The Non-Performing Asset Problem

By Akshaya Gaur, Founder, Aayan


Akshaya Gaur, Founder, Aayan

The financial position of India’s Public Sector Banks (PSBs) has deteriorated sharply over the past financial year. Gross Non-Performing Assets (NPAs) rose to 9.5 per cent of total advances in 2015-16, an increase of 5 percent on the year before. Most banks didn’t adequately provide for these loans, thus putting immense pressure on their solvency position. Interestingly, if PSBs were to currently provide for all their bad loans, it would erode 66 percent of their total net worth. A loss of INR 17,672 crores on an aggregate of all PSBs was reported in 2015-16 – a significant drop from a profit of INR 36,350 crore in 2014-15. PSB stock prices have tanked, eroding crores of rupees in market capitalization. The Nifty PSU Bank Index declined from a high of 4,419.25 in January 2015 to 2,913 in July 2016.

Many analysts fear the current capital levels of PSBs are simply not enough to cover the actual extent of bad loans in the system. And while the government has budget operational inefficiencies to provide INR 25,000 crores in 2016-17 for bank re-capitalization, it ended up giving INR 19,950 crores in 2014-15. While any such attempt to boost capitalization may bring temporary comfort, the long-term resolution lies in addressing operational inefficiencies through legislation, regulation, improved processes and the use of new technology-based solutions beyond the traditional systems that the PSBs have in place today. Until this underlying problem is addressed, we will get nowhere.

The Sources of Lending Distress: Poor Monitoring and Collection

Banks, essentially manage risk and good banks manage risk well. The reality of banking is that default will occur in small parts of the lending portfolio of a bank and the professional banker learns to manage the downside risk while maximising the return from prudent lending. If bankers were to target a zero-default, they would probably end up being over conservative and reduce lending to levels that impact growth! The key here is sensible lending defined by careful pre-assessment of risks, attention to documentation, ensuring appropriate levels of collateral and then continuous monitoring of assets in the post lending phase – including tracking of promoter guarantees for large projects.

The other area that created this issue was weak monitoring.

Over reliance on expecting others in the syndicates to exercise the due diligence or relying on non-validated market information led to distressed assets. In such situations, more agile private banks took remedial action by securing additional collateral from promoters or getting repaid.

The next aspect that aggravated the NPA issue was the inefficiency of collections – hampered by the lack of adequate legislation. Some of the more unscrupulous promoters started diverting additional lending increasing the problems on bank balance sheets.

Last, but not the least, government pressures on PSBs to loosen the reins and norms on lending to specific sectors regardless of inherent lending risks also led to some of the NPAs.

Leveraging Technology to Create Operational Efficiencies

The Government of India, the RBI and the Banks are all working to create regulation, legislation and guidelines to address this issue. However, the role of technology in helping the implementation of these regulations and processes cannot be underestimated. Emerging technologies – cognitive systems, data analytics, artificial intelligence, machine learning – could very well be the platforms of today and the future to help address this malaise and prevent its spread. 

Technology can be used to synthesize data from multiple sources internal to the lender and the borrower as well as numerous external sources. Current technology is able to handle multiple formats and types; and is able to discriminate data sources on the basis of a factor of reliability of source and credibility of information. Using this data, technology solutions are able to ‘learn, understand, recognise and identify’ critical risk situations and generate alerts supported by data to managers responsible for the risk without having to scan voluminous reports that could potentially conceal more than they reveal. It would also be possible to provide an end-to-end 360 view of borrowers by aggregating relevant information of the entire value chain of the borrower and affiliated parties on a common platform. What is more this technology allows identification of changes in share holding patterns, changes in ownership, potential diversion of funding provided by banks in the risk-assessment and monitoring of the asset automatically.

Banks can also leverage technology to monitor enterprises they lend to continuously by keeping track of key financial and business parameters. When combined with the systems identified above, banks would be able predict when and how an enterprise might start losing traction and would be able to weed out wilful defaulters.

What Next?

It is evident that the technology world has already taken cognizance of the severity and criticality of the NPA problem and a few solutions are becoming available to help Banks address these thorny issues. There are not many that are taking a comprehensive approach in creating this Financial NPA-radar and early-warning systems. Unfortunately, there are only a few solution providers who understand the NPA-related business considerations and can harness the power of the emerging technologies. These organisations are leveraging new technologies to create advanced and comprehensive solutions. Those that do so will certainly do well and the Banks that leverage these will certainly come out winners in the race to address the NPA malaise.

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