Trust and lending management of bank branches in India
Branch Managers and Loan officers of Indian bank branches are two key players in lending management of Indian bank branches. Their relationship is crucial in determining how the loans will be assessed and evaluated. This relationship is one of the important relationships in lending risk that a branch may face. A social risk evaluation approach based on trust theory is used to understand this relationship. A theoretical framework of trust between branch manager and loan officer was developed in an earlier study by Bhati (2006). In the current study, case studies of Indian bank branches are completed to determine empirically the various factors of trust between branch manager and loan officer, the stages of trust development between branch manager and loan officer and the effect that trust between branch manager and loan officer might have on the lending performance of bank branches in India. The findings have significant applications for operations of bank branches in general and India in particular. Banks in India operate in a very different lending environment as compared to banks in developed western countries. There is a considerable amount of state intervention in bank lending in India. All banks including public sector banks must observe guidelines from Government of India in their lending activities. For example, all public sector banks in India are required to lend 40% of their total loans to specified priority sectors of economy. In addition, the Credit Guarantee Fund established to refund a part of defaulted loan to the banks, reduces the incentive for banks to assess and monitor loans properly but also motivates the borrowers to undertake risky business activities because the borrowers depend on the Credit Guarantee Fund to pay a part of their defaulted loan amount. Consequently banks in India, particularly public sector banks, have a large portfolio of non-performing assets. This large portfolio of non-performing assets arises because banks have followed the government requirements on lending, resulting in increase of non-performing loans.