STRESS IN BANKING INDUSTRY
The slowdown in economic growth is primarily caused by the stress on the banking sector’s balance-sheet, especially of public sector banks. On analysis of the Reserve Bank’s data, we found the stress in bank assets has been mounting since 2011 and has materially crystallized in the form of non-performing assets (NPAs). Stressed assets on the books of Indian banks are getting higher than their net worth; the situation is most acute for public sector banks where stressed assets are now about 50 percent higher than the total net worth of these lenders. A high level of stressed assets; and dramatic changes in the technological and regulatory environment are creating a perfect storm-like condition for the Indian banking sector. Some banks are under the Reserve Bank’s Prompt Corrective Action (PCA) having failed to meet asset-quality, capitalization and/or profitability thresholds; others meet these thresholds for now but no one can give a guarantee of other banks and their asset quality which may bring them under the ambit of PCA in near future .When bank balance-sheets are so weak, they cannot support healthy credit growth. Under-capitalized banks have capital only to survive, not to grow; those banks barely meeting the capital requirements will want to generate capital quickly, focusing on high interest margins at the cost of high loan volumes. The resulting weak loan supply, the steady decline in loan advances, and the low efficiency of financial intermediation, have created significant headwinds for economic activity.
CONCEPT OF STRESSED ASSETS:
Now stressed assets are getting increased attention as the trend of deteriorating asset quality has emerged as a big economic risk for the Indian banking sector. Stressed assets are a powerful indicator of the health of the banking system. To understand stressed assets we have to understand NPA and Restructured assets. This is because:
Stressed assets = NPAs + Restructured loans + Written off assets
Assets of the banking system comprises of loans given and investment (in bonds) made by banks. Quality of the asset indicates how much of the loans taken by the borrowers are repaid in the form of interests and principal. The most important scale of asset quality is Non-Performing Assets (NPA). An NPA means interest or principal is not repaid by the borrower during a specified time period. Bad assets are further classified into substandard asset, doubtful asset, and loss assets depending upon how long a loan remains as an NPA.
Measuring stressed assets
But NPA alone doesn’t tell the whole story of bad asset quality of loans given by banks. Some of the loans are restructured by banks by giving a further opportunity to the borrower if they default. This opportunity is in the form of an extended time period for repayment and a reduced interest rate or such soft conditions. Hence a new classification is made in the form of stressed assets that comprises restructured loans and written off assets besides NPAs.
Stressed assets = NPAs + Restructured loans + Written off assets
What is an NPA?
A loan whose interest and/or instalment of principal have remained ‘overdue ‘ (not paid) for a period of 90 days is considered as NPA.
What is a restructured loan?
Restructured asset or loan are that assets which got an extended repayment period, reduced interest rate, converting a part of the loan into equity, providing additional financing, or some combination of these measures. Hence, under restructuring a bad loan is modified as a new loan. A restructured loan also indicates bad asset quality of banks. This is because a restructured loan was a past NPA or it has been modified into a new loan. Whether the borrower will repay it in future remains a risky element.
What is written off assets?
Written off assets are those the bank or lender doesn’t count the money borrower owes to it. The financial statement of the bank will indicate that the written off loans are compensated through some other way. There is no meaning that the borrower is pardoned or got exempted from payment.
What is Special Mention Accounts?
Health of advance accounts is determined by their categorization as SPECIAL MENTION ACCOUNT. The Special Mention Accounts are usually categorized in terms of duration of overdue in the account. For example, in the case of SMA -1, the overdue period is between 31 to 60 days. On the other hand, an overdue between 61 to 90 days will make an asset SMA -2.If there is no sign of improvement in their overdue status, the accounts are further deteriorated to NPA accounts amounting to a major chunk of stressed assets of our Banking industry.
SMA Sub Category
|SMA-0||Principal or interest payment overdue between 1-30days.|
|SMA- 1||Principal or interest payment overdue between 31-60days.|
|SMA – 2||Principal or interest payment overdue between 61-90 days.|
RESOLUTION OF STRESS ASSETS-NEW INITIATIVES:
Stressed assets in the banking system have reached unacceptably high levels and urgent measures are required for their resolution. To minimise the stress in advances particularly in large exposures, public credit intimation plays vital role and transparent credit information of large credit exposures should be readily available. Let us analyse the various resolution measures taken by the Government and our Regulator in the recent past to address the burning stressed assets position in banking industry.
CRILC FRAMEWORK: A TOOL FOR BANKS/FIs TO MONITOR STRESSED ASSETS
Conversion of a performing asset to a non-performing one does not happen overnight. There are some early signs of distress which if ignored, can lead to delinquency. Furthermore, the cumulative non-performance across institutions can have a snowballing effect and lead to a credit crunch, paralyzing the economy. With strong systems in place, warning signs can be recognized well in advance to prevent problems and also alert other players within the system, to curb the negative effects.
Monitoring non-performing assets (NPA) is one of the biggest concerns of any financial institution as well as that of the regulator. In the pre-digital reporting era, this was an even bigger problem. The limited and often untimely exchange of information across stakeholders did not provide enough time for corrective measures. With the recent boost to digital reporting, the situation has improved, but challenges around the efficiency of tracking and exchange of information is still a concern.
To help overcome some of these challenges, the banking regulator of India, the RBI, introduced guidelines for credit risks on large exposures of banks and financial institutions. Subsequently, in 2014, a collaborative system called the Central Repository of Information on Large Credits (CRILC) was built to help banks and financial institutions evaluate their NPAs and share information with other institutions as alerts.
The RBI came up with the guidelines for individual financial institutions to highlight the status of stressed borrowers (based on their repayment status) and furnish the details to the RBI to be stored in a central database: CRILC. Participating institutions are required to submit reports on all the borrowers with an aggregate fund-based and non-fund based exposure of INR 50 million or more under the CRILC guidelines. The guidelines also require institutions to segregate borrowers as Special Mention Accounts (SMA) of various levels to gauge their probability of going delinquent.
CRILC DATA- A HELPING HAND TO BANKING INDUSTRY
The RBI shares the CRILC data on stressed borrowers with all lending institutions. The CRILC reports help institutions to look at and tackle their stressed or near NPA exposures. The RBI has asked FIs to make use of credit information provided by CRILC for opening current accounts. FIs should use the data available in the CRILC database to verify whether the customer is availing/has availed of a credit facility from another FI.
The CRILC system is an innovative data sharing framework that collects data on stressed assets from all Indian FIs and then advises the rest of the sector about the state of impairment. This is a mechanism that dramatically improves the stability of the banking sector in India and is an initiative that many other countries are following closely.
Legal Entity Identifier (LEI):
To minimize the corporate delinquency and burden of banks, the regulator has come out with a new concept of LEI. It has been decided for banks to make it mandatory for corporate borrowers having aggregate fund-based and non-fund based exposure of Rs.5 crore and above from any bank to obtain Legal Entity Identifier (LEI) registration and capture the same in the Central Repository of Information on Large Credits (CRILC). This will facilitate assessment of aggregate borrowing by corporate groups, and monitoring of the financial profile of an entity/group. This requirement will be implemented in a calibrated, but time-bound manner. To start with it will be now mandatory for credit limits of Rs.50 crore and above.
SALE OF STRESSED ASSETS BY BANKS:
Given the continuous rise of stressed assets in the banking system, accompanied with a low volume of sale of such assets by banks to asset reconstructions companies (ARCs) / non-banking financial companies (NBFCs) / financial institutions (FIs), the Reserve Bank of India on 1 September 2016 has announced new guidelines regulating sale of stressed assets, with the intent of incentivising more proactive sales (Guidelines). This has a significant impact on the manner in which banks as sellers and ARCs / NBFCs / FIs as buyers will now transact in this asset class and will require them to recalibrate their approach towards selling and acquiring interests in distressed portfolios. Banks will now have to put in place detailed internal policies for disposal of stressed assets and (at the very least) on an annual basis, identify and prepare a board approved list of stressed loans which need to be sold in the relevant financial year. Banks also need to lay down the norms for sale and most importantly, delegate powers to managers to consummate such sale. In relation to assets held by banks under the doubtful category, the board (or committee) of such bank would be required to document its views on exit or retention, on a periodic basis.
THE BANKING REGULATION (AMENDMENT) ORDINANCE:
To combat stressed assets, the government promulgated the Banking Regulation (Amendment) Ordinance, 2017 on May 4.It was passed to deal with stressed assets, particularly those in consortium or multiple banking arrangements. The ordinance enables the Union government to authorise the Reserve Bank of India (RBI) to direct banking companies to resolve the issues related to specific stressed assets, by initiating insolvency resolution process wherever required. The government has introduced two new provisions — Sections 35A and 35AB, under Section 35A of the Banking Regulation of Act of 1949 through which banking companies can initiate insolvency proceedings. The RBI has also been empowered to issue other directions for resolution, and appoint or approve for appointment, authorities or committees to advise banking companies for stressed asset resolution.
The recent enactment of Insolvency and Bankruptcy Code (IBC), 2016 has opened up new possibilities for time-bound resolution of issues related to stress assets. The IBC was enacted to consolidate and amend the laws relating to re-organisation and insolvency of corporate persons, partnership firms and individuals in a time-bound manner for maximisation of the value of assets in order to promote entrepreneurship, availability of credit and balance of interest of stakeholders. The banking ordinance is meant to firm up the IBC and is meant to join forces with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and Debt Recovery Acts, which have been amended to facilitate recoveries. The comprehensive approach is part of the effective implementation of various schemes through resolution or problems related to stress assets.
This is just the new beginning of resolution process which will take its full form with time to make a radical change in the banking environment. All the stake holders are seriously affected by the growing stress assets in our banking sectors. A serious thought by the regulator and Government has enabled to bring new tools to tackle the situation with gravity. We are quite hopeful of change of situation that will bring back the banking to its real track of progressive lending for growth of individual and economy, which will in turn make the bank most profitable as the earlier days.
CHIEF MANAGER, FACULTY
UNION BANK OF INDIA, STAFF COLLEGE, BANGALORE