formats prevailing in each bank. This applies even to the Syndicated/Underwritten deals, where the Information Memorandums (IMs) are of limited use as long as efficiency is concerned.

Think of the enormous time, energy, resources, systems, people, etc. invested by each bank in undertaking the same exercise which is already done by leader of the consortium, and even shared the assessment/appraisal note. Whether this meets the efficiency levels we expect in this challenging business environment?

In a time when Government is focusing on improving the system efficiencies in financial sector, formed the Banks Board Bureau (BBB) for improving the working of public sector banks, is it not time to address this issue of not having uniform formats in banks? If this is rectified, imagine how faster it would be to achieve financial closures for the WC/project finance. The Corporates will be able to use the saved time and resources in addressing the other issues. Banks will be also able to save their huge time which they can devote for processing additional proposals. Hence, addressing this small issue can hugely benefit India Incorporation, and its indirect effect would support the overall productivity in economy which is struggling to keep growth rate high.    

The above issue can be easily addressed by IBA/RBI by initiating dialogues with banks in drafting the uniform formats, uniform definitions of ratios, covers etc. for WC and project assessment. They can also initially conduct workshops for adopting the uniform formats. There could be need for addressing sector specific formats which can be also facilitated. There can be some information like industry exposures etc. specific to each bank which cannot be covered by lead bank in its uniform assessment note. Such limited information and the commercials pricing etc. can be prepared and topped up by each bank over the lead bank’s uniform assessment.

As a long term solution and efficiency building exercise, they can facilitate software which can generate industry specific templates having required assessment fields and formulas. This will standardize the assessment practices in banks without tempering with the templates/formulas. They can keep on improving/developing this software in consultation with banks over time.

There is thrust by RBI that each bank should undertake its own due diligence for exposures taken. To this effect, lead bank can share copies of supporting back up papers to enable the other members individually verify critical data.

Banks will be able to address the other issue i.e. of not having common due dates for renewals, once the uniform formats are adopted. Since the uniform formats will significantly reduce the assessment time, member banks will be also able to immediately take up the assessment exercise.