BANCON 2013

Two decades of credit

management in banks:
Looking back and moving ahead
K.C. Chakrabarty
Deputy Governor
Reserve Bank of India

Introduction
Business
of
intermediation

banking

is

business

of

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

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

Evolution of NPA
regulation in India

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 sub-standard
2001
90 day norm for NPAs introduced (effective from March
31, 2004)
specified asset classification treatment of restructured

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 precrisis 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

Trends in asset quality

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

In recent years, NPA ratios

have been rising, though on
an 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

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

PSBs growing asset quality

concerns and increasing
PSBs share a disproportionate
burden of NPAs especially in recent years

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

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)
NPAs at Beginning
of the period
New Accretion to
NPAs during the
period
Reduction in NPAs
during the period
Due to
upgradation
Due to write-off
Due to actual
recovery
NPAs at End of the
period

2001-2013

20012007

2007-2013

60,434

60,434

50,647

652,987

160,102

492,885

520,221

169,889

350,332

114,890

24,003

90,887

216,133
189,198

74,838
71,049

141,295
118,149

193,200

50,647

193,200

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

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-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

191.3
279.0
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

Recovery & write offs associated moral

Write offs contributing significantly in reduction in NPAs
hazard
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 Write off as

as % of
% of
reduction in reduction in
NPAs
NPAs
Mar01
Mar02
Mar03
Mar04
Mar05
Mar06
Mar07

Recovery as
% of
reduction in
NPAs

12.6

39.3

48.1

12.0

49.4

38.7

16.0

50.7

33.4

12.3

48.3

39.4

15.2

39.0

45.8

15.2

40.2

44.6

14.5

42.5

42.9

Upgradation as a
% of slippages

2001-13

17.6

2001-07

14.9

2007-13

18.4

Reduction as a %
of slippages

2001-13
2001-07

78.4
105.
3

2007-13

70.8

Write-Off and recovery from WriteoffsRecovery 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

26

45

84

132

173

217

207

231

201

200

NPBs

30

111

109

120

87

92

197

327

294

779

FBs

10

16

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

12,02
1

10,82
3

11,65
7

11,62
1

11,65
3

15,99
6

PSBs

5,555

6,428

9,448

13,55
9
11,30
8

8,048

8,799

9,189

8,019

6,966

25,01
9
11,18
5

23,89
6
17,79
4

20,89
2
15,55
1

32,21
8
27,01
3

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

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
In recent years, the ratio
rose sharply for PSBs

Slippag All
e Ratio Banks PSB OPB NPB
1.8
Mar-07
1.8 1.8 2.0
1.7
Mar-08
1.7 1.4 2.1
2.2
Mar-09
1.8 1.9 3.0

FB
1.5
2.1
5.5

Mar-10

2.1

2.0

2.2

2.0

5.5

Mar-11

2.0

2.2

1.7

1.3

2.2

Mar-12

2.5

2.8

1.5

1.1

2.3

Mar-13

2.6

3.1

1.8

1.2

1.8

Average
slippage
ratio
PSB OPB NPB FB
2001-13
2.7 2.6
3.9 2.8
2001-07
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

Divergent bank group wise trends net slippages

Recovery performance also varied across banks

as revealed by trends in net slippages

Net
All
Slippag Banks
e Ratio
0.8
Mar-07
0.9
Mar-08
1.2
Mar-09
1.3
Mar-10
1.1
Mar-11
1.5
Mar-12
1.6
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 PSB OPB NPB FB

net
slippage
ratio
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

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

All
banks
5.1
5.4
2.9
5.4
5.9

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

Summing up
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

Restructured Accounts
Growth in restructured accounts
Trends
mixed trend in early 2000s

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

dispensation

Continued high growth rate thereafter

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
(%)
GNPA
Ratio
(GNPA
+ Rest.
Std.
Adv) to
Total

Ma
Ma
Mar- r- Mar Mar r09
10 -11 -12 13
2.4

5.1

2.5

6.7

2.3

5.8

2.9

7.6

3.4

9.2

Rest.
Std. Adv) MarMar-10 Mar-11 Mar-12 Mar-13
09
to Total
Adv.
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

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)

Summing up..

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 and creates a dent in overall
recovery efforts

Banks should be given the freedom to decide whether the cases involve
restructuring
- where only the technical covenants of the loan or the date of
commencement of commercial production might have changed 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 lending rate below
base rate should not be considered as concession
I
24

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

medium and large enterprises (50% share in NPAs)
Impaired Assets ratio
in %

Mar-09

Mar10

Mar-11

Mar-12

Mar-13

Micro+Small

10.7

10.6

9.4

9.7

10.6

Medium+La
rge

7.8

9.4

8.0

11.2

14.8

Infrastructure finance significantly

affected
Impaired Assets ratio

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

In %
Mining
Iron and
Steel
Textiles
Infrastructur
e
Real Estate

Mar-09 Mar-13
4.0

8.2

9.3

16.9

16.7

21.3

5.0

18.0

2.5

2.0

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

Micro+Small
*
Medium+La
rge
Micro+Small
Medium+La
rge

Mar-09

Mar10

Mar11

Mar12

Mar13

10.1

11.4

12.0

10.8

10.7

39.9

42.9

45.0

46.8

48.4

16.1

20.4

21.1

17.5

17.2

23.8

28.7

27.5

37.7

48.8

4.3

3.4

Micro+Small
12.2
7.7
7.7
Share
* The datain
for Medium & Large and Micro & Small pertains to Industries and services sectors.
total bank

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

Study Conclusions & Other

Issues :

Why high NPA and such poor

state of Credit Management?

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

GDP slowdown leading to increased NPAs!

Recent decline in asset quality coincided with
deceleration in GDP growth

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

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

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 promoters
debt and equity
Promoters equity contribution
declined / leverage higher

Credit
monitoring
neglected

was

Recovery efforts slowed

Legal
infrastructure
recovery
remained
supportive

for
non-

Restructuring became rampant

PSB
OPB
NPB
FB

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

Bank
Amt
Grou No.
No.
(in cr.)
p
PSBs 201 1820

2012-13

Amt
(in
cr.)

Cumulative
(end Mar13)

Amt
No.

(in
cr.)

No.

Amt
(in cr.)

228 2961 309 6078 1792 14577

OPB

20

289

14

63

12

49

149

767

NPB

18

234

12

75

24

67

363

1068

33

19

83

16

456

277

FB

Gran
d
242 2376
Total

273 3183 349 6212 2760 16690

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

Sectors

Source : Credit Suisse Research

Iron and
Steel
Infrastructur
e
Power
Telecom
Aggregate

CAGR
of
credit
20092012

Impaired
Assets
ratio
(March
2013)

25

17

33
41
28

18
18
16

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

Summing up..
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

Assessing the resilience

of the banking system

Resilience of the banking sector(1)

Current NPA levels - not alarming though could pose
concern if current trends persist
All Banks
Year
GNPA
Ratio

PSBs

Old Pvt. New Pvt.

Sec. Banks Sec Banks

Foreign
Banks

NNP
NNP
NNP
NNP
NNP
GNPA
GNPA
GNPA
GNPA
A
A
A
A
A
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

Resilience of the banking sector(2)

Stress testing reveals resilience of banking system due
to strong capital position
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

June 2013

NPA increases by 150%

Resilience of the banking sector(3)

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

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)}

Recommendations and
Way ahead

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

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

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

Improved information systems

Information systems the backbone of credit risk
management
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

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
To eliminate ad-hoc implementation processes

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
provisions

Tribunals

(DRTs)

&

other

legal

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

Concluding
Thoughts

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.

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 appraisal in determining appropriate structure of debt
and equity both in terms of quantity and quality.

Overall standard and quality of credit management and

recovery 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

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 nonpriority sector
High pace of credit growth has resulted in lower credit
quality in subsequent periods

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

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 !

Thank you