The gross non-performing assets of public sector and private sector banks as on September 30, 2017 were Rs 7,33,974 crore and Rs 1,02,808 crore, respectively. The data is from RBI and Ministry of Finance.
If we look at the banking system today, we have as well moved from a point in 2000 B.C from a system where loans were given to farmers and traders who carried goods between different cities to this day where we have the IMF and World Bank to prevent economic crisis and scenarios equivalent to the great depression.
During this tenure, the banks have witnessed loopholes in their systems and regulations which were exploited for individual profitability. Rome was not built in a day. This is an argument which has been used on numerous occasions to hide and cover the faults by our systems. Agreed, but not to an extent where the money parked by the common man (aam aadmi) is distributed to specific influential people in the name of development and building a nation. I hold a Postgraduate Diploma in Management specializing in finance and am able to build some complex financial models covering possibilities of bankruptcy, breakeven and skyrocketing profits, but using historical and predictive data available. In the end the model is useful only if assumptions and predictions come true.
So how should a bank provide loan targeting development and economic progress? Looking at collateral is one system. But the question arises, if a startup and or established player has trust in their financial model and projections, why take a loan as against disposing the collateral and raising funds?
Consider the case of Nirav Modi. A close look at his history and you will notice he had a peculiar interest in art and diamonds. Begun his first diamond sourcing company in 1999. In 2008 post a request from a close friend to make a pair of earrings he put up an idea of a brand in place. Let us analyze this point. An individual who has been in diamond trades moved across Europe and has a brand catering to the high class. The first question a bank could prospectively ask, why an LOU. Isn’t it possible for you to raise loans from FFF (friends, family, and fools)? You come from a high-class segment of the society. If you have immense trust in the projections you have submitted, why not sell your collateral (in case you have one) and raise the necessary funds? Even if the bank denominates a loan amount the client is liable to pay the bank within a specified time period.
The situation is worsened when the client does not pay and ends up restructuring the loan or requesting more loan to cover up the expenses as his/her projections might not be able to garner fruitful outputs.
This is the issue with the legacy system of banks alongside a glitch in internal working and regulations. We have moved from cheque deposits, cash deposits to online transfers, internet banking, and settlements, swift etc. But where exactly do we stand on contracts and digital notifications on expiry of contracts? Where do we stand on automatic termination of contracts/execution of agreements without human interference? Where do we stand on the quantitative and qualitative evaluation of financial projections, in comparison to historical data and defaults? Are we not learning anything from the faults, scams, and delays in loan repayment which have hindered our systems? Are the banks and government only here to write off loans and not find a better solution and punish the guilty?
The answer is in front of us. Satoshi Nakamoto the named founder of Blockchain gave a solution which can be harnessed and used. There are smart contracts which can be designed. Audit trails which can be easily traced back to origin without breaking the sweat and employing manpower to dissect each book and records. There is no central ledger and hence this system is close to impossible from being hacked into and records being changed. If I were to give a layman example I would call it a system which has been built inside out with only routes to enter and no exits. You can make entries which are consensus cryptographic-based but you are not allowed to rewrite or modify entries.
There are contracts which can be designed to be executed on completion of targets, end of dates and or fulfillment of conditions with flags which can be set to be raised at definite intervals and can be directed to higher authorities to enable them to take decisions and actions.
When such a system exists why are we still stuck with LOU and LOC driven system? Why are we still dependant on just flags and not automation based systems to directly stop funds or use the collateral against the loans along with a temporary suspension of all bank accounts linked with the defaulter and if a step ahead can be taken why not the passport too?