Incentive Payout on a Weak Portfolio
The zonal office asks the LBO to settle an incentive dispute at the Barshi branch for the half-year ending 30 September. Two relationship managers are compared. P: 72 loan accounts, ₹2.16 crore disbursed, fee income ₹1.08 lakh, 3 accounts worth ₹9 lakh classified NPA. Q: 30 loan accounts, ₹2.10 crore disbursed, fee income ₹1.26 lakh, 4 accounts worth ₹42 lakh classified NPA. One of Q's NPAs is a ₹28 lakh unsecured advance to a proprietary firm, although the branch's delegated sanction limit for a relationship manager is ₹10 lakh and Q's file shows no higher sanction. The existing scheme pays 0.35% of the amount disbursed plus 12% of fee income, with no quality adjustment, giving Q about ₹8,862 and P about ₹8,856. The branch head says the scheme is 'fair because it is equal'. The LBO must decide.
1. Compute the average ticket size, the NPA rate by number and by value, and fee income per account and per ₹100 disbursed for both officers.
Read the worked answer
P: average ticket = 216 lakh / 72 = ₹3.00 lakh; NPA by count = 3/72 = 4.17%; NPA by value = 9/216 = 4.17%; fee per account = 1,08,000/72 = ₹1,500; fee per ₹100 disbursed = 1.08/216 × 100 = ₹0.50.
Q: average ticket = 210 lakh / 30 = ₹7.00 lakh; NPA by count = 4/30 = 13.33%; NPA by value = 42/210 = 20.00%; fee per account = 1,26,000/30 = ₹4,200; fee per ₹100 disbursed = 1.26/210 × 100 = ₹0.60.
Reading the numbers: the two disbursement figures are almost identical, but they are not the same business. Q writes fewer, much larger tickets and earns 20% more fee per rupee lent; Q also converts one rupee in five into an NPA, against one in twenty-four for P. Q's book is roughly five times as risky by value. The single ₹28 lakh unsecured file alone is two-thirds of Q's entire NPA value (28/42) and 13% of everything Q disbursed - a concentration that the disbursement figure conceals.
2. Evaluate the branch head's claim using a weighted scorecard (40% disbursement, 30% fee income, 30% asset quality, best performer = 100 on each metric) and recommend the payout.
Read the worked answer
Normalise each metric, best performer = 100.
| Metric | P | Q |
|---|---|---|
| Disbursement (40%) | 100 | 210/216 × 100 = 97.2 |
| Fee income (30%) | 1.08/1.26 × 100 = 85.7 | 100 |
| Asset quality (30%), inverse of NPA% | 100 | 4.17/20.00 × 100 = 20.9 |
| Weighted score | 0.4(100)+0.3(85.7)+0.3(100) = 95.7 | 0.4(97.2)+0.3(100)+0.3(20.9) = 75.1 |
Recommendation: P is the clear performer once quality is priced. The branch head is confusing equality of formula with fairness of outcome: an equal formula applied to unequal risk is not neutral - it pays Q about the same for creating ₹42 lakh of NPA as it pays P for creating ₹9 lakh. Pay the volume-linked component as computed, but hold back the quality-linked portion on Q's ₹28 lakh file pending the conduct review, and state in writing that the next half-year's scheme will carry a quality gate (for example, no quality component if NPA by value exceeds 10%).
3. What should the LBO do about the ₹28 lakh unsecured advance, and does it change the incentive decision?
Read the worked answer
Process first. The RM's delegated limit is ₹10 lakh. A ₹28 lakh unsecured advance to a proprietary firm therefore required sanction by a higher authority, and Q's file shows none. Three things follow:
- Trace the sanction trail - locate the sanction memo, the approving authority and the appraisal note. If no higher sanction exists, the disbursement breached the delegation of powers, which is a conduct issue independent of whether the loan is repaid.
- Escalate, do not bury - place the facts before the branch head and the credit/audit function in writing, with the file reference, so that ratification or regularisation (if any) is decided by someone competent to decide it.
- Protect the account - confirm security, insurance and documentation, set a recovery plan, and record the account in the watch list.
Effect on the incentive: yes, it changes the decision. A payout is a reward for compliant business. Even if the money were ultimately recovered, Q cannot be credited with volume generated outside delegated authority, and the ₹28 lakh is two-thirds of the NPA value that is dragging Q's quality score down. Recommended treatment: exclude the file from Q's disbursement and fee base for this half-year, release the balance of Q's payout, and let the conduct review decide whether any recovery is warranted. Record the reasoning in the minutes so the decision is defensible if challenged.