BANCON 2013

Two decades of credit

management in banks:
Looking back and moving ahead
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

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
Trends in asset quality
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

In recent years, NPA ratios
have been rising, though on
an 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
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Gross NPA ratio Net NPA ratio
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


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All banks PSB OPB NPB FB
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%

1997-2001 2001-2005
2005-2009 2009-2013
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PSB OPB NPB FB
PSBs growing asset quality concerns
PSBs share a disproportionate and increasing
burden of NPAs especially in recent years

Share in
total bank
credit
M
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0
3

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7

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8

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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
total bank
GNPA
M
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3

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7

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8

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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
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 upgradation
110,918 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
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

0
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5
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8
9
10
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Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13
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SlippageRatio Net Slippage Ratio Gross NPA Ratio (RHS)
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
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-07 173.2
Mar-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
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
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 42.9
Mar-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 % of
slippages
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
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
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
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

In recent years, the ratio
rose sharply for PSBs
Slippage
Ratio
All
Banks PSB OPB NPB FB
Mar-07
1.8
1.8 1.8 2.0 1.5
Mar-08
1.7
1.7 1.4 2.1 2.1
Mar-09
2.2
1.8 1.9 3.0 5.5
Mar-10
2.1
2.0 2.2 2.0 5.5
Mar-11
2.0
2.2 1.7 1.3 2.2
Mar-12
2.5
2.8 1.5 1.1 2.3
Mar-13
2.6
3.1 1.8 1.2 1.8
Average
slippage ratio PSB OPB NPB FB
2001-13 2.7 2.6 3.9 2.8
2001-07 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 year

Divergent bank group wise trends net 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
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
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
Summing up
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

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
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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
All Banks
(%)
Mar-
09
Mar
-10
Mar-
11
Mar-
12
Mar
-13
GNPA
Ratio
2.4 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-
09
Mar-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
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
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80
100
PSB OPB NPB FB
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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 9.5
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
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
Within industries segment - deterioration driven by medium
and large enterprises (50% share in NPAs)
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10
15
20
Agriculture Industries Services Retail Agriculture Industries Services Retail
Gross NPA ratio Impaired Assets ratio
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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
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 % 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
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 % Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
Share in total
bank credit
Micro+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.
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
1
3
5
7
9
11
13
GNPA Ratio (GNPA +
restructured
standard
advances) ratio
Impaired assets
ratio
GNPA Ratio (GNPA +
restructured
standard
advances) ratio
Impaired assets
ratio
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Mar-11 Mar-12 Mar-13
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
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
GDP slowdown leading to increased NPAs!
Recent decline in asset quality coincided with
deceleration in GDP growth

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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?
3
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-15
-5
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25
35
45
55
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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
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
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 promoters
debt and equity
Promoters equity contribution
declined / leverage higher
Credit monitoring was
neglected
Recovery efforts slowed
Legal infrastructure for
recovery remained non-
supportive
Restructuring became rampant
OPB
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
C
A
G
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N
P
A

2
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8
-
2
0
1
3

CAGR Advances 2003-2008
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
Increasing frauds or are they business
failures?
Advance Related Frauds (>Rs. 1cr)
2010-11 2011-12 2012-13
Cumulative
(end Mar13)
Bank
Group
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
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
0
2
4
6
8
10
12
14
0
1000
2000
3000
4000
5000
6000
7000
FY07 FY08 FY09 FY10 FY11 FY12 FY13
p
e
r

c
e
n
t

R
s

i
n

b
i
l
l
i
o
n

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 17
Infrastructure 33 18
Power 41 18
Telecom 28 16
Aggregate
banking sector 19 11
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
Credit appraisal suffered(2)
Summing up..
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
Assessing the resilience of
the banking system
Resilience of the banking sector(1)
Current NPA levels - not alarming though could pose
concern if current trends persist
Year
All Banks PSBs
Old Pvt. Sec.
Banks
New Pvt. Sec
Banks
Foreign 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
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% 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)
Provision coverage ratios of Indian banks low by
international standards declining in recent times

2.0
2.2
2.4
2.6
2.8
3.0
3.2
40
45
50
55
Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
p
e
r

c
e
n
t

p
e
r

c
e
n
t

PCR GNPA ratio (RHS)
Resilience of the banking sector(3)
Stressed Assets Provision Coverage Ratio
Mar 2009 Mar 2010 Mar 2011 Mar 2012 Mar 2013
PSBs

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
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 when
Restructured Standard Advances are also considered
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

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



Concluding
Thoughts
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.
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 appraisal in determining appropriate structure of debt
and equity both in terms of quantity and quality.
Overall standard and quality of credit management and
recovery 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
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

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
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 dis-
incentivized
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 !
Thank you