We highlight – via a series of posts on Credit Risk Management (Read the previous blog – “Credit Risk – Under The Spotlight“) – the ever-growing challenge of credit risk in financial institutions, the benefits of real-time analytics and the wave of change that can be brought about with Heckyl’s unique capabilities. We bring to you the second post, from the series.
Global financial catastrophes and consequent losses at several banks have compelled risk management systems at banks to get more focused on Credit Risk. The lack of an efficient system in place that can help the banks to efficiently identify the underlying causes of rising NPA figures has begun to reflect negatively on their performance. A high level of bad loans is indicative of a large number of loan defaults that directly affects the profitability and net worth of banks. This in turn necessitates larger provisioning requirements to provide a cushion against loan losses, thus reducing overall profits and shareholders value. While banks have been successful in identifying the need of the hour, they seem unable to exactly place their finger on what will address the problem.
Bank’s current perspective:
”We have a research team dedicated to tracking companies in our portfolio. Will this ensure that we will be able to discover stressed companies ahead of the curve?”
“We use reliable credit reports from leading rating houses to rate the default probability of companies in our portfolio. Will this help us minimise the size of bad loans on our books?”
“We complement our internal rating system with market reference data. Will this help us make informed decisions on potential target borrowers?”
While banks have been attempting in their own capabilities to find a plausible solution to this puzzle, the question is why is there no noticeable impact on the volumes of non-performing assets (NPAs)? Here are some alarming facts and testimonials on the rising issue of NPAs:
- Banks’ gross NPAs have risen to 4.45% (FY’15) from 4.1% (FY’14) (Source: Business Standard, 7th May 2015)
- FSR Report estimates gross NPA of 4.7% for FY’16 (Source: Business Standard, 7th May 2015)
- “NPAs at unacceptable level for Public Sector Banks”- Arun Jaitley (Source: Business Standard, 7th May 2015)
- Union Bank of India to sell INR 1,200 crore of stressed loans to ARCs (Source: Economic Times, 25th Aug 2015)
- Corporation bank to sell INR 1,000 crore NPA by Sept’15 end (Source: Economic Times, 24th Aug 2015)
- PNB reported a steep 49 per cent fall in net profit in Q1’15, due to increased bad loans and higher provisions for bad loans (Source: Economic Times, 25th Aug 2015)
- GTL Infra’s lenders look to convert part of Rs 5,000-crore debt into equity (Source: ET Telecom, 29th June 2015)
- Moser Solar’s CDR (Corporate Debt Restructuring) plan gets bankers’ nod (Source: DNA India, 8th May 2012)
Clearly, there is a huge gap that needs to be bridged between what banks think will address the problem and what actually needs to be done. Credit Risk Management departments of banks are grappling with possible solutions to curb the rising NPA numbers.
A corporate bank might have lent money to hundreds of institutions. In addition to this, there will be many corporates who are not current borrowers but would be seeking loans from the bank in the future. The research departments of banks are limited in their capabilities to create a comprehensive profiling of such huge volumes of borrowers and prospects. It is indeed a taxing proposition for the risk department of the bank to follow hundreds of institutions in real time to capture any unusual activity or a red flag. Such limitations have often led to instances when banks have extended loans to doubtful debtors.
The issue of bad loans has risen to such extents that banks are now occupied in discovering innovative ways to recover the loans from these accounts. The banks are trying to avoid surrendering to Asset Reconstruction Companies (ARCs) citing pricing issue and low-interest rates being offered in the market. However, amidst the hassle of dealing with ways to get rid of the bad loans, why not find a solution to controlling the exponentially growing NPA figures?
Heckyl understands the factors that could turn a loan into a bad loan. Heckyl also understands the level of difficulty a bank faces when it comes to dealing with bad loans on books. We foresee the wave of change that an Early Warning System can bring to the banks. In an ever-increasing pressure on banks to reduce their quarter-on-quarter NPA figures, they need a system in place which can help them carry out a profile-assessment of the current and prospective customers, track the companies in real-time to make informed strategic decisions. Heckyl believes that there is plethora of actionable data available in the market and on the web which can not only help banks be vigilant on a particular borrower but also help decide whether to increase the credit limit to a certain borrower. The system should act as a comprehensive tool which is not limited by the limitations of a research team; neither should it be restricted to external credit ratings or internal rating models. The implementation of such an intelligent credit risk management system should be viewed as a competitive edge by the bank.
Watch this space for more upcoming posts on Credit Risk Management…