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Banking – Early Warning System for Curative and Preventive NPA management

Corporate Banking and Risk management applications either have got a backseat or were late starters. A victim of late adoption of digital, is the NPA in loans area, the biggest headache affecting the Indian banking system. Models for re-capitalization, problem loan resolution through IBC and NCLT, overleveraging in large corporate houses are everyday headlines. The increased powers given to the banking regulator(RBI) to clean up asset quality, and to intervene in Banks at an earlier stage when risk builds, represents an important positive step toward ensuring a healthy Banking system in the future. A resolution under Insolvency & Bankruptcy code (IBC) would mean rate of recoveries would be higher than what banks were experiencing so far under the much more protracted routes of NPA recoveries.

Management of NPAs begins with the consciousness of a good portfolio, which warrants a better understanding of stop at risks. The management has to decide a strategy keeping in view the regulatory norms, the business environment, its market share, the risk profile, the available resources etc. The strategy should be reflected in management approved policies and procedures to monitor implementation. The essential containments of sound NPA management are:

  • Quick identification of NPAs
  • Their containment at a minimum level and Ensuring minimum impact of NPAs on financials
  • External data acquisition for Credit assessment models
  • Early warning framework and Collateral management for credit monitoring
  • Soft landing and care programs for default management

BankIQTM EWS – Early warning systems, can be an important tool to mitigate credit risks through proactive monitoring. Monitoring Internal factors include diversion of funds, time and cost overruns during project implementation, business failure, inefficiency in management, slackness in credit management and monitoring, inappropriate technology and lack of coordination between lenders. Monitoring External factors include recession, price, escalation and currency fluctuations, changes in government policies, environmental concerns and accident and natural calamities to name a few.