A Detailed Insight On Non-Performing Assets
Current Status Of NPAS & Future Trajectory
Let us start with some numbers. By March 2021, India’s banking credit growth (y-o-y) slowed down to 5.6 percent, nearly a point percentage from the last year. There has been lower growth in credit versus deposits, and the credit deposit (C-D) ratio sank to 71.5 percent from 76 percent a year ago. When compared to the previous year, and through the lens of the global slowdown created by the pandemic, this still seems like a favorable credit climate. Gross banking non-performing assets (NPAs) were valued at around 293 billion, down from 2020. There is a remarkably steep decline, from 11.2 percent in March 2018 to 7.4 percent in March 2021. In addition, Government sources confirm that the GDP data for the first quarter of 2021-22 reassures chances of recovery.
Upon first glance, the government’s strategic reforms seem to be showing signs of slow, yet steady recovery. Among these, one of the most highly anticipated moves came in September 2021 with the introduction of the proposed National Asset Reconstruction Company Limited(NARCL) and India Debt Management Company (IDMCL), formed purely with the intent of reviving failed bad assets. In many ways, this is a welcome proposition to bring our economic game plan back in focus.
NPAs place tremendous and progressive stress on the credit system in which a list involves India’s foremost private and public sector banks
The Key Concerns About Growing NPAS
A few weeks ago, the concerns around the country’s growing NPAs seemed pressing, if not daunting. They still are, although we are witnessing sure signs of progress. In 2020, a country-wide slowdown, fuelled in part by the COVID-19 pandemic, had threatened to elevate NPAs to between 15-20 percent of assets, as per the RBI’s Financial Stability Report dated Jan’21. India was indire need of strategic intervention, and that is what we have been seeing of late, in terms of the bad bank announcement and moratorium of up to two years for borrowers with exposure up to Rs.2 crore subject to certain conditions. However, even today, we are not past the point of crisis. The latest industry reports by ASSOCHAM and CRISIL, for example, emphasize that GNPAs of commercial banks may exceed Rs.10 lakh crore by March 2022.
Why Is This Important?
At the very least, NPAs place tremendous and progressive stress on the credit system in which a list involves India’s foremost private and public sector banks. They are also a ticking time bomb. Over the long term, they pose clear threats to the country’s economy, impeding growth, and hampering investment plans. Hence, despite the early indicators of recovery that we’re seeing, not much is expected to change without some deep cleansing at the core and this includes introspection, systemic checks, and technology adoption.
The Role Of Technology In Identifying Stress & Managing Varied Risks
Technology has come a long way in the world of financial management. Fintech is, interestingly, no longer seen as just an enabler, but rather an enforcer. It is a core function that holds the potential to transform and enrich the way business is done every day. The tools available at our disposal today can not only help banks track NPAs on a near realtime basis but also guide them through the next courses of action. Let us take risk management as an example. There are products available in the market that can help identify Credit Risk, Model Risk, Operational Risk, or Liquidity Risk and guide in managing & mitigating them proactively.
The Role Of AI-Based Predictive Analytics To Identify Risks, Enable Faster Recovery & Assessing Future Credit Growth
AI-based predictive analytics can help banks correctly assess various risks and gauge the extent of the impact while guiding them on the best mitigation strategies possible. They can help lenders estimate credit losses before hand and thus, manage them better on the books as well as communicate effectively to stakeholders. With advanced analytical tools, the repaying capacity of borrowers is no longer subjective; even the likelihood of default can be quantified today. They can even track incipient stress, detect credit fraud, and flag NPAs. Banks can utilize the data to remediate action and focus on credit growth. Technology has been highly effective in enabling banks to augment their risk monitoring and management capabilities as well. As banks look to transition to the next phase of operations, having the right technology in place becomes extremely critical to allow them to focus on credit growth, ensure regulatory compliance, and embrace a healthy & competitive lending strategy. AI-enabled technologies also empower and equip banks to tap into industry-wide megatrends using real-time predictive and prescriptive insights. Banks can in turn utilize these insights and customer intelligence to plan a secure and effective transformative journey that results in enhanced market positioning.
The Key Consideration For Banks While Leveraging Technology To Manage Varied Risks
Technology is an indispensable ally for banks that are looking to build on their nextgeneration capabilities that is from tackling uncertainty to navigating precarious or niche areas, like risk management, corporate governance, and many others. The involvement of technology can certainly demystify some of the inherent complexities of banking. In India for instance, we can eagerly anticipate emerging technologies like public and hybrid cloud, blockchain, microservices based architecture, and artificial intelligence, to make waves in the conventional playing field. But banks also need to stop looking at technology as a one size fits all solution or silver bullet to cure all their ailments. This is a common pitfall. Even the best of technologies cannot empower a superficial attempt to digitalize operations. To find success, any technology led transformation needs to underpin a wellcrafted organization-wide change strategy. Banks need to approach digital transformation using an open and consultative mindset that begins at the top and encompasses all key stakeholders.