It’s time for banks and credit institutions to make business excellence a condition of lending

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I don’t know how history will judge me, but let me say that I’ve put a lot of time and energy into transforming Tatas from a patriarchal company into an institutional one, said Ratan N Tata.

Business transformations have been the order of the day for the past forty years. Since the dawn of Industry 3.0 with the widespread adoption of computers, automation and computer controlled operations, many companies have found the need to transform their culture as the customer becomes more important to the business.

Of course, many “gurus” appeared with many theories about change management, business transformation and the like.

What is Business Excellence?

One of the important movements to modernize businesses and help them deal with increasing complexity has been Business Excellence (BE). The movement originally began in Canada, where the government decided to recognize and encourage excellence in business in the face of increasing competitive conditions.

The Malcolm Baldrige Model for Performance Excellence followed. This model was adopted by industry first in the US and then in all parts of the world through the development of regional and country models.

The EFQM is another model. In India we have Rajiv Gandhi’s model, Golden Peacock’s model and the CII-EXIM model which is identical to the EFQM. Interestingly, EXIM Bank was the first bank to sponsor an award for business excellence.

Growth of “Business Excellence”

Over the years, business excellence has grown exponentially, with innovations such as the Balanced Score Cards in 1991 (Kaplan and Norton), the concept of core competencies by CK Prahalad and more recently by Dr. Govindarajan with his “The Three Box Solution”. Another significant development was the work of John Kotter with his eight-step method for managing change.

With all this and more, many Fortune 500 companies have adopted these BE models and reaped tremendous benefits from them.

What is different about these models and what attracts companies to adopt them? And why would Indian banks know and use them to get better returns on their lending?

Modern companies prioritize business processes over silo management. Silos management existed when competition and customer convenience were not essential to sustained profitability and growth. While individual departments exploited their potential, the overall position of the company was often at risk.

This is consistent with the truism that “local maxima do not always lead to global maxima”. On the contrary, in many cases. The BE models were invented to remedy this and make companies more agile and responsive to external stimuli.

These models make companies more “integrated” by balancing the results of individual departments (or silos) within the company and creating synergies. The synergies gained in this way led to efficient overall growth of the organization. Only such companies could thrive in times of competition.

Banks and “Business Excellence”

So where do Indian banks come in?

Actually, they should have entered right at the beginning, when the BE movement started. For banks to have better security to service their long-term loans – both interest payments and principal repayments – they need assurance from the companies they lend to that this ability will remain in place.

Only on this basis can banks reduce risk and avoid the accumulation of distressed assets or NPAs. It is unfortunate that Indian banks have failed to take notice of developments in industry and business practices over the years.

It all started with Total Quality Management or TQM. Business Excellence (or BE) followed, building on the framework established by TQM and connecting the missing aspects such as leadership, strategy, stakeholders and sustainability.

BE’s perspective on any organization is to provide guidance and facilitation for the development and application of best practices, systematic work and an integrated and synergistic approach to organizational work that increases efficiency and effectiveness.

Only one Indian bank – EXIM Bank – noticed and did something about it. EXIM Bank has partnered with the Confederation of Indian Industry (or CII) to use the EFQM model to recognize “Best Companies” through an awards system.

The CII-EXIM Bank awards have become a major arbiter of excellence in organizations. Many companies have joined the process and applied for the award. So far, there have been many companies that have won the award, and many are on their way.

Expansion of the scope of business activities

Various studies have found that there is a correlation between the practice of BE and sustainable company performance. BE models have broadened the scope of business activities from direct profit making to those that enable long-term sustainability of the industry as a whole, more recently adopting triple bottom line (TBL) principles.

BE models are regularly and periodically updated to incorporate the latest trends in corporate governance – social, environmental, community and stakeholder interests that need to be considered.

If banks insist that companies that borrow money from them report their performance using the BE model guidelines, this will ensure that borrowers develop skills to ‘outperform’ their performance in a systematic way. This will lead to better opportunities for sustainable interest payments and returns on capital. And that’s exactly what banks want.

Such an approach has a double benefit. Firms are improving their performance on multiple dimensions, and banks are becoming drivers of the firm’s “friendly” growth. Given the lower NPAs, they can lower interest rates over the long term and improve their bottom line.

Banks and climate neutrality

At a recent GBSN Seed Class for Sustainable Finance and ESG Investments (Global Business School Network), a conference of senior finance experts gathered to discuss how Indian banks can help companies meet the increasing need for carbon neutrality and savings counteract the environment, reduce environmental degradation, improve corporate sustainability in the long term.

The group noted that “banks in Canada are taking environmental protection into account when making lending decisions.”

An internal Bhavans SPJIMR document states: “According to the Loan Market Association, issuance of sustainability-related loans in the European leveraged loan market increased rapidly in the first half of 2021 and is now poised for growth in mid-cap companies and small and medium-sized enterprises. large companies.”

It is recommended that banks also insist that borrowers, particularly larger corporations, submit an annual or semi-annual “Performance Excellence” report based on a selected BE model to reflect organizations’ ongoing commitment to NPA prevention and consistency To make progress towards building “great and sustainable companies”.

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