NPA (Non-Performing Assets) Restructuring and Core Banking Solution
Restructuring of Loans:
Debt Restructuring, a common practice globally, provides relief to distressed borrowers. The intent here is to support deserving businesses by extending loan tenures, putting interest payments on hold, converting debt into equity, issuing fresh term or working capital loans, waiving off the interest and so on.
Impacts of Restructuring:
With a helping hand from banks, organizations which are financially viable can remobilize channels and resources and stand a chance to recover from debt traps.
Restructuring of such loans, which are 100% NPA, helps bring the mark down to 18-20% (generally), further cutting losses for banks.
Restructuring in a perfect financial world proves to be a very significant tool but when done excessively, brings public funds into depression.
The number of restructuring exercises approved by banks has significantly increased in the recent past:
1. No. of cases:
a.) From 9 (2009-10) to 41 (2011-12).
2. Amount Involved:
a.) Rs 4,200 crore (2009-10) to Rs. 35,000 crore (2011-12).
3. NPA percentages estimates:
a) Credit rating agency CRISIL estimates that banks' NPAs will rise from around 2.3% in 2009/10 to 3.2% by 2012/13, crossing the Rs. 2 trillion mark (1 trillion equals 1,00,000 crore).
"A ratio below 1% is considered ideal. The NPAs could rise to 3.5% if the economic environment weakens further," as per leading credit rating agency estimates.
b. The Reserve Bank of India (RBI) fears further deterioration. In its fifth financial stability report released on June 28, 2012, the RBI says bad loans could rise to 4.6% in a severe risk scenario.
1. Sector-specific Viability:
a.) Currently, prudential norms dictate that organizations seeking restructuring should provide the action plan to revive themselves in:
i. 10 years for infrastructure companies.
ii. 7 years for other sectors.
b.) As per strict RBI guidelines, these are considered upper limits and are allowed only in extreme cases.
2. Financial Positions:
a.) Various ratios to be in specified limits.
i. Return on Capital Employed
ii. Debt Service Coverage Ratios
iii. Gap between Internal Rate of Return(IRR) and Cost of Fund
iv. Operating and Cash Breakeven Point
v. Loan Life Ratio
3. Jurisdictional Limits:
a. Currently infrastructure projects are given more flexibility with respect to "date of commencement of commercial operation" and restructuring affords added advantage to this sector.
b. The RBI also mandates that the infrastructure project should be implemented only in India.
4. According to the RBI's new prudential guidelines on provisioning for restructured loans, banks will now have to write off 5% of the value of restructured assets instead of the current 2.75%. The rate was revised to 2.75% in November 2012, and the further hike to 5% means that banks have to provide more capital in the balance-sheet and more provisions in their P&L account, which directly impacts their profitability. This provision will lead to decreased profits in the P & L account, diminished asset sizes, and increase in capital requirement to comply with Basel rules. In India, where 70% of the banking sector is owned by the Government, requirement of extra capital will dry up Government resources in a two-phased manner, (i) Decreased contribution from banks to the Government as part of profit distribution (ii) Increased capital infusion requirement.
Core Banking Solution to Deal with the Same:
A core banking solution has the capability to deal with these NPAs and restructure the loans with configured rules.
The solution can define asset classification to identify and recognize NPAs and is also equipped to capture the financial information of an organization. A comparative analysis of these financial results, collected over a period of five years, can be made on a quarterly, half-yearly and annual basis.
Additionally, the system is equipped to capture various ratios for the organization. It also records the principal place and date of commencement of operation in order for RBI prudential norms to be implemented. It acquires information on the industry and sector in which the organization is engaged in, so that sector-specific norms can be complied with. Apart from these, maintenance of customer transactions, other product information, credit agency report etc. are the measures used to collect relevant data to perform a financial viability check.
The core solution, while making feasibility check for any new loan application, has the extensive credit check mechanism so that any unviable application is not going through and resulting into NPA.
The core solution has implemented the checks like:
- Credit score check: Credit scoring on the basis of customer attributes like age,
- DSR (Debt service Ratio)
- LVR (Loan to Value Ratio): the value of mortgage kept with the bank as proportion to the loan sought.
- CIF Checks: Black list check, negative list checks
- Credit reporting checks: Credit reports being taken from rating agencies like CRISIL etc.
- Underwriting: The application going through the approval hierarchy processes.
- Exception check and deviation checks: Any loan being passed beyond the configured rules being routed to proper authorities.
- Delinquency management can be adopted to negotiate with the customer and come to appropriate restructuring terms.
To identify the prospective NPA, the daily reports can be used which will list the overdue accounts with ageing matrix. The categorization of accounts can be modified (special Mention Accounts) so that can be taken care of well before they actually turn into NPA. While approving any restructuring/rescheduling any application, the various checks can be configured.
Though core banking solutions cannot entirely replace financial viability check procedures, they can help banks, critically analyze the financial viability of businesses and approve only the most deserving and feasible ones.