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K.C. Chakrabarty
Deputy Governor
Reserve Bank of India
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 became diverse, complex,
sophisticate
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
accounts tightened
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
Per cent
8
prudential norms 6
4
2
Thereafter, the NPA ratios 0
declined
Mar-96
Mar-98
Mar-00
Mar-02
Mar-04
Mar-06
Mar-08
Mar-10
Mar-12
Sep-13
Improved risk management
Gross NPA ratio Net NPA ratio
Increased write offs
Rising credit growth / robust
economic growth Average NPA in % GNPA NNPAs
Abundant liquidity conditions 1997-2001 12.8 8.4
Increased restructuring 2001-2005 8.5 4.2
2005-2009 3.1 1.2
In recent years, NPA ratios 2009-2013 2.6 1.2
have been rising, though on
an average, the ratios are Mar 2013 3.4 1.7
not higher Sep 2013 4.2 2.2
Divergent bank group wise trends
18
PSB OPB NPB FB
1996-2003 wide variation 16
GNPA ratio in %
10
8
2003-06 - NPA ratios of all 6
bank groups moved in 4
tandem 2
Mar-00
Sep-13
Mar-96
Mar-98
Mar-02
Mar-04
Mar-06
Mar-08
Mar-10
Mar-12
2007-09 NPA ratios begin to
decouple
16 1997-2001 2001-2005
Mar-13
Mar-03
Mar-07
Mar-08
Mar-09
Sep-13
total bank
credit
PSBs 74.0 72.8 72.5 75.2 76.2 75.3
OPBs 6.2 4.7 4.5 4.3 4.6 5.0
NPBs 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
Mar-03
Mar-13
Mar-07
Mar-08
Mar-09
Sep-13
total bank
GNPA
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
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
9
5
8
7
4
6
per cent
per cent
3 5
4
2
3
2
1
1
0 0
Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13
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
424 501 479 1,065 1,768 2,902 2,480 3,101 3,686 4,362 5,036 5,191 6,960
Banks
PSBs 418 494 463 1,008 1,612 2,699 2,220 2,824 3,372 3,819 4,412 4,656 5,953
FBs 0 1 6 0 0 10 8 16 4 139 66 40 29
All
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
Banks
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
FBs 20 798 356 440 628 905 590 1,334 3,350 6,238 3,083 1,646 855
Substantial Write-off but recovery from write-off has been very poor
Divergent bank group wise trends - slippages
Slippage All
Ratio Banks PSB OPB NPB FB
In the aftermath of the
Mar-07 1.8 1.8 1.8 2.0 1.5
crisis, slippage ratios rose,
Mar-08 1.7 1.7 1.4 2.1 2.1
especially for FBs and NPBs
Mar-09 2.2 1.8 1.9 3.0 5.5
Mar-10 2.1 2.0 2.2 2.0 5.5
FBsand NPBs, though Mar-11 2.0 2.2 1.7 1.3 2.2
quickly arrested Mar-12 2.5 2.8 1.5 1.1 2.3
deterioration in asset Mar-13 2.6 3.1 1.8 1.2 1.8
quality post-crisis through
improved credit risk Average
management slippage ratio PSB OPB NPB FB
2001-13 2.7 2.6 3.9 2.8
Inrecent years, the ratio 2001-07 3.2 3.3 5.7 2.4
rose sharply for PSBs 2007-13 2.2 1.8 1.8 3.0
10 180
9
150
7 120
6 90
5
4 60
3 30
2
0
1
0 -30
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Restructured standard advances ratio
GNPA ratio
Restructured standard advances growth rate (RHS)
GNPA growth rate (RHS)
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 borrowers
get overlooked
Promoters contribution to equity not ensured
Restructuring increasingly used as a tool of NPA management
by banks (GNPA +
Rest. Std.
Mar-
All Banks Adv) to Total Mar-10 Mar-11 Mar-12 Mar-13
Mar- Mar Mar- Mar- Mar Adv.
09
(%) 09 -10 11 12 -13
GNPA PSBs 5.1 7.3 6.6 8.9 11.1
2.4 2.5 2.3 2.9 3.4
Ratio
OPBs 5.7 5.9 4.9 5.3 5.9
(GNPA +
Rest. Std. NPBs 5.5 4.8 3.2 3.2 3.1
5.1 6.7 5.8 7.6 9.2
Adv) to
Total Adv. 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 PSB OPB NPB FB
Mar-09 6.8 6.8 6.6 6.5
Mar-10 8.8 7.3 7.3 9.5
Mar-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
Share of NPA, restructuring and write offs in total impaired assets - 2013
100
80
per cent
60
40
20
0
PSB OPB NPB FB
Gross NPA Restructured Standard Advances Cumulative Write Off
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
20
Mar-09 Mar-13
15
per cent
10
5
0
Agriculture Industries Services Retail Agriculture Industries Services Retail
Gross NPA ratio Impaired Assets ratio
* The data for Medium & Large and Micro & Small pertains to Industries and services sectors.
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
13 Mar-11 Mar-12 Mar-13
11
9
Per cent
1
GNPA Ratio (GNPA + Impaired assets GNPA Ratio (GNPA + Impaired assets
restructured ratio restructured ratio
standard standard
advances) ratio advances) ratio
50 15
14
40 13
12
30 11
per cent
10
per cent
20
9
8
10
7
0 6
5
-10 4
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
3
-20 2
45 9
35 8
per cent
per cent
25 7
15 6
5 5
Mar-07
Mar-03
Mar-04
Mar-05
Mar-06
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
-5 4
-15 3
Real GDP growth rate (RHS) Slippage growth rate GNPA growth rate
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
FB
Increasing frauds or are they business
failures?
Increasing incidence of
frauds, especially large Advance Related Frauds (>Rs. 1cr)
value frauds in recent years
Cumulative
2010-11 2011-12 2012-13
Over 64 % of fraud cases are (end Mar13)
advances related over
70% in case of large value Amt Amt
frauds (over Rs. 50 crore) Bank Amt Amt
No. No. No. No.
Group (in cr.) (in (in (in cr.)
Poor appraisal and cr.) cr.)
absence of equity has led to
larger no. of advance PSBs 201 1820 228 2961 309 6078 1792 14577
related frauds especially
through diversion
OPB 20 289 14 63 12 49 149 767
Moral hazard associated
with identifying business
failures as frauds NPB 18 234 12 75 24 67 363 1068
Lacunae in credit
appraisal not identified FB 3 33 19 83 4 16 456 277
Fixation of Staff
accountability a Grand
242 2376 273 3183 349 6212 2760 16690
casualty Total
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 Impaired
7000 14
credit Assets ratio
6000 12 Sectors
2009- (March
5000 10
2012 2013)
Rs in billion
per cent
4000 8
3000 6
Iron and Steel 25 17
2000 4 Infrastructure 33 18
1000 2 Power 41 18
0 0
FY07 FY08 FY09 FY10 FY11 FY12 FY13
Telecom 28 16
Borrowings of 10 corporate groups Aggregate
Share in system credit (RHS) banking sector 19 11
Source : Credit Suisse Research
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
GNPA Losses as % of
June 2013 CRAR Core CRAR
Ratio Capital
55 3.2
3.0
50 2.8
per cent
per cent
2.6
45 2.4
2.2
40 2.0
Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
Mar 2009 Mar 2010 Mar 2011 Mar 2012 Mar 2013
PSBs
38.47 29.61 34.29 30.00 27.71
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 and Early Warning Systems to facilitate regular
viability 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
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