Banks should increase provision coverage ratio, says RBI Deputy Governor

In view of rising Non-performing assets (NPAs) of banks, the provision coverage ratio of banks should be increased, Deputy Governor of the Reserve Bank of India (RBI), N S Vishwanathan said at the Associated Chambers of Commerce and Industry of India (ASSOCHAM) event held in New Delhi on Tuesday.

"Any bank which does not have a strong risk management is likely to build a highly susceptible credit portfolio. Risk management is not static. It evolves over a period of time. It need not be the same for all. Its sophistication grows with the growth in the complexities of a bank's functioning. Regulators have put in place a framework for risk management", said Vishwanathan while inaugurating the national conference on 'Risk Management-Key to Asset Quality,' organized by the ASSOCHAM.

We believe that the information asymmetry is the main bottleneck in sound credit appraisal and strong credit monitoring. The RBI has created a Central Repository of Information on Large Credits (CRILC), large loan database that covers all loans over five crore.

The database is accessible to all the banks that allows banks to identify incipient sickness that is reflected in repayment behaviour, said Vishwanathan.

"Leveraging the CRILC database, lenders could coordinate their planning for recovery and resolution of the affected unit through a Joint Lender's Forum once early signals of sickness are noticed," said Vishwanathan.

The RBI believes that businesses can get into financial difficulties and genuine business needs should be supported, malfeasance should be properly dealt with. We have therefore put in place a detailed system for identifying willful defaulters and non-cooperative borrowers with attendant consequences to the borrowers who are so declared. We also believe that frauds should be sternly dealt with and have created a fraud registry.

The government has notified the amendment to the Debts Recovery Tribunal and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, which will speed up the debt recovery process. The insolvency code has already been enacted. The government has set up a committee, with four sub-groups, to formulate detailed regulations and rules to operationalize the code within a short time span. The government has also taken steps to improve the corporate governance in public sector banks (PSBs).

We have issued guidelines to make large borrowers to go to capital market for part of their funding needs. The revised draft on large exposure has also been issued. We have also allowed increased credit enhancement to be provided by banks for bonds issuances to make them attractive for long investors, added the Deputy Governor.

The total stressed assets of PSBs have risen to 14.5 percent as at the end March 2016. They still contain some element of restructured assets indicating potential for some more pain, albeit of lesser intensity. With the annual recovery in NPAs falling from 20 percent in 2013-14 to nine percent in 2015-16, the problem assumes greater significance, mentioned Vishwanathan.

One could see that incremental accretion to NPAs is quite substantial. There was a big addition post the  the Asset Quality Review exercise. What we need to realize is that may be going forward addition to NPAs may moderate but the provisioning needs as the NPAs age will put pressure on the P and L.

He said, it would be interesting to look at the sectoral distribution of NPAs and stressed assets. It shows the obvious that maximum stress is in the industry/ infrastructure. The reason for this is also not far to seek.

It is indeed surprising that despite the 'high leverage' being a well-established and most widely known risk factor of corporate lending, bank lending to industrial sector continued at an elevated rate of around 20 percent per annum. Obviously, a leveraged business is more sensitive to turbulence.

Essentially risk management would involve knowing the risk, measuring it, and controlling it within the risk appetite of the banks by using appropriate mitigants. The first risk from credit management emanated from the possibility that the business does not take off as projected. It is likely that the report based on which credit proposal is submitted is highly optimistic.

Therefore, there is a need to evaluate a proposal for how close to reality the projections. Even assuming that the projections were reasonable, there is the possibility of external factors in that might render the projections unachievable. The usual way to deal with this to do a sensitivity analysis.

The scenario tested should be adequately stressed and plausible. They need to factor the possibilities that arise on account of the fact that India is a lot more open economy.

Competitions from abroad apart from domestic competition should be visualized and therefore global capacities and not just domestic capacity should be criteria.

R K Gupta, Co-Chairman, ASSOCHAM National Council on Banking and Finance said that the banking industry has been passing through a difficult phase and vulnerabilities remain. A general decline in the asset quality was not totally unexpected.

However, the extent being witnessed needs to be avoided in future. One way is to strengthen the risk management, share information amongst banks' so as to ensure to preventive measures.

He further said that banks need to change their systems or indeed to build new systems to ensure collecting the necessary data and can calculate the new risk weights using the proposed approaches.