Enabling Technology to Tackle the Indian NPA Crisis
It is imperative to bring about new technologies that could work at the grass-roots level and help find a solution to the existing NPA crisis
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The issue of rising NPAs has put the Indian banking sector under an enormous amount of pressure. According to the Reserve Bank of India's Financial Stability Report in June 2018, the gross non-performing assets ratio of the SCBs rose from 10.2 per cent in September 2017 to 11.6 per cent in March 2018. This scenario is expected to worsen due to the PCA framework that could help mitigate financial stability risks by arresting the deterioration in the banking sector.
What Increased The Crisis?
Multiple factors have triggered the current NPA crisis. Companies that were debt-ridden were allowed to raise more debt from the system. Relaxed lending norms by banks to corporates without due diligence and increased selling of unsecured loans aggravated the crisis. Another reason is the lack of contingency planning and lack of existence of frameworks that could help mitigate project risks.
Government and financial institutions have been making an effort to recover outstanding loans and put in place stricter norms and regulations that could help avoid the situation in the future. Some of the notable legislation include the IBC (Insolvency and Bankruptcy Code), the SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, and the RDDBFI (Recovery of Debts due to Banks and Financial Institutions). Moreover, Debt Recovery Tribunals (DRT) were also set up to fast-track proceedings.
While it is a commendable fact that institutions have undertaken corrective actions to overcome the NPA situation, one critical factor that has been overlooked is Technology. Yes, technology definitely has the potential to address the NPA crisis in its own way. And looking at the current pace of retail lending, whether through banks, NBFCs or the mushrooming fin-techs, we may soon be staring harder at retail NPAs and that's where technology will play a pivotal role.
Be it advanced analytics related to studying consumer behaviour, business intelligence or data science, technology can & will enable a whole set of equations that will help identify early signals of stressed accounts in varied sectors to further segment or group accounts requiring proactive differentiated treatments. The technology already has demonstrated its potential within the financial sector - from i-banking to credit evaluation purchasing insurance or mutual funds or filing of taxes. The next step, however, which many of us are already working on is to integrate collections in the overall risk management wireframe so as to check the NPA crisis from building up in the retail lending space the way it has plagued the corporate segment.
Role of Technology
Technology can add tremendous weight to the credit monitoring & recovery process. Banks need to have all the relevant data about the borrowers to make an informed decision to process or extend credit line. Data analytics is one such solution. It can help banks gather & categorize the borrower thereby assigning a risk score to each borrower. This can be implemented for two aspects - verification of new borrowers and continuous monitoring of existing borrowers.
Drawing from the previous attempts of data processing, technology is more matured today and can provide concrete solutions to effectively identify stressed accounts, extract borrowers' social media profile and classify account health based on heaps of available customer data.
On the SME/Corporate side, data analytics & statistical reporting can eliminate the manipulation of company data and bring about transparency in the evaluation process. This statistical information can uncover patterns through predictive analysis and provide early warning signals of potential defaulters and evaluate whether companies are meeting their financial obligations on time, helping banks to make informed decisions. Moreover, various additional macroeconomic metrics could be factored in along with custom parameters that banks deem fit to suit the requirement for eligibility and verification.
Another aspect that technology could contribute is scaling up of the task force. Whereas early warning signals (EWS) mechanisms have been instituted, the majority of the work is still done manually. Recovery of NPAs is a time-consuming process that requires deploying and managing new resources that could increase the underlying costs burden on the financial institutions. Here's where an amalgamation of technology and taskforce could help scale up the productivity and speed up the process to tackle the problem of NPAs. The systemic framework could greatly work at the root level to identify stressed accounts based on the set parameters of the banks and notify the taskforce which can focus on recovery strategy and collaboration for resolution.
Moreover, improvements in analytics and automation could deliver on quick & transparent decision making. This will bring about greater accountability of financial institutions, effective monitoring of borrowers and prioritisation of stress accounts.
NPAs have a huge impact on the banking sector and the national economy. Failure in the banking sector could greatly impact other sectors and mitigate growth prospects for the economy. It is imperative to bring about new technologies that could work at the grass-roots level and help find a solution to the existing NPA crisis. With the focus towards long-term growth prospects, it is imperative for the government, RBI and financial institutions to adopt technological processes that could bring about transparency, effectiveness, informed decision making and a positive outlook to the economy as a whole.