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The recent economic crisis has seen a spate of defaults on loans across banks and one of the key reasons behind this seems to be inadequate credit appraisal processes. Through this interview with Mrs. Ranjana Kumar, Vigilance Commissioner and former Chairperson and Managing Director, Indian Bank, we have tried to examine some of the key issues in credit appraisal in the context of recent events to gauge the place it holds or should hold in today's banking landscape.
Every branch would not be doing it. It would be done only through certain specialized branches which would have proper policies in place on how the appraisal would be done. Also, officers with thorough knowledge and experience would be posted in those branches. That was very important. Again these officers, at all levels, were trained in an institute of the SBI which is known for its credit appraisal. Further, internal audit was also strengthened.
Work doesn't end in the sanctioning of the account, that's where it starts. Even more important than the quality of advance is the monitoring process. A second grade appraisal followed by first grade monitoring can still help the account to be healthy whereas a first grade appraisal followed by second grade monitoring will definitely end up as a problem. Work doesn't end in the sanctioning of the account, that's where it starts. tejas@iimb: The past few years have seen many players exiting the UPL (Unsecured Personal Loan) space, particularly in small ticket personal loans. Would a microfinance model through SHGs be a viable form of risk reduction given the difficulty of assessing the creditworthiness of this segment? RK: Microfinance has been here for almost 15-20 years. It started in a big way in South India with Andhra being one of the first and Karnataka and Tamil Nadu, all in a very big way. But in the last decade, it has come to states like Madhya Pradesh, Rajasthan, Gujarat etc. There is, of course, a lesser risk in doing it through SHGs. And one of the reasons why banks went gaga over these people, apart from the fact that social lending was mandatory also in a way, was because their recoveries were 98-100%. Which banker would not want to go for them? These SHGs are not necessarily agriculture. It could be products or other activities such as making things in the rural areas. Today people are becoming much more quality conscious. So SHGs should also be conscious of the market, the quality standards and they should get trained/ equipped. So the success of microfinance will come provided you train the staff, equip them, make them conscious of the market, upgrade their skills and most important, don't have a middle man between them and the buyer. The benefit of this is that they meet the consumer and they are able to understand the needs of the consumer. That is a sustainable model. It shouldn't be a flash in the pan.
Conclusion
Post the recent crisis, there has been an increased focus on credit appraisal with an emphasis on acquiring a thorough understanding of all aspects of the customer and his business. Further, there is a growing realization that there is a need to go beyond just credit appraisal to proper monitoring of the account post the sanctioning of the loan. Going forward, initiatives like the Unique ID scheme and proliferation of SHGs, leading to financial inclusion are expected to play a critical role in credit appraisal and risk management.
Profile
Mrs. Ranjana Kumar is a prominent Indian banker. Known as the 'Turnaround Queen of India', she was responsible for the turnaround of Indian Bank in her role as Chairman and Managing Director. Post her retirement as Chairperson of the National Bank for Agriculture and Rural Development (NABARD), she is currently the Vigilance Commissioner in the Central Vigilance Commission.