npas in indian banks

8/12/2019 NPAs in indian banks

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BANCON 2013

Two decades of credit

management in banks:Looking back and moving ahead

K.C. Chakrabarty

Deputy Governor

Reserve Bank of India


2/57

Introduction

Business of banking is business of intermediation

Credit risk is integral to banking business

When banking was simple

Lending decisions - made on impressionistic basis

Credit risk managementstraightforward Information requirementsminimal

As banking became diverse, complex,sophisticate

Risks increased, became transmitive and contagious

But, credit risk managementlagged behind

And, information systemsremained primitive and didnot capture granular data correctly


3/57

Objectives Examine how Indian banks have dealt with credit risk

over the last two decades

Evolution of regulatory framework Analyse trends in asset quality of Indian banks

Trends in gross and net NPAs

Trends in slippages, write offs and recoveries

Trends in restructuring Dwell on some facets that have a bearing on the asset

quality of banks

Risk management and primitive information systems

GDP growth trends Size / segment analysis of impaired assets

General governance and management structure

Credit appraisal and monitoring standards

Way forward for the regulators, policy makers, banksand bank customers


4/57

Evolution of NPA

regulation in India


5/57

Prudential norms for NPAs 1985

First-ever system of NPA classification - Health Code system

Classification of advances into eight categories rangingfrom 1 (Satisfactory) to 8 (Bad and Doubtful Debts)

1992

Prudential norms on income recognition, asset classificationand provisioning introduced

Restructuring guidelines introduced

Assets, where the terms of the loan agreement regardinginterest and principal is renegotiated or rescheduled aftercommencement of production to be classified as sub-standard

2001

90 day norm for NPAs introduced (effective from March 31,2004)

specified asset classification treatment of restructuredaccounts tightened


6/57

NPA trendsReflecting regulatory initiatives

NPAs rose when prudential regulations introduced - reducedthereafter as regulatory initiatives facilitated improved credit risk

management by banks Pace of introduction / tightening of regulatory reforms slowed after

2001

Regulatory norms were not further tightened during the good pre-crisisyears

Reflected in poor credit standards and increased delinquencies

Provisioning levels remained low for the Indian banking sector

Norms with regard to floating provisions changed

Provisioning coverage ratio was introduced but relaxed thereafter

Dynamic provisioning coverage yet to be introduced

Mere tweaking and flip flop approach to Prudential norms

Restructuring increased as regulatory requirements were relaxed,especially in the post crisis years

One time special dispensation for asset classification of restructuredaccounts provided to deal with the impact of the global financial crisis


7/57

Trends in asset quality


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Trends in gross and net NPAs

Early 1990s

NPA ratios rose

Immediate impact ofprudential norms

Thereafter, the NPA ratiosdeclined

Improved risk management

Increased write offs

Rising credit growth / robusteconomic growth

Abundant liquidity conditions

Increased restructuring

In recent years, NPA ratioshave been rising, though onan average, the ratios are

not higher

Average NPA in % GNPA NNPAs

1997-2001 12.8 8.4

2001-2005 8.5 4.2

2005-2009 3.1 1.2

2009-2013 2.6 1.2

Mar 2013 3.4 1.7

Sep 2013 4.2 2.2

0

2

4

6

810

12

14

16

Ma

r-96

Ma

r-98

Ma

r-00

Ma

r-02

Ma

r-04

Ma

r-06

Ma

r-08

Ma

r-10

Ma

r-12

Sep-13

Percent

Gross NPA ratio Net NPA ratio


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Divergent bank group wise trends

1996-2003 wide variation

between NPA ratio of PSBsand other bank groups

2003-06 - NPA ratios of allbank groups moved in

tandem

2007-09NPA ratios begin todecouple

After 2009, gap betweenPSBs and other bank groupsstarted rising

0

2

4

6

8

10

12

14

16

All banks PSB OPB NPB FB

AverageGNPAratioin%

1997-2001 2001-2005

2005-2009 2009-2013

0

2

4

6

8

10

12

14

16

18

Mar-96

Mar-98

Mar-00

Mar-02

Mar-04

Mar-06

Mar-08

Mar-10

Mar-12

Sep-13

GNPAratioin%

PSB OPB NPB FB


10/57

PSBsgrowing asset quality concerns

PSBs share a disproportionate and increasingburden of NPAsespecially in recent years

Share in

total bank

credit Mar-03

Mar-07

Mar-08

Mar-09

Mar-13

Sep-13

PSBs 74.0 72.8 72.5 75.2 76.2 75.3

OPBs 6.2 4.7 4.5 4.3 4.6 5.0NPBs 12.8 16.2 16.4 15.0 14.8 14.7

FBs 6.9 6.4 6.5 5.6 4.5 5.0

Share in

total bankGNPA M

a

r-03

Ma

r-07

Ma

r-08

Ma

r-09

Ma

r-13

Sep-13

PSBs 75.4 76.6 71.1 64.5 84.8 86.1

OPBs 6.2 5.9 4.6 4.5 2.8 2.8

NPBs 14.2 12.5 18.7 20.3 8.0 6.8

FBs 4.2 4.9 5.6 10.7 4.3 4.3


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Looking beyond the veil of headline numbers

Gross and net NPAs numbers have limitations!

In the 1990s, only data about gross and net NPAs wereavailable

Subsequently, data on flow of NPAs (fresh accretions andrecoveries) collected, followed by data on restructuring,which allowed better understanding of the real problem ofcredit management in the banks

A more detailed understanding of trends in asset quality ofbanks required collection and analysis of granular dataabout various aspects of NPA management viz. Slippages,Write offs and RecoveriesSegment wise and activity wise

Such data has been collected only in recent years(since2009), largely due to regulatory impetus

The current analysis is an attempt to examine trends in assetquality based on this detailed information


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NPA movement over the last decade Increasing slippages and write offs since the crisis years

New accretion to NPAs exceeds reduction in NPAs postcrisis

All amount in

(Rs crore)

2001-2013 2001-2007 2007-2013

NPAs at Beginning of

the period

60,434 60,434 50,513

New Accretion to NPAs

during the period

624,772 159,072 465,700

Reduction in NPAs

during the period

492,006 168,993 323,013

Due to upgradation110,918 24,003 86,915

Due to write-off 203,616 73,941 129,675

Due to actual

recovery

177,473 71,049 106,424

NPAs at End of the

period

193,200 50,513 193,200


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Slippages Trends

Slippagesbetter metric to assess creditmanagement

Slippages & net slippages

Showed a declining trend in the early 2000s;started rising since 2006-07

0

1

2

3

4

5

6

7

8

9

10

0

1

2

3

4

5

6

Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13

percent

percent

SlippageRatio Net Slippage Ratio Gross NPA Ratio (RHS)


14/57

Recovery efforts deteriorating

Extent to which banks able to reduce NPAs throughrecovery efforts deteriorating

evidenced by increasing ratio of slippages to recoveryand upgradation

Average Slippage to

(Recovery + Upgradation) Ratio

Slippage to (Recovery +

Upgradation) Ratio

Mar-01 191.3

Mar-02 279.0

Mar-03 190.5

Mar-04 167.1

Mar-05 129.5

Mar-06 125.4

Mar-07 173.2Mar-08 205.2

Mar-09 221.0

Mar-10 264.1

Mar-11 217.0

Mar-12 255.9

Mar-13 257.0

PSB OPB NPB FB

2001-13 191.1 191.3 452.8 438.6

2001-07 211.3 179.6 376.6 350.6

2007-13 220.6 202.7 418.7 430.3


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Recovery & write offsassociated moral hazard Write offs contributing significantly in reduction in NPAs

Reducing incentives to improve recovery efforts

Slippages exceeding reduction in NPAs especially post crisis The trends indicate weaknesses in credit as well as recovery management

Upgradation as

% of reduction

in NPAs

Write off as % of

reduction in

NPAs

Recovery as % of

reduction in

NPAs

Mar-01 12.6 39.3 48.1

Mar-02 12.0 49.4 38.7

Mar-03 16.0 50.7 33.4

Mar-04 12.3 48.3 39.4

Mar-05 15.2 39.0 45.8

Mar-06 15.2 40.2 44.6

Mar-07 14.5 42.5 42.9Mar-08 17.4 40.7 41.8

Mar-09 23.8 39.6 36.6

Mar-10 21.3 50.2 28.4

Mar-11 24.2 42.4 33.4

Mar-12 31.7 33.4 34.9

Mar-13 33.1 37.8 29.2

Reduction as a % ofslippages

2001-13 78.4

2001-07 105.3

2007-13 70.8

Upgradation as a % of

slippages

2001-13 17.6

2001-07 14.9

2007-13 18.4


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i i i


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Divergent bank group wise trendsnet slippages

Recovery performance also varied across banks

as revealed by trends in net slippages

Net

Slippage

Ratio

All Banks PSB OPB NPB FB

Mar-07 0.8 0.6 0.5 1.5 1.0

Mar-08 0.9 0.7 0.5 1.8 1.6

Mar-09 1.2 0.7 1.0 2.4 4.7

Mar-10 1.3 1.2 1.1 1.5 3.9

Mar-11 1.1 1.2 0.7 0.6 0.6

Mar-12 1.5 1.8 0.6 0.5 1.5

Mar-13 1.6 1.9 0.8 0.6 1.1

Average net

slippage ratio

PSB OPB NPB FB

2001-13 1.3 1.3 2.5 1.8

2001-07 1.3 1.6 3.6 1.4

2007-13 1.2 0.8 1.3 2.1

Net slippage ratio is slippage ratio net of recoveries

i i


19/57

Divergent bank group wise trendsslippages and fresh restructured accounts

The bank group wise trends in slippages arefurther re-enforced when the trends inslippages and fresh restructuring areexamined

All banks PSB OPB NPB FB

Mar-09 5.1 5.2 5.2 3.9 6.8

Mar-10 5.4 5.6 4.0 4.0 6.8

Mar-11 2.9 3.2 2.7 1.5 2.3

Mar-12 5.4 6.5 2.8 1.9 2.3

Mar-13 5.9 7.1 3.4 1.8 1.8

Slippages + fresh restructured ratio


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Summing up

Standards of credit and recovery administration isinefficient and poor as is reflected from the fact thatupgradation as a % of slippage is very lowonly lessthan 20 % of accounts have been upgraded

Recoveries are very less- A major part of reduction is

through write-off Even during 2001-07, recoveries and upgradation were

not as good-things have considerably deterioratedthereafter

Gross NPA in itself not a problem but in conjunctionwith restructured advances they have emerged as amajor issue

d d


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Restructured Accounts Trends Growth in restructured accounts

mixed trend in early 2000s

sharp uptick in 2008 / 2009 due to the one time regulatory dispensation

Continued high growth rate thereafter

-300

30

60

90

120

150180

01

2

3

4

5

6

7

8

9

10

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

g

rowthrateinpercent

ratioinpercent

Restructured standard advances ratio

GNPA ratio

Restructured standard advances growth rate (RHS)

GNPA growth rate (RHS)

R t t d A t U d Mi


22/57

Restructured Accounts Use and Misuse Forbearance a necessity, especially for viable accounts

facing temporary difficulties

But, increasing evidence of misuse of facility for ever-greening of problem accounts by banks Restructuring of unviable units

Deserving & viable units especially for small borrowersget overlooked

Promoters contribution to equity not ensured

Restructuring increasingly used as a tool of NPA managementby banks

All Banks

(%)

Mar-

09

Mar

-10

Mar-

11

Mar-

12

Mar

-13

GNPA

Ratio2.4 2.5 2.3 2.9 3.4

(GNPA +

Rest. Std.

Adv) to

Total Adv.

5.1 6.7 5.8 7.6 9.2

(GNPA +

Rest. Std.

Adv) to Total

Adv.

Mar-

09Mar-10 Mar-11 Mar-12 Mar-13

PSBs 5.1 7.3 6.6 8.9 11.1

OPBs 5.7 5.9 4.9 5.3 5.9

NPBs 5.5 4.8 3.2 3.2 3.1

FBs 5.0 4.7 2.7 2.8 3.1

Di t b k i t d i


23/57

Divergent bank group wise trends inrestructuring and write -off

Asset quality deteriorates further if restructured accounts and write

offs are included, especially in the case of PSBs Banks which are more aggressive in identifying NPAs appear to be

able to manage them better

0

20

40

60

80

100

PSB OPB NPB FB

percent

Share of NPA, restructuring and write offs in total impaired assets - 2013

Gross NPA Restructured Standard Advances Cumulative Write Off

Impaired Assets ratio = (GNPA + Restructured Standard Advances +Cumulative write off) to (Total Advances +Cumulative write off)

Impaired Assets ratio PSB OPB NPB FB

Mar-09 6.8 6.8 6.6 6.5

Mar-10 8.8 7.3 7.3 9.5Mar-11 8.1 6.1 5.5 7.2

Mar-12 10.0 6.3 5.4 6.6

Mar-13 12.1 6.8 5.3 6.4


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Summing up..

Only less then 10% of the total amount written off (including the

Technical Write-off ) is recovered The amount of restructuring and writeoffs distorts inter-segment

comparison of credit quality

Technical writeoff creates moral hazard and creates a dent inoverall recovery efforts

Banks should be given the freedom to decide whether the casesinvolve restructuring

- where only the technical covenants of the loan or the date ofcommencement of commercial production might havechanged and the banks are convinced that the pay-offs from

asset created will be sufficient to repay the loan

- Cases where the reduction does not bring down the lendingrate below base rate should not be considered as concession

I

24

S t i NPA T d


25/57

Segment wise NPA Trends Deterioration in asset quality highest for industries segment Though banks devote fewer resources to the administration

of small credits vis--vis larger credits

Within industries segment - deterioration driven by mediumand large enterprises (50% share in NPAs)

0

5

10

15

20

Agriculture Industries Services Retail Agriculture Industries Services Retail

Gross NPA ratio Impaired Assets ratio

percent

Mar-09 Mar-13

in % Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Micro+Small 10.7 10.6 9.4 9.7 10.6

Medium+Large 7.8 9.4 8.0 11.2 14.8

Impaired Assets ratio

I f t t fi i ifi tl ff t d


26/57

Infrastructure financesignificantly affected

Infrastructure projects strainon banks

regulatory, administrativeand legal constraints

Banks took inadequatecognizance of the need forcontingency planning forlarge projects in theirappraisal

absence or insufficiency ofuser charges

Impaired Assets ratio

In % Mar-09 Mar-13

Mining 4.0 8.2

Iron and Steel 9.3 16.9

Textiles 16.7 21.3

Infrastructure 5.0 18.0

Real Estate 2.5 2.0

L ti k t d t h i


27/57

Large ticket advancesgreater share inrestructured accounts

Restructuringprovided primarily to large corporates

medium and large accounts make up over 90 percent of restructured accounts

larger ticket accounts hold major share in CDR

in % Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Share in total

bank creditMicro+Small* 10.1 11.4 12.0 10.8 10.7

Medium+Large 39.9 42.9 45.0 46.8 48.4

Share in total

bank NPA

Micro+Small 16.1 20.4 21.1 17.5 17.2

Medium+Large 23.8 28.7 27.5 37.7 48.8

Share in total

bank

restructuring

Micro+Small 12.2 7.7 7.7 4.3 3.4

Medium+Large 77.4 69.6 71.1 83.0 90.8

* The data for Medium & Large and Micro & Small pertains to Industries and services sectors.

A t lit f Di t d L di


28/57

Asset quality worse for Directed LendingA myth

General belief is that directed lending has contributed

to rising NPAsGNPA ratio higher for priority sector than non-priority

sectorHowever, considering restructured accounts and write

offs, asset quality worse for the non-priority sector

Priority sector Non Priority sector

1

3

5

7

9

11

13

GNPA Ratio (GNPA +restructured

standardadvances) ratio

Impaired assetsratio

GNPA Ratio (GNPA +restructured

standardadvances) ratio

Impaired assetsratio

Percent

Mar-11 Mar-12 Mar-13


29/57

Study Conclusions & Other Issues :

Why high NPA and such poorstate of Credit Management?

P i iti I f ti S t


30/57

Primitive Information Systems

Improvements in information systems were

not coincident with increased size of assetportfolio, increasing complexities in creditmanagement

Banks ability to manage the quality of theirasset portfolio remained weak given

The lack of granular data on slippages, earlyindications of deterioration in asset quality,

segment wise, trends, etc.Banks failed in identifying / arresting the early

pre-crisis trendsfrom 2005-06 - in asset qualitydeterioration

GDP slowdown leading to increased NPAs!


31/57

GDP slowdown leading to increased NPAs!

Recent decline in asset quality coincided with

deceleration in GDP growth

2

3

4

5

6

7

8

9

10

11

12

13

14

15

-20

-10

0

10

20

30

40

50

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

percent

percen

t

Real GDP growth rate (RHS) Gross Advances growth rate

Gross NPAs growth rate Gross NPA ratio (RHS)

Higher NPAs only a result of GDP slowdown?


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Higher NPAs only a result of GDP slowdown?

3

4

5

6

7

8

9

10

-15

-5

5

15

25

35

45

55

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

percent

percent

Real GDP growth rate (RHS) Slippage growth rate GNPA growth rate

Beginnings of deterioration in asset quality started ahead of

slowdown in economic growth

Growth rate of GNPAs started rising before the crisis even as

the pace of slippages turned sharply positive in 2006-07

Asset quality of PSBs Economic downturn


33/57

Asset quality of PSBsEconomic downturnor sub-optimal credit management?

Recent increase in NPAs not reflected across all

bank groups Though economic downturn faced by all banks

Early threats to asset quality - swiftly and

effectively managed by private sector andforeign banks

PSBs suffer from structural deficiencies related tothe management and governance

arrangements Reflected in lacunae in credit management

Pre-dates the crisis, but not dealt with on time,unlike in the case of the FBs and NPBs

L C dit M t


34/57

Lax Credit Management Deficiencies in credit

management crept in during

the pre-crisis goodyears In general, banks with high credit

growth in 2004-08 ended up withhigher NPA growth in 2008-13

The appraisal process failed todifferentiate between promoters

debt and equity

Promoters equity contributiondeclined / leverage higher

Credit monitoring wasneglected

Recovery efforts slowed

Legal infrastructure forrecovery remained non-supportive

Restructuring became rampantOPB

NPB

PSB

FB

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

50

55

60

65

10 15 20 25 30 35

CAGRNP

A2008-2013

CAGR Advances 2003-2008


35/57

Increasing incidence of

frauds, especially largevalue frauds in recent years

Over 64 % of fraud cases areadvances relatedover70% in case of large valuefrauds (over Rs. 50 crore)

Poor appraisal andabsence of equity has led tolarger no. of advancerelated frauds especiallythrough diversion

Moral hazard associated

with identifying businessfailures as frauds

Lacunae in creditappraisal not identified

Fixation of Staffaccountability a

casualty

Increasing fraudsor are they businessfailures?

Advance Related Frauds (>Rs. 1cr)

2010-11 2011-12 2012-13Cumulative(end Mar13)

BankGroup

No.Amt

(in cr.)No.

Amt

(in

cr.)

No.

Amt

(in

cr.)

No.Amt

(in cr.)

PSBs 201 1820 228 2961 309 6078 1792 14577

OPB 20 289 14 63 12 49 149 767

NPB 18 234 12 75 24 67 363 1068

FB 3 33 19 83 4 16 456 277

Grand

Total

242 2376 273 3183 349 6212 2760 16690

C dit i l ff d (1)


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Credit appraisal suffered(1) Poor Credit appraisal at the time of sanctioning as also at the time of

restruturing

Significant increase in indebtedness of large business groups

Sample of 10 large corporate groups - credit more than doubled between 2007 and2013 even while overall debt rose 6 times

Credit growth concentrated in segments with higher level of impairment

Lending elevated in several sectors where impairments were higher thanaverage

0

2

4

6

8

10

12

14

0

1000

2000

3000

4000

5000

6000

7000

FY07 FY08 FY09 FY10 FY11 FY12 FY13

percent

Rsin

billion

Borrowings of 10 corporate groups

Share in system credit (RHS)Source : Credit Suisse Research

Sectors

CAGR of

credit

2009-

2012

Impaired

Assets ratio

(March

2013)

Iron and Steel 25 17Infrastructure 33 18

Power 41 18

Telecom 28 16

Aggregate

banking sector 19 11

Credit appraisal suffered (2)


37/57

Indian corporates - accessing international marketsto raise capital

Risk from un-hedged exposures

Risk from increase in interest rates

Impact could spill-over to lenders

Project risks not taken due cognizance ofContingency planning for large projects

Restructuring extended to large corporates thatfaced problems of over-leverage and inadequateprofitability

Companies with dwindling repayment capacity torepay debt - raising more and more debt from banks ability of corporates to service debt was falling

exposure of companies to interest rate risk was rising

Credit appraisal suffered(2)


38/57

Summing up..

High credit growth in select sectors has led to decline incredit quality in subsequent periods

High incidence of advance related frauds are anoutcome of deficient credit appraisal standards

Level of Leverage of corporate borrowers, creditgrowth, diversion of funds, sub standard assets andfraud cases are highly correlated. They are first orderderivative of improper credit and recoverymanagement


39/57

Assessing the resilience of

the banking system

Resilience of the banking sector (1)


40/57

Resilience of the banking sector(1)

Current NPA levels - not alarming though could poseconcern if current trends persist

Year

All Banks PSBsOld Pvt. Sec.

Banks

New Pvt. Sec

BanksForeign Banks

GNPA

Ratio

NNPA

Ratio

GNPA

Ratio

NNPA

Ratio

GNPA

Ratio

NNPA

Ratio

GNPA

Ratio

NNPA

Ratio

GNPA

Ratio

NNPA

Ratio

Mar 94 19.07 13.71 21.11 15.44 6.93 3.88 - - 1.46 -0.65

Mar-95 15.31 10.46 17.12 11.98 7.35 4.12 2.21 0.93 1.62 -0.91

Mar-97 14.33 9.50 16.44 11.15 8.29 4.66 2.92 2.51 3.57 1.02

Mar-99 13.34 8.99 14.63 10.17 13.02 7.82 4.55 3.52 5.00 0.86

Mar-01 11.14 6.28 11.99 6.97 11.86 6.71 5.40 3.21 6.69 1.72

Mar-03 8.81 4.42 9.36 4.54 8.86 5.41 7.50 4.67 5.34 1.76

Mar-05 4.94 1.96 5.38 2.07 5.97 2.72 2.93 1.53 3.01 0.87



41/57

Stress testing reveals resilience of banking system due tostrong capital position

June 2013 CRAR Core CRARGNPA

Ratio

Losses as % of

Capital

Baseline 13.4 9.7 4.0 -

NPA increases by 50% 11.5 8.0 5.9 15.4

NPA increases by 100%10.6 7.0 7.9 23.2

NPA increases by 150%9.6 6.0 9.9 31.0

30% of restructured advances

turn into NPAs (Sub-Standard) 12.1 8.6 5.7 10.4

30% of restructured advances

written off (Loss) 11.2 7.6 5.7 18.2




42/57

Provision coverage ratios of Indian banks low byinternational standards declining in recent times

2.0

2.2

2.4

2.6

2.83.0

3.2

40

45

50

55

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

percent

percent

PCR GNPA ratio (RHS)



43/57

Stressed Assets Provision Coverage Ratio

Mar 2009 Mar 2010 Mar 2011 Mar 2012 Mar 2013

PSBs38.47 29.61 34.29 30.00 27.71

OPBs 33.16 35.40 41.58 33.31 31.11

NPBs 38.91 42.64 63.25 55.52 53.73

FBs 51.58 57.73 81.75 83.44 74.04

All Banks 34.80 30.78 36.25 33.00 30.25

Stressed Assets Provision Coverage Ratio defined as {(Total Provisions (excl. Provision for std adv) + Tech

W/Os) to (GNPAs + Rest Std Adv + Tech W/Os)}

Provision Coverage Ratio presents a dismal picture whenRestructured Standard Advances are also considered


44/57

Recommendations and way ahead


45/57

Recommendations and way ahead

Short run

Addressing the existing stock of impaired assetsNPAsand restructured

Time bound revival or recovery

Long run

Robust risk management

Improved information system

Facilitating granular analysis of trends in asset quality

Improved credit management

Credit appraisal and monitoring

Facilitative regulatory and legal infrastructure

Short term: Review of NPAs / restructured


46/57

Short term: Review of NPAs / restructuredadvances

Assess viability of NPA and restructured accounts oncase-to-case basis

Pre-stipulated time-frame for review/ restructuring

Accounts found viable

Promoters to assume their share of losses - not resort to furtherborrowing for equity

If need be bring new promoters

Burden to be equally shared

Restructuring of small accounts - Reorient restructuring towardssmall customersSMEs, priority sector

Accounts found to be un-viable

Put under time bound asset recovery

banks takeover of units where promotersequity is low

sale of assets to ARCs

Improve credit risk management


47/57

Improve credit risk managementEnhanced Credit Appraisal

Group Leverage, Source/ structure of equity capital

Complex project structure (as in SPV) External constraintseffective contingency planning

Keep a check on credit growth and linkage with equity

Need for quicker decision making

Appraisal, sanction, disbursement - timely and fast

More compassion to smaller borrower and increased stringency forlarger borrowers

Strengthen Credit Monitoring

Comprehensive MIS and Early Warning Systems to facilitate regularviability assessment

Enforce accountability

Accountability on Individuals and all levels of hierarchy

Accountability to encompass all aspects of credit management

Accountability for delayed decision making / non-action


48/57

Regulatory framework


49/57

Regulatory framework

Need to review the existing regulatory arrangements for

asset classification and provisioningFacilitative and practical regulation

Restructured accounts to be classified as NPAaligning

domestic norms with global best practices

The practice of technical write offs of NPAs to be

dispensed with

Increased provisioning requirements in line with

international norms and to ensure resilience of the

banking system

Uniform approach to regulationeither principle or rule based

For stability in credit risk management practices

To eliminate ad-hoc implementation processes

Reforming legal & institutional structures


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Reforming legal & institutional structures

Corporate Debt Restructuring (CDR) mechanism

Remove existing bias towards large-ticket accounts

Ensure viability and promotersstake upfront Independent oversight of large CDR account

Debt Recovery Tribunals (DRTs) & other legal provisions

Need for vigorous follow up in the case of suit filed accounts

setting up of more DRTs and DRATs

Asset Reconstruction Companies (ARCs)

Review and revitalise functioning of ARCs

Credit Information Companies (CICs)

Expand use of CICs for credit management


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Concluding

Thoughts

K M (1)


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Key Messages ..(1)

Present level of stressed asset as an outcome is not abig problem but present processes, systems and

structure of creation of stressed assets are a bigproblem.

Existing level of NPAs are manageable but if correctiveactions to arrest the slide in NPA are not initiated, the

stability of financial system will be at great risk. Gross NPAs are not alarming but the quantum and

growth of restructured assets is of great concern

Economic slowdown and global meltdown are not theprimary reason for creation of stressed assets but thestate of credit and recovery administration in thesystem involving banks, borrowers, policy makers,regulators and legal system have contributedsignificantly to the present state of affairs.

K M (2)


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Key Messages .(2)

Credit quality has a high positive correlation with the prudential

norms and regulations prescribed by RBI Laxity, soft and flip-flop approach to regulatory and prudential

norms have contributed significantly to creation of NPAs andstressed assets in the system

Level of Leverage of corporate borrowers, credit growth,

diversion of funds, sub standard assets and fraud cases arehighly correlated. They are first order derivative of impropercredit appraisal in determining appropriate structure of debtand equity both in terms of quantity and quality.

Overall standard and quality of credit management andrecovery management is very poor.

Less than 20% of NPAs are upgraded

Reduction of NPAs is less than slippages

About 50% reduction in NPA is through write-off


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Key Messages .(3) Banks following the process of recognizing NPAs quickly

and more aggressively are having better control overNPAs.

Appraisal standards are lax for bigger loans both at thetime of sanction as also restructuring while appraisal rulesare very stringent for smaller borrowers

Restructuring and write off processes are highly biasedtowards bigger loans as compared to smaller loans.

Credit risk for small borrowers is lower than that for biggerborrowers

Credit risk in priority sector is less than in the non-prioritysector

High pace of credit growth has resulted in lower creditquality in subsequent periods


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Measures .(1)

Credit Appraisal needs to be strengthened with focus on:

Quantum of equity brought in by the promoters Sources of Equity

Contingency Planning in respect of infrastructureprojects

Improve appraisal and approval process for restructuringproposals

Benefits of restructuring to be also extended to smallerborrowers

CDR Mechanism grossly misutilised and needs a thoroughoverhaul

Need for an oversight structure for dealing withrestructuring of large ticket advances

Independent body to oversee CDR mechanism

M (2)


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Measures ..(2)

Restructuring and Technical Write-off as a prudentialmeasure should be eased out by the regulator

Existing NPAs need careful examination for determiningrehabilitation or recovery

Conduct viability study

Quick rehabilitation with support from boththebank and the borrower

Those who put spoke needs to be sufficiently dis-incentivized

Bring new promoter if the existing promoter unableto bring new equity

Restructuring decision should be left to the bank

Quick and determined action is the need of the hour !


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Thank you

npas in indian banks

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