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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
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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
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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
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Evolution of NPA
regulation in India
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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
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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
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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
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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)
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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
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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
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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
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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
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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
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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
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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
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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
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Study Conclusions & Other Issues :
Why high NPA and such poorstate of Credit Management?
P i iti I f ti S t
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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!
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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
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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
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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
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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)
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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)
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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
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Assessing the resilience of
the banking system
Resilience of the banking sector (1)
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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
Resilience of the banking sector (2)
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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
Resilience of the banking sector(2)
Resilience of the banking sector (3)
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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)
Resilience of the banking sector(3)
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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
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Recommendations and way ahead
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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
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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
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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
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Regulatory framework
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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