To some extent, the rising incidence of non-performing assets can be attributed to the economic slowdown witnessed in 2012-13, but NPAs could have been avoided had the banks adopted more stringent credit risk-management policies and practices, writes C KRISHNAN
The unacceptably high level of non-performing assets in the banks in India, especially the public sector banks, is a matter of great concern, since it has far-reaching implications. Group-wise, the nationalised banks apparently account for about 54 per cent of the gross NPAs, and it is estimated that NPAs and restructured assets (stressed assets) if put together, account for about 10 per cent of the total bank loans which stood at Rs 57,55,900 crore (figures as at December 2013, according to the Reserve Bank of India).
To some extent, the rising incidence of NPAs can perhaps be attributed to the economic slowdown witnessed in 2012-13, when lower economic growth and higher interest rates made it difficult for companies to honour their commitments to banks. But, is that the only reason why the quantum of bad loans has risen to such unacceptable levelsIJ Perhaps not, since a significant percentage of NPAs could have been avoided had the banks adopted more stringent credit risk management policies and practices.
The corporate banking division of one of the best known foreign banks in India, puts its relationship manager or credit officer through an intensive world-class credit-training. Besides teaching the basics of credit risk, numerous case studies, including live cases from the bank, is analysed in depth to provide a practical perspective.
One of the key learning from such training is that, it is not only important to do a proper credit-analysis of the borrower, but to also monitor a customer’s account conduct and performance continuously so that early warning signs of credit weaknesses can be detected, and timely corrective action can be taken. In addition, mistakes made earlier should not be repeated.
As all lending bankers know, it is impossible to have a completely clean lending portfolio. In other words, to have a portfolio without a single bad debt. After all, banks are in the business of risk and they must take ‘bankable’ risks. To quote William Shedd, “A ship is safest in harbour, but that’s not what ships are for.”
So, how does a bank minimise its NPAs portfolioIJ In India, most of the multi-national and good private sector banks have managed to keep their NPA book below one or 1.5 per cent of their asset book. There is no secret formula or magic wand to achieve a good quality asset book. Essentially, it is making sure that the basics of credit risk management are adhered to and resisting any pressure to influence credit decisions. It is very important to carry out the initial credit assessment of a customer thoroughly and if the customer happens to be a start-up or new venture, a much more rigorous analysis is necessary since there is no track record to go by.
Credit assessment would relate to analysing quantitative and qualitative data. For larger publicly listed companies, information related to the customer’s balance-sheet is likely to be quite reliable. Hence, a lot of emphasis is placed on quantitative data — prior years account statements, projections and assumptions behind the projections. Qualitative information like the profile of the promoters, industry, competition, market share, outlook for the company and industry are also studied in detail.
In the case of smaller borrowers, more emphasis is placed on qualitative information than ‘balance-Sheet’ numbers mainly because the financial management of these companies may not be as good or transparent as those of the larger listed companies.
Unfortunately, many public sector banks depend upon credit appraisal reports prepared by outside consultants or ‘Rating’ agencies instead of doing their own independent and objective appraisal. This can hardly safeguard the banks interests as ‘Rating’ agencies do not deal with a client on a day-to-day basis, and unable to critically assess their ongoing status. Only the bank’s RM who has, or should have, an intimate knowledge of his customer can assess this financial performance objectively.
Interestingly, a very useful chapter of credit policy document of a well known bank — called ‘Accountability Exercise’ + states that, ‘If a credit became a non-performing asset or a bad debt within one year of its sanction, an experienced and senior credit officer — who was not involved with this credit at any stage — would be asked to carry out an independent review to see whether there were any shortcomings in assessment or negligence, and whether the bad debt could have been prevented.
If, however, it was clear that, based on all available information and due diligence carried out the decision to grant the credit was correct, no action would be taken against any of the persons who were involved with the original proposal. However, if there were clearly identified lapses, suitable action would be taken against the concerned officials.
The objective is not to ‘witch-hunt’ or find a scapegoat, but to learn valuable lessons from past mistakes or lapses, and not let them happen again.