Asset Quality Review And Stress Testing RBSA Advisors

16 Mar Asset Quality Review And Stress Testing RBSA Advisors

The credit channel of monetary policy transmission is robust in India and operates through changes in lending. The most important reasons for rising NPAs have been insufficient appraisal of loan proposals and also inadequate monitoring of the loans given out. The gross non-performing assets and net NPAs of banks improved to 5.97 per cent and 1.7 per cent as of March 31, 2022, from 9.23 per cent and 3.66 per cent as of September 2019, respectively, he said. The company’s stock was slammed at the end of the quarter after the Reserve Bank of India directed MMFS to stop using third-party services for loan recovery, citing “material supervisory concerns”.

The restructured loan book of banks is just around 1.5 percent and banks have extra provisions to take care of any NPA formation from this restructured loan book. However, sustained weakness in the global and Indian economy can lead to a new wave of NPAs for the sector a year down the line and has to be watched closely. Toning up credit administration and internal credit risk management is vital to the sustainability of the business model of banks. With technology able to support augmentation of market and economic intelligence, banks may have to revisit their internal credit-handling processes, procedures and systemic controls related to quality of credit origination. As a result of such deterioration in asset quality, the capital to risk weighted assets ratio at 15.6 percent in September 2020 may drop down to 14 percent in baseline stress and to a low of 12.5 percent if the stress is severe. It is expected that four to fivebanks may even breach the minimum benchmark of CRAR of 11.5 percent in baseline and nine banks in severe stress situations.

High credit rating positively affects the ease with which a loan can be procured. The decline in credit growth post 2013 was mainly due to a surge in bad loans, accentuated by a slowdown in GDP. The NPA ratio of public sector banks has fallen from 9.4 per cent in June 2021 to 7.2 per cent, a 220 basis point decrease, while private banks’ NPA ratio has fallen by 110 basis points, from 4.2 per cent to 3.1 per cent in the same period. Quite clearly this is one factor which affects the growth and prospects of this sector. The fact that the Indian economy has slowed down in the last three years is significant here. However, management highlighted that it has a good pipeline for construction finance loans and LRD loans, and expects non-individual book to experience strong growth in coming quarters.

Asset Quality in Banks: Looking Far beyond Bad Banks

Moderate pressures on asset quality of Indian banks may re-emerge as forbearance starts to unwind from 2023, Fitch Ratings said on Friday. Our gross NPAs and net NPAs have come down, and we have adequately provided for the stress which is there in our book,” Dinesh Khara, chairman of SBI, said on 6 August. To be sure, the data for state-owned banks includes IDBI Bank, which was reclassified as a private sector lender in 2019 after Life Insurance Corp. of India bought a 51% stake in the bank. Every defaulter, by now, understands that if one does not pay what one has committed to pay, one will lose the reins of control over business forever. This eventually should lead to a new cult of healthy borrowing, where borrowers shun over-leveraging, over-capitalisation, and diversification. It should be able to address the chronic problem of rising willful defaulters in banks.

These supportive institutions have been playing a strategic role in accelerating debt resolution. Banks go for technical write-off of aged bad loans against which 100 percent provision has already been built up. Such write-off can reduce its burden on a bad loan portfolio and conserves capital while keeping the recovery options from borrowers open. Coming down heavily, the Economic Survey 2021 rightly attributed inefficient bank boards, poor governance structure and the failure of auditors to understand the “ever-greening” problem that added to the bad-loan mess. Besides recapitalising banks, enhancing governance in banks is held essential to improve the stability of the banking system.

Managing Asset Quality in Times of Crisis

In a bank-led economy, asset quality is always a cause of concern as it influences flow of fresh credit to productive sectors of the economy that is more critical during the ongoing revival. The recent data points reflect the marked improvement in the asset quality, more noticeably during the pandemic period. It will be pertinent to look at how the asset quality had improved to see if it will be sustainable.

Higher the interest rates, higher will be the cost of borrowing and hence, lower would be the demand for credit. Asset quality of Scheduled Commercial Banks is measured as a ratio of gross non-performing assets to gross advances. The growth rate in credit offtake has steeply declined to 5.8% in November 2020, as against 14.2% in 2013. Our payment security system encrypts your information during transmission. We don’t share your credit card details with third-party sellers, and we don’t sell your information to others.

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The present book is an attempt to diagnose assest quality and level of non performing assets of commercial banks with refernce to backward region. The current regulatory forbearance on bank loans has been necessitated by the COVID-19 pandemic. Given relaxed provisioning requirements, banks exploited the forbearance window to restructure loans even for unviable entities, thereby window dressing their books. As a result of the distorted incentives, banks misallocated credit, thereby damaging the quality of investment in the economy. The inflated profits were then used by banks to pay increased dividends to shareholders, including the government in the case of public sector banks.

The level of NPAs has gone up sharply this year which becomes more worrisome when the restructured assets are also factored in. Full access to our intuitive epaper – clip, save, share articles from any device; newspaper archives from 2006. Management highlighted loans that not qualifying for being transferred to the bank are not substantial. For transfer of non-individual portfolio from HDFC Limited to HDFC Bank, the company has requested certain forbearance.

• Gross NPA in the MSME2 segment, which suffered the most during the pandemic, may rise to ~10-11% by March 2024 from ~9.3% as on March 31, 2022.
• Given the general weakness in the economy and competition within banks on the lending side, banks might need to absorb these additional costs of funds and take a hit on their NIMs.
• HDFC continues to gain market share in core mortgages, despite increased competitive intensity.
• These supportive institutions have been playing a strategic role in accelerating debt resolution.
• While all the stakeholders are working together to tackle near-term challenges, additional capital infusion and even setting up of a bad bank could be a possibility.

Looking at the extraordinariness of the ongoing crisis, while it is necessary to focus on near-term challenges, at the same time, banks should not lose sight of the long-term systemic approach to improve the asset quality. While all the stakeholders are working together to tackle near-term challenges, additional capital infusion and even setting up of a bad bank could be a possibility. According to the IMF, India ranks at 33 among 137 nations in a global list of countries with bad debt ratio in a descending order based on data of September 2018. Out of 32 countries having more bad loans than India, 16 are in Africa and the rest are in Asia, Europe and Caribbean. China’s GNPAs stand at 1.75%, Brazil’s at 3.69%, South Africa’s at 2.83% as against Indian GNPAs at approximately 9.85% in 2017.

India’s Top 50 NBFCs Ranking 2017

When the loan recovery ecosystem is gradually strengthened with the enactment of the Insolvency and Bankruptcy Code, 2016, formation of bad banks can only be a temporary measure. With the improved credit appraisal, monitoring and debt resolution mechanism, banks should be capable to enforce recovery of loans and manage asset quality without the perpetual help of external institutions. The urgency is for banks to improve people and system competency to source quality credit, monitor it and recover it in time as part of normal banking operations. Bad banks cannot be a panacea against the systemic flaws in credit administration. The collateral damage caused by such a high volume of toxic assets impinges upon the overall efficiency of banks. Whenever banks accumulate large toxic assets attracting the attention of stakeholders, the issue of hastening resolution comes to the centre stage of policy debate.

Bank of Maharashtra Surpasses PSU Banks in Profits

All in all, https://1investing.in/ and credit rating are important aspects of a wealth customer, and a wealth manager helps you manage it well. Hence, concentrate on utilizing your current assets to the fullest and leave the rest to the experts who have their best interest in your growth. For monetary policy actions to have their full impact on the credit channel, it is imperative that the asset quality concerns of banks are addressed and that their capital positions are strengthened.

Apart from general buoyancy in credit demand, banks are also benefitting from corporate credit demand shifting back to banks from the corporate bond market. Bond yields softening over FY20-22 had resulted in large high-rated corporates moving away from bank borrowings to the corporate bond market. However, the difference between 1-year AAA bond yield and 1-year MCLR rate has disappeared over the last six months, which is bringing back corporates to banks. “The small- and mid-size enterprise sector and low-income households are vulnerable to rising interest rates and high inflation. But, in our base case of moderate interest rate hikes, we view these risks as limited,” the report said.

The new NPA formation for banks has been lower over the last 4 quarters even compared to pre-COVID levels. He added that although bad loans have moderated, lenders continue to carry higher provisions, which would provide them some room to deal with pressure on margins as borrowing rates are going up. “Coming to asset quality, I think we have seen this trend in terms of improving asset quality sustained right through the pandemic. As we have discussed before, this has largely been driven by the improvement in the corporate credit cycle that continues,” Sanjiv Chadha, chief executive of Bank of Baroda, told analysts on 1 August.

Credit Rating is an evaluation of the creditworthiness of a borrower to fulfill his/her financial commitments or repayment of debts and other financial obligations. The borrower can be an individual, company, state authority or the government itself. Individual borrowers have credit scores while a company or government organization gets a credit rating. These ratings are given based on the credit assessment done by various credit rating agencies.

Both asset quality and credit rating move in a virtuous circle where a better asset quality rating leads to higher credit rating. Due to high credit rating, an organization is able to procure loans at low rate of interest as well as invest in high return yielding bonds. These loans and bonds make up a better asset quality base which in turn again increases the credit rating of the organization. A wide divergence has also been observed in credit growth of public and private sector banks. Asset quality in the banking system has improved over the last year, aided by an increase in economic activity. Bad loans fell by 185 basis points to 5.7 per cent of total loans, but concerns about restructured credit remain.

A deep dive into the state of these asset quality drivers can help identify the gaps. There are various macroeconomic factors that impact asset quality of banks. Low economic growth, less exports due to a weak global economy, delay in granting administrative clearance to infrastructure and industrial projects are a few macroeconomic factors that lead to deterioration in asset quality. A sharp fall in currency exchange rates also causes importers to default on loans. The term asset quality implies the quality of loans that a bank has given out.

In the meantime, the restructured standard loans under RF 1.0 and RF 2.0 worked out to 1.80 percent of the total assets. The restructured loans which have come down steeply to 0.30 percent has gone up again due to covid induced stress. A wealth manager works on allocating an organization’s asset base in order to match the asset quality thus resulted to achieve the credit rating desired by the latter.