Two decades of Credit Management in Banks, by KC Chakrabarty, Nov 2013 at: http://rbidocs.rbi.org.in/rdocs/content/PPTs/NPA181113BS.ppt

1. BANCON 2013
Two decades of credit
management in banks:
Looking back and moving ahead
K.C. Chakrabarty
Deputy Governor
Reserve Bank of India

2. 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 management – straightforward
 Information requirements – minimal
 As
banking
sophisticate
became
diverse,
complex,
 Risks increased, became transmitive and contagious
 But, credit risk management – lagged behind
 And, information systems – remained primitive and did
not capture granular data correctly

3. 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, banks
and bank customers

4. Evolution of NPA
regulation in India

5. Prudential norms for NPAs
 1985
 First-ever system of NPA classification - ‘Health Code’ system
 Classification of advances into eight categories ranging
from 1 (Satisfactory) to 8 (Bad and Doubtful Debts)
 1992
 Prudential norms on income recognition, asset classification
and provisioning introduced
 Restructuring guidelines introduced
 Assets, where the terms of the loan agreement regarding
interest and principal is renegotiated or rescheduled after
commencement of production to be classified as substandard
 2001
 90 day norm for NPAs introduced (effective from March 31,
2004)
 specified asset classification treatment of restructured
accounts tightened

6. NPA trends – Reflecting regulatory initiatives
 NPAs rose when prudential regulations introduced - reduced
thereafter 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-crisis
years


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 restructured
accounts provided to deal with the impact of the global financial crisis

7. Trends in asset quality

8. Trends in gross and net NPAs
 Early 1990s
 NPA ratios rose
 Immediate impact of
prudential norms
 Thereafter, the NPA ratios
declined
 Improved risk management
 Increased write offs
 Rising credit growth / robust
economic growth
 Abundant liquidity conditions
 Increased restructuring
GNPA
NNPAs
1997-2001
12.8
8.4
2001-2005
8.5
4.2
2005-2009
 In recent years, NPA ratios
have been rising, though on
an average, the ratios are
not higher
Average NPA in %
3.1
1.2
2009-2013
2.6
1.2
Mar 2013
3.6
1.9
Sep 2013
4.2
2.2

9. Divergent bank group wise trends

1996-2003 – wide variation
between NPA ratio of PSBs
and other bank groups

2003-06 - NPA ratios of all
bank groups moved in
tandem

2007-09 – NPA ratios begin to
decouple

After 2009, gap between
PSBs and other bank groups
started rising

10. PSBs – growing asset quality concerns
 PSBs share a disproportionate and increasing
burden of NPAs – especially in recent years

11. Looking beyond the veil of headline numbers
Gross and net NPAs numbers have limitations!
In the 1990s, only data about gross and net NPAs were
available
Subsequently, data on flow of NPAs (fresh accretions and
recoveries) collected, followed by data on restructuring,
which allowed better understanding of the real problem of
credit management in the banks
A more detailed understanding of trends in asset quality of
banks required collection and analysis of granular data about
various aspects of NPA management viz. Slippages, Write offs
and Recoveries – Segment wise and activity wise
Such data has been collected only in recent years(since
2009), largely due to regulatory impetus
The current analysis is an attempt to examine trends in asset
quality based on this detailed information

12. NPA movement over the last decade
 Increasing slippages and write offs since the crisis years
 New accretion to NPAs exceeds reduction in NPAs post
crisis
All amount in Rs crore
2001-2013
60,434
2001-2007
60,434
2007-2013
50,513
New Accretion to NPAs
during the period
629,058
161,406
494,836
Reduction in NPAs
during the period
492,903
169,889
350,332
Due to upgradation
110,918
24,003
90,887
Due to write-off
204,512
74,838
141,295
Due to actual
recovery
177,473
71,049
118,149
NPAs at Beginning of the
period
NPAs at End of the
period
193,200
50,513
193,200

13. Slippages … Trends
 Slippages – better metric to assess credit
management
 Slippages & net slippages
 Showed a declining trend in the early 2000s;
started rising since 2006-07

14. Recovery efforts deteriorating
 Extent to which banks able to reduce NPAs through
recovery efforts deteriorating
 evidenced by increasing ratio of slippages to recovery
and upgradation
Slippage to (Recovery +
Upgradation) Ratio
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
190.5
167.1
129.5
125.4
173.2
205.2
221.0
264.1
217.0
255.9
257.0
Average Slippage to
(Recovery + Upgradation) Ratio
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

15. Recovery & write offs – associated 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
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
Write off as %
of reduction in
NPAs
Recovery as %
of reduction in
NPAs
12.6
12.0
16.0
12.3
15.2
15.2
14.5
17.4
23.8
21.3
24.2
31.7
33.1
39.3
49.4
50.7
48.3
39.0
40.2
42.5
40.7
39.6
50.2
42.4
33.4
37.8
48.1
38.7
33.4
39.4
45.8
44.6
42.9
41.8
36.6
28.4
33.4
34.9
29.2
Upgradation as a % of
slippages
2001-13
17.6
2001-07
14.9
2007-13
18.4
Reduction as a % of
slippages
2001-13
78.4
2001-07
105.3
2007-13
70.8

16. Divergent bank group wise trends - slippages


In the aftermath of the
crisis, slippage ratios rose,
especially for FBs and
NPBs
FBs and NPBs, though
quickly arrested
deterioration in asset
quality post-crisis through
improved credit risk
management
Slippage
Ratio
PSB
OPB
NPB
FB
Mar-07
1.8
1.8
2.0
1.5
Mar-08
1.7
1.4
2.1
2.1
Mar-09
1.8
1.9
3.0
5.5
Mar-10
2.0
2.2
2.0
5.5
Mar-11
2.2
1.7
1.3
2.2
Mar-12
2.8
1.5
1.1
2.3
Mar-13
3.1
1.8
1.2
1.8
In recent years, the ratio
rose sharply for PSBs
OPB
NPB
FB
2001-13
2.7
2.6
3.9
2.8
2001-07

Average
slippage ratio PSB
3.2
3.3
5.7
2.4
2007-13
2.2
1.8
1.8
3.0
Slippage ratio = fresh accretion to NPAs during the
year to standard advances at the beginning of the

17. Divergent bank group wise trends – net slippages

Recovery performance also varied across banks as
revealed by trends in net slippages
Net Slippage
Ratio
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
PSB
OPB
NPB
FB
0.6
0.7
0.7
1.2
1.2
1.8
1.9
0.5
0.5
1.0
1.1
0.7
0.6
0.8
1.5
1.8
2.4
1.5
0.6
0.5
0.6
1.0
1.6
4.7
3.9
0.6
1.5
1.1
Average net PSB
slippage ratio
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

18. Divergent bank group wise trends –
slippages and fresh restructured accounts
 The
bank group wise trends in slippages are
further re-enforced when the trends in
slippages and fresh restructuring are
examined
Slippages + fresh restructured ratio
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
PSB
5.2
5.6
3.2
6.5
7.1
OPB
5.2
4.0
2.7
2.8
3.4
NPB
3.9
4.0
1.5
1.9
1.8
FB
6.8
6.8
2.3
2.3
1.8

19. Conclusions ..
 Standards of credit and recovery administration is
inefficient and poor as is reflected from the fact that
upgradation as a % of slippage is very low – only less
than 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 deteriorated
thereafter
 Gross NPA in itself not a problem but in conjunction
with restructured advances they have emerged as a
major issue

20. 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

21. Restructured Accounts … Use and Misuse
 Forbearance a necessity, especially for viable accounts
facing temporary difficulties
 But, increasing evidence of misuse of facility for “evergreening” of problem accounts by banks
 Restructuring of unviable units
 Deserving & viable units especially for small borrowers
get overlooked
 Promoters contribution to equity not ensured
 Restructuring increasingly used as a tool of NPA management
by banks
(GNPA +
All Banks
(%)
Mar09
GNPA
Ratio
2.4
(GNPA +
Rest. Std.
Adv) to
Total Adv.
5.1
Mar Mar- Mar- Mar
-10
11
12
-13
Rest. Std.
Adv) to
Total Adv.
MarMar-10 Mar-11 Mar-12 Mar-13
09
6.7
2.3
5.8
2.9
7.6
3.4
9.2
PSBs
5.1
7.3
6.6
8.9
11.1
OPBs
2.5
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

22. Write-Off and recovery from Write-offs
Recovery from written off Accounts during the FY ended
(Rs. crore)
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
All
Banks
424
501
479
1,065
1,768
2,902
2,480
3,101
3,686
4,362
5,036
5,191
6,960
PSBs
418
494
463
1,008
1,612
2,699
2,220
2,824
3,372
3,819
4,412
4,656
5,953
OPBs
2
3
5
26
45
84
132
173
217
207
231
201
200
NPBs
3
2
4
30
111
109
120
87
92
197
327
294
779
FBs
0
1
6
0
0
10
8
16
4
139
66
40
29
Write offs of NPAs during the FY ended
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
All
Banks
6,446
8,711
12,021
13,559
10,823
11,657
11,621
11,653
15,996
25,019
23,896
20,892
32,218
PSBs
5,555
6,428
9,448
11,308
8,048
8,799
9,189
8,019
6,966
11,185
17,794
15,551
27,013
OPBs
331
588
653
525
464
544
610
724
616
884
682
671
863
NPBs
580
896
1,564
1,286
1,682
1,409
1,232
1,577
5,063
6,712
2,336
3,024
3,487
20
798
356
440
628
905
590
1,334
3,350
6,238
3,083
1,646
855
FBs
Substantial Write-off but recovery from write-off has been very poor

23. Divergent bank group wise trends in
restructuring 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
Impaired Assets ratio
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
PSB
6.8
8.8
8.1
10.0
12.1
OPB
6.8
7.3
6.1
6.3
6.8
NPB
6.6
7.3
5.5
5.4
5.3
FB
6.5
9.5
7.2
6.6
6.4
Impaired Assets ratio = (GNPA + Restructured Standard Advances +Cumulative write off) to (Total Advances +
Cumulative write off)

24. Conclusions …..
 Only less then 10% of the total amount written off
(including the Technical Write-off ) is recovered
 The amount of restructuring and write –offs
distorts inter-segment comparison of credit
quality
 Technical write –off creates moral hazard
 Write offs creates a dent in overall recovery
efforts

25. Segment wise NPA Trends
 Deterioration in asset quality highest for industries’ segment
 Though banks devote fewer resources to the administration
of small credits vis-à-vis larger credits

Within industries segment - deterioration driven by medium
and large enterprises (50% share in NPAs)
Impaired Assets ratio
in %
Micro+Small
Medium+Large
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
10.7
10.6
9.4
9.7
10.6
7.8
9.4
8.0
11.2
14.8

26. Infrastructure finance – significantly affected
Infrastructure projects – strain on
banks
 regulatory, administrative and
legal constraints
 Banks’
took
inadequate
cognizance of the need for
contingency planning for large
projects in their appraisal
 absence or insufficiency of user
charges
Impaired Assets ratio
In %
Mining
Iron and Steel
Textiles
Infrastructure
Real Estate
Aviation
Mar-09
Mar-13
4
8
14
5
1
1
9
15
23
16
2
27
Increase in NPA by adding restructuring & write off - 2009 vs 2013

27. Large ticket advances – greater share in
restructured accounts
 Restructuring – provided primarily to large corporates
 medium and large accounts make up over 90 per
cent of restructured accounts
 larger ticket accounts hold major share in CDR
in %
Share in total
bank credit
Share in total
bank NPA
Share in total
bank
restructuring
Mar-09
Mar-10
Mar-11
Mar-12 Mar-13
Micro+Small
10.1
11.4
12.0
10.8
10.7
Medium+Large
39.9
42.9
45.0
46.8
48.4
Micro+Small
16.1
20.4
21.1
17.5
17.2
Medium+Large
23.8
28.7
27.5
37.7
48.8
Micro+Small
12.2
7.7
7.7
4.3
3.4
Medium+Large
77.4
69.6
71.1
83.0
90.8

28. Asset quality worse for Directed Lending –
A myth
 General belief is that directed lending has contributed
to rising NPAs
 GNPA ratio higher for priority sector than non-priority
sector
 However, considering restructured accounts and write
offs, asset quality worse for the non-priority sector
Priority sector
Non Priority sector

29. Study Conclusions & Other Issues :
Why high NPA and such poor
state of Credit Management?

30. Primitive Information Systems
 Improvements in information systems were
not coincident with increased size of asset
portfolio, increasing complexities in credit
management
 Banks ability to manage the quality of their
asset portfolio remained weak given
 The lack of granular data on slippages, early
indications of deterioration in asset quality,
segment wise, trends, etc.
 Banks failed in identifying / arresting the early
pre-crisis trends – from 2005-06 - in asset quality
deterioration

31. GDP slowdown leading to increased NPAs!
Recent decline in asset quality coincided with
deceleration in GDP growth

32. Higher NPAs only a result of GDP slowdown?
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

33. Asset quality of PSBs – Economic downturn
or 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 and
foreign banks
 PSBs suffer from structural deficiencies related to
the
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

34. Lax Credit Management
 Deficiencies
in
credit
management crept in during
the pre-crisis “good years”
 In general, banks with high credit
growth in 2004-08 ended up with
higher NPA growth in 2008-13

The appraisal process failed to
differentiate between promoter’s
debt and equity
 Promoters equity contribution
declined / leverage higher
 Credit
monitoring
neglected
was
 Recovery efforts slowed

Legal infrastructure for recovery
remained non-supportive
 Restructuring became rampant
PSB
OPB
NPB
FB

35. Increasing frauds – or are they business
failures?




Increasing
incidence
of
frauds,
especially
large
value frauds in recent years
Over 64 % of fraud cases are
advances related – over
70% in case of large value
frauds (over Rs. 50 crore)
Poor appraisal and
absence of equity has led to
larger no. of advance
related frauds especially
through diversion
Moral hazard associated
with identifying business
failures as frauds
 Lacunae in credit
appraisal not identified
 Fixation of Staff
accountability a
casualty
Advance Related Frauds (>Rs. 1cr)
2010-11
2011-12
2012-13
Amt
Bank
Amt
No.
No.
Group
(in cr.)
(in
cr.)
Cumulative
(end Mar13)
Amt
No.
(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
242
Total
2376
273 3183 349 6212 2760 16690

36. 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 and
2013 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 than
average
CAGR of
credit
20092012
Impaired
Assets ratio
(March
2013)
Iron and Steel
25
15
Infrastructure
33
16
Power
41
18
Telecom
Aggregate
banking sector
28
16
19
11
Sectors
Source : Credit Suisse Research

37. Credit appraisal suffered…(2)
 Indian corporates - accessing international markets
to 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 of
 Contingency planning for large projects
 Restructuring extended to large corporates that
faced problems of over-leverage and inadequate
profitability
 Companies with dwindling repayment capacity to
repay 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

38. Conclusions …..
 High credit growth in select sectors has led to decline in
credit quality in subsequent periods
 High incidence of advance related frauds are an
outcome of deficient credit appraisal standards
 Level of Leverage of corporate borrowers, credit
growth, diversion of funds, sub standard assets and
fraud cases are highly correlated. They are first order
derivative of improper credit and recovery
management

39. Summing up…. (1)
 Current NPA levels - not alarming though could pose
concern if current trends persist
All Banks
Year
PSBs
Old Pvt. Sec. New Pvt. Sec
Foreign Banks
Banks
Banks
GNPA NNPA GNPA NNPA GNPA NNPA GNPA NNPA GNPA NNPA
Ratio Ratio Ratio Ratio Ratio Ratio Ratio Ratio Ratio 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

40. Summing up…. (2)
 Stress testing reveals resilience of banking system due to
strong capital position
June 2013
CRAR
Core CRAR
GNPA
Ratio
Losses as % of
Capital
Baseline
13.4
9.7
4.0
-
NPA increases by 50%
NPA increases by 100%
11.5
8.0
5.9
15.4
10.6
7.0
7.9
23.2
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
NPA increases by 150%

41. Summing up .… (3)
Provision coverage ratios of Indian banks low by
international standards – declining in recent times

42. Stressed Assets Provision Coverage Ratio
Provision Coverage Ratio presents a dismal picture when
Restructured Standard Advances are also considered
Mar 2009
Mar 2010
Mar 2011
Mar 2012
Mar 2013
38.47
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
PSBs
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)}

43. Concluding
Thoughts

44. Key Messages …..(1)
 Present level of stressed asset as an outcome is not a
big problem but present processes, systems and
structure of creation of stressed assets are a big
problem.
 Existing level of NPAs are manageable but if corrective
actions 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 the
primary reason for creation of stressed assets but the
state of credit and recovery administration in the
system involving banks, borrowers, policy makers,
regulators and legal system have contributed
significantly to the present state of affairs.

45. 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 and stressed assets in the system
 Level of Leverage of corporate borrowers, credit growth,
diversion of funds, sub standard assets and fraud cases
are highly correlated. They are first order derivative of
improper credit and recovery management.
 Less than 20% of NPAs are upgraded
 Reduction of NPAs is less than slippages
 About 50% reduction in NPA is through write-off

46. Key Messages ….(3)
 Banks following the process of recognizing NPAs quickly
and more aggressively are having better control over
NPAs.
 Appraisal standards are lax for bigger loans both at the
time of sanction as also restructuring while appraisal rules
are very stringent for smaller borrowers
 Restructuring and write off processes are highly biased
towards bigger loans as compared to smaller loans.
 Credit risk for small borrowers is lower than that for bigger
borrowers
 Credit risk in priority sector is less than in the non-priority
sector
 High pace of credit growth has resulted in lower credit
quality in subsequent periods

47. 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 infrastructure
projects
 Improve appraisal and approval process for restructuring
proposals
 Benefits of restructuring to be also extended to
smaller borrowers
 CDR Mechanism grossly misutilised and needs a thorough
overhaul
 Need for an oversight structure for dealing with
restructuring of large ticket advances
 Independent body to oversee CDR mechanism

48. Measures …..(2)
 Restructuring and Technical Write-off as a prudential
measure should be eased out by the regulator
 Existing NPAs need careful examination for determining
rehabilitation or recovery
 Conduct viability study
 Quick rehabilitation with support from both –the
bank and the borrower
 Those who put spoke needs to be sufficiently disincentivized
 Bring new promoter if the existing promoter unable
to bring new equity
 Restructuring decision should be left to the bank
Quick and determined action is the need of the hour !

49. Recommendations and
Way ahead

50. Recommendations and way ahead
 Short run
 Addressing the existing stock of impaired assets – NPAs
and 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

51. Short term: Review of NPAs / restructured
advances
 Assess viability of NPA and restructured accounts – on
case-to-case basis
 Pre-stipulated time-frame for review/ restructuring
 Accounts found viable
 Promoters to assume their share of losses - not resort to
further borrowing for equity

If need be bring new promoters

Burden to be equally shared
 Restructuring of small accounts - Reorient restructuring towards
small customers – SMEs, priority sector
 Accounts found to be un-viable

Put under time bound asset recovery

banks takeover of units where promoters’ equity is low

sale of assets to ARCs

52. Improve credit risk management
Enhanced Credit Appraisal

Group Leverage, Source/ structure of equity capital

Complex project structure (as in SPV)

External constraints – effective 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 for larger
borrowers
Strengthen Credit Monitoring

Comprehensive MIS
viability assessment
and Early Warning Systems to facilitate regular
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

53. Improved information systems
 Information systems
management
–
the
backbone
of
credit
risk
 Robust information systems needed
 Facilitate more intensive data capturing
 Integrated into decision making, capital planning, business
strategies, and reviewing achievements.
 Enable timely detection of problem accounts,
 Flag early signs of delinquencies,
 Facilitate timely information to management on these
aspects
 Coordinating mechanism across departments within a
bank and across banks
 MIS for capturing common exposure across banks

54. Regulatory framework
 Need to review the existing regulatory arrangements for
asset classification and provisioning
 Facilitative and practical regulation
 Restructured accounts to be classified as NPA – aligning
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 regulation – either principle or rule
based
 For stability in credit risk management practices


55. Reforming legal & institutional structures
Corporate Debt Restructuring (CDR) mechanism



Remove existing bias towards large-ticket accounts
Ensure viability and promoters’ stake 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

56. Thank you