BANCON 2013

Two decades of credit
management in banks:

Looking back and moving ahead
K.C. Chakrabarty
Deputy Governor
Re...
Introduction
 Business of banking is business of intermediation
 Credit risk is integral to banking business

 When ban...
Objectives

 Examine how Indian banks have dealt with credit risk
over the last two decades
 Evolution of regulatory fra...
Evolution of NPA
regulation in India
Prudential norms for NPAs
 1985
 First-ever system of NPA classification - ‘Health Code’ system
 Classification of adva...
NPA trends – Reflecting regulatory initiatives
 NPAs rose when prudential regulations introduced - reduced
thereafter as ...
Trends in asset quality
Trends in gross and net NPAs
 Early 1990s
 NPA ratios rose
 Immediate impact of
prudential norms

 Thereafter, the NPA...
Divergent bank group wise trends


1996-2003 – wide variation
between NPA ratio of PSBs
and other bank groups



2003-06...
PSBs – growing asset quality concerns
 PSBs share a disproportionate and increasing
burden of NPAs – especially in recent...
Looking beyond the veil of headline numbers
Gross and net NPAs numbers have limitations!
In the 1990s, only data about gr...
NPA movement over the last decade
 Increasing slippages and write offs since the crisis years
 New accretion to NPAs exc...
Slippages … Trends
 Slippages – better metric to assess credit
management
 Slippages & net slippages
 Showed a declinin...
Recovery efforts deteriorating
 Extent to which banks able to reduce NPAs through
recovery efforts deteriorating
 eviden...
Recovery & write offs – associated moral hazard
Write offs contributing significantly in reduction in NPAs




Reducing ...
Divergent bank group wise trends - slippages





In the aftermath of the
crisis, slippage ratios rose,
especially for F...
Divergent bank group wise trends – net slippages


Recovery performance also varied across banks as
revealed by trends in...
Divergent bank group wise trends –
slippages and fresh restructured accounts
 The

bank group wise trends in slippages ar...
Conclusions ..
 Standards of credit and recovery administration is
inefficient and poor as is reflected from the fact tha...
Restructured Accounts … Trends


Growth in restructured accounts


mixed trend in early 2000s



sharp uptick in 2008 /...
Restructured Accounts … Use and Misuse
 Forbearance a necessity, especially for viable accounts
facing temporary difficul...
Write-Off and recovery from Write-offs
Recovery from written off Accounts during the FY ended
(Rs. crore)
Mar-01

Mar-02

...
Divergent bank group wise trends in
restructuring and write -off



Asset quality deteriorates further if restructured a...
Conclusions …..
 Only less then 10% of the total amount written off
(including the Technical Write-off ) is recovered
 T...
Segment wise NPA Trends
 Deterioration in asset quality highest for industries’ segment
 Though banks devote fewer resou...
Infrastructure finance – significantly affected
Infrastructure projects – strain on
banks
 regulatory, administrative and...
Large ticket advances – greater share in
restructured accounts
 Restructuring – provided primarily to large corporates
 ...
Asset quality worse for Directed Lending –
A myth
 General belief is that directed lending has contributed
to rising NPAs...
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
portf...
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 econo...
Asset quality of PSBs – Economic downturn
or sub-optimal credit management?
 Recent increase in NPAs not reflected across...
Lax Credit Management
 Deficiencies
in
credit
management crept in during
the pre-crisis “good years”
 In general, banks ...
Increasing frauds – or are they business
failures?







Increasing
incidence
of
frauds,
especially
large
value fraud...
Credit appraisal suffered…(1)


Poor Credit appraisal at the time of sanctioning as also at the time of
restruturing



...
Credit appraisal suffered…(2)
 Indian corporates - accessing international markets
to raise capital
 Risk from un-hedged...
Conclusions …..
 High credit growth in select sectors has led to decline in
credit quality in subsequent periods
 High i...
Summing up…. (1)
 Current NPA levels - not alarming though could pose
concern if current trends persist
All Banks
Year

P...
Summing up…. (2)
 Stress testing reveals resilience of banking system due to
strong capital position
June 2013

CRAR

Cor...
Summing up .… (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 Adv...
Concluding
Thoughts
Key Messages …..(1)
 Present level of stressed asset as an outcome is not a
big problem but present processes, systems an...
Key Messages ….(2)
 Credit quality has a high positive correlation with the
prudential norms and regulations prescribed b...
Key Messages ….(3)
 Banks following the process of recognizing NPAs quickly
and more aggressively are having better contr...
Measures …….(1)
 Credit Appraisal needs to be strengthened with focus on:
 Quantum of equity brought in by the promoters...
Measures …..(2)
 Restructuring and Technical Write-off as a prudential
measure should be eased out by the regulator
 Exi...
Recommendations and
Way ahead
Recommendations and way ahead
 Short run
 Addressing the existing stock of impaired assets – NPAs
and restructured
 Tim...
Short term: Review of NPAs / restructured
advances

 Assess viability of NPA and restructured accounts – on
case-to-case ...
Improve credit risk management
Enhanced Credit Appraisal


Group Leverage, Source/ structure of equity capital



Comple...
Improved information systems
 Information systems
management

–

the

backbone

of

credit

risk

 Robust information sy...
Regulatory framework
 Need to review the existing regulatory arrangements for
asset classification and provisioning
 Fac...
Reforming legal & institutional structures
Corporate Debt Restructuring (CDR) mechanism




Remove existing bias toward...
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KC Chakrabarty on NPAs in India

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

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  • During 1996-2003, NPA ratios declined for PSBs and rose for other bank groups
    During 2003-06, NPA ratios declined for all bank groups
    During 2007-09, NPA ratios of NPBs and FBs increased; but declined thereafter
    After 2009, the ratio rose sharply for PSBs
    2007-09
    NPA ratios of PSBs remained largely unchanged while that of the new private sector banks and foreign banks increased sharply.
    Foreign banks have witnessed the highest spurt in NPA in 2009.
    after 2009, when NPAs rose significantly for PSBs while it declined for other bank groups. In 2013, all the bank groups registered an increase in gross NPA ratios, except the new private sector banks.
  • Slippages - closer metric to assess credit management
    Slippages & net slippages started rising since 2006-07
    Ratio of slippages and advances restructured and classified as standard during the year (fresh restructured advances) to standard advances at the beginning of the year, also remained high (except in the year 2011).
  • Extent to which banks able to reduce NPAs through recovery efforts deteriorating
    evidenced by increasing ratio of slippages to recovery and upgradation and net slippage ratio
  • These trends indicate that the current decline in asset quality cannot be simplistically attributed solely to the recent decline in the country’s macroeconomic performance. While the deceleration in GDP growth rate is undoubtedly one of the major factors affecting the asset quality of banks, there are other factors/causal relationships which will need to be explored further in order to fully understand the recent trends in asset quality.
  • KC Chakrabarty on NPAs in India

    1. 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. 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. 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. 4. Evolution of NPA regulation in India
    5. 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. 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. 7. Trends in asset quality
    8. 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. 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. 10. PSBs – growing asset quality concerns  PSBs share a disproportionate and increasing burden of NPAs – especially in recent years
    11. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 29. Study Conclusions & Other Issues : Why high NPA and such poor state of Credit Management?
    30. 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. 31. GDP slowdown leading to increased NPAs! Recent decline in asset quality coincided with deceleration in GDP growth
    32. 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. 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. 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. 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. 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. 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. 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. 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. 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. 41. Summing up .… (3) Provision coverage ratios of Indian banks low by international standards – declining in recent times
    42. 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. 43. Concluding Thoughts
    44. 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. 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. 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. 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. 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. 49. Recommendations and Way ahead
    50. 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. 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. 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. 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. 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. 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. 56. Thank you

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