There has been a great change in the banking industry in the past three decades. Earlier, asset quality wasn’t a prime concern in the Indian banking sector. The focus was more on performance objectives. Banks were emphasizing opening new branches, expanding business areas, extending reach to rural areas, and so on.
Therefore, the priority was not on recovering loans or doing npa management. Therefore, Non Performing Assets or NPA became a big issue.
When the percentage of NPA went higher than the threshold value, banks started feeling its heat. With time, a structured approach was developed to handle npa in india.
What’s the way forward? Here are some important strategy points that could help solve the problem.
Corporate Governance
By improving corporate governance to the desired level, it is possible to bring NPA under control.
Stringent NPA recovery process
The government has made many amendments to the laws and has given many powers to banks so that they can recover NPA.
The RBI has asked for nine additional powers under the Banking Regulation Act with regard to pubic sector banks. It includes the powers to remove CMDs and appoint them. It also includes the power of superseding the Board of Directors and making applications for winding up defaulter banks. It included the power of sanctioning schemes of voluntary amalgamation etc.
These steps will control the level of NPA before it goes beyond uncontrollable limits.
CRM Process
It is the Credit Risk Management process. With adequate credit appraisal of the project, the creditworthiness of clients can be ensured. Not just that, their skill and experience can also be carried out. While conducting these analyses, banks need to do a sensitivity analysis. Banks should build safeguards against external factors.
With a powerful and effective Management Information System (MIS), banks can generate reports to monitor early warning signals about projects.
The MIS should detect issues and set off timely alerts to management so that necessary action is taken.
Asset Reconstruction Company
By setting up an ARC or an Asset Management Company, banks can achieve fast-track resolution of stressed assets.
The government should initiate the necessary steps to explore the feasibility of doing that after thorough discussions on implementation issues.