A continuous tweaking of the credit risk management systems to the evolving macro environment holds the key
It is noteworthy that public sector banks (PSBs) have posted improved performance during FY22. Out of 12, 11 have declared results and most of them reflect overall improvement in terms of capital adequacy ratio (CAR), asset quality and profitability and in many other parameters.
Many of them have increased provision coverage ratio (PCR). The gross non-performing assets (GNPAs) of SBI stands at 3.97 per cent, Bank of Baroda at 6.61 per cent, Canara Bank at 7.51 per cent with their corresponding PCR at 90.2 per cent, 88.71 per cent and 84.17 per cent, respectively, in March 2022 reflecting a distinct uptick in asset quality. Amid improving asset quality, higher PCR empowers banks to withstand losses in case they turn irrecoverable.
Though some delinquent loans on account of Covid-19 must have escaped classification under RBI restructuring schemes, they have not undermined the asset quality improvement. Bringing down GNPAs from as high as 14.6 per cent in March 2018 to 7.5 per cent by March 2021, which may further go down in March 2022, is indeed impressive. But upside risks cannot be ruled out due to ongoing macroeconomic volatility and lingering geopolitical risks.
The next challenge for PSBs would be sustaining this tempo of improving asset quality, which will call for consistent efforts to tone up credit risk management (CRM). Better application of technology in CRM, systemic improvements in sourcing credit, monitoring and debt resolution will be the significant milestones.
Technology intensive innovations in credit management techniques and progressively tightened regulations have strengthened the asset quality ecosystem.
As components of CRM, the quality of credit origination, rigour in the follow up of credit, timely use of hand-holding processes (restructuring facilities) to bail out temporary disruptions of borrowers depends upon the internal systemic efficiencies and tools of surveillance of loan portfolio built over a period of time. It also depends upon how the three lines of defence in CRM is strengthened.
The galvanisation of technology, data analytic support, market intelligence in originating credit, the rigour in proactive monitoring, systemic controls, maintaining quality of credit and compliance standards will depend upon the related policies and people efficiencies.
Maintaining quality of credit
Given the legacy limitations, diversity in the borrower profile and geographical outreach of PSBs, the CRM systems are evolving to improve asset quality. But how it can be sustained in the long term while balancing the near-term challenges is a moot point.
With data on special mention account (SMA) and information on Central Repository of Information on Large Credits (CRILC) for loan accounts of over ₹50 million made available to the bank branches, the scope of monitoring of credit has vastly improved.
The debt resolution and efficiencies of DRTs and NCLTs are work in progress, aligned to the dynamics of business environment of banks and borrowers.
The two important parts of CRM — (i) monitoring of quality of credit and (ii) debt resolution after loans become non-performing assets (NPAs) — are post sanction activities. Rigorous follow up and ensuring NPA recovery are the only options.
But the most important part of CRM — the methods of sourcing of fresh credit — is always contentious, subject to improvement and its nuances are always under debate. It continuously evolves with the markets. The quality of credit origination depends on three distinct sources of information — external information from rating agencies and industry sources, information provided by borrower and, finally, the market intelligence used in credit appraisal by banks.
CRM governance has to be eventually in sync with loan policies, regulations and exposure norms leading to credit decision.
Ensuring creditworthiness of new loan accounts is critical to keep the asset quality intact. That is why it is important to calibrate risk appraisal norms to filter poor assets and acquire creditworthy portfolio.
The norms and standards of credit appraisal and resultant credit decision will have to be fine-tuned to organisational strengths so that its monitoring and recovery during the life of the loan asset can be enforced.
Reforms in CRM
PSBs in the early 2000s lent aggressively to corporates for building infrastructure, particularly to power generation, steel and telecom.
This led to steep rise in restructured assets, which led to a stock pile of NPAs after RBI dispensed with forbearance on restructuring of loans and came up with asset quality review (AQR). PSBs must learn from this experience and and set their own sectoral risk appetite.
Instead of being totally industry demand driven, the CRM should be well-aligned to internal strengths setting micro prudential norms capable of weeding out potential delinquent assets.
The efficiency of CRM of PSBs would lie in differentiated approach in taking sectoral exposure for fresh loans instead of adopting a uniform asset acquisition in line with peers.
A classic example in the current context could be the increasing exposure to retail loans and using risk-sharing opportunities with non-banks. They are good business opportunities but increased exposure to them may not suit every PSB. At the same time, as a larger part of CRM, building people competencies, procedural reforms of credit appraisal, and use of technology in assessment need to be upgraded.
Customising credit portfolio mix
Compliance with regulatory norms should not limit the ability of PSBs to frame their own risk appetite. Sustainability of asset quality will depend on not only faster debt resolution of existing stock of GNPAs but also barring the entry of high risk group of assets into the portfolio.
Before the new chunk of credit is absorbed, PSBs will have to examine the future implications of cost and capability to follow up such loans, consider state of digital literacy of borrowers to respond to banks’ use of technology in monitoring credit.
Asset quality is a result of the work of a combination of stakeholders, but the vision and foresight of lenders assume great significance in sustaining competitiveness in the markets.
An introspection into the credit portfolio mix and timely policy intervention can lead the way for long-term asset quality management.
The writer is Adjunct Professor, Institute of Insurance and Risk Management, Hyderabad. Views expressed are personal
Published on May 26, 2022