Banks should strengthen internal credit appraisal system & use external credit appraisals to control rising NPAs: RBI deputy governor

In order to stem the problem of increasing level of non-performing assets (NPAs) and stressed assets, Indian banks need to strengthen their internal credit appraisal system i.e. on their credit assessment and risk management mechanisms, Reserve Bank of India's deputy governor, Mr R. Gandhi said at an ASSOCHAM event.

With the downturn in economic activity, the cracks in our credit appraisal and monitoring system have appeared and we should get our act together to repair the structures, said the RBI deputy governor.

The RBI deputy governor also stressed upon the development of corporate bond market, which he said, is very critical for leveraging synergies between banks and CRAs which can address the issue of growing NPAs in the system.

Banks should consider using external credit appraisals in conjunction with their own assessment as this is where credit rating agencies can play an important role given their experience and steady track record over the years, said Mr Gandhi. Banks need to balance the use of external ratings and can use them as third party, professional assessment, either as stand-alone basis or in combination with their own internal ratings.

Considering that total stressed assets in the banking system (including NPAs and restructured standard assets) as at December 2013 was 10.13 per cent of the gross advances of the banks, the top RBI official termed it as a cause of concern. Growing NPAs which have been more pronounced in the public sector banks is the biggest challenge for the banking industry.

Shortcomings in the credit appraisal, disbursal and recovery mechanism of banks together with a host of reasons like global and domestic economic slowdown, persistent policy logjams, delayed project clearances, aggressive expansion by corporate during the high growth phase and others are key reasons responsible for high levels of NPAs of banks, he added. Lack of robust verification and screening of application, absence of supervision following credit disbursal and shortfalls in the recovery mechanism have led to deterioration of asset quality of these banks.

Banks should take into account the cost to the companies and balance it against the benefits, besides constant monitoring of ratings by CRAs and their comparison with banks' own models are certain areas where banks and credit rating agencies (CRAs) need to work together so that banks are able to de-risk their portfolios and monitor their loans more effectively, added Mr Gandhi.

On the issue of guidelines for new bank licenses, Mr Gandhi said, Guidelines are being drafted and being discussed internally and will be made available for comments from the public once they are finalised.

On the issue of guidelines for new bank licenses, Mr Gandhi said, Guidelines are being drafted and being discussed internally and will be made available for comments from the public once they are finalised.

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