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Role of Risk Management in NPA Management

Posted Date: 03-08-2023 Posted By: user

Banks play a critical role in the economy of any country as they are the financial intermediaries. They are the financial institutions that are exposed to a variety of risks while fulfilling the financial needs of their customers.

Along with many other risks, one important risk is having an account in the status of NPA or Non-Performing Assets. When a bank faces a credit risk, its financial position gets hampered.

When the NPA percentage of a bank increases beyond a certain level, the financial health of the bank deteriorates.

According to the FSR or Financial Stability Report of RBI, risks to the banking sector go to higher levels and remain there. Thus, overall asset quality deteriorates.

Therefore, it is all the more mandatory and critical for a bank to have a diligent and efficient risk management system. It should tackle the risks in a lucid manner. It becomes a part of the overall npa management strategy followed by it.

When we think about risk management, it has a close relation with the broad npa management in banking.

The relationship between NPA and Rik Management

As we know, banks are financial intermediaries. Hence, they are in the daily business of lending and trading.  We can understand that their chance of getting exposed to the risks is high.

When there is a problem, the best way to overcome it is by monitoring the problem and searching for its solution. And the problem of NPA is also not an exception.

As far as risks are concerned, a bank is exposed to many of them, e.g., legal risk, market risk, operational risk, liquidity risk, and so on. However, the most critical risk is the credit risk.

We should understand that a bank does not generate money, but it is the interest on the credit and the deposits accepted are the principal amount for the loan it gives to the borrowers.

When a bank wants to reduce the NPA, it needs to evaluate the risk well. And therefore, it needs to establish a strict approval mechanism. Experts say that it is one of the best strategies for npa management in banking.

The government has also set up some measures like the establishment of the Risk Management Committee to improve corporate governance. Rules say that the board of directors must constitute the Risk Management Committee, which is the indication of the concern and seriousness of the government about NPA.

Risk Management and NPA has to be tackled well

It is important to assess the risks and keep the NPA under control because it might also lead to the restructuring of the organization. It is the reason; banks have become incredibly sensitive toward npa management.

When the creditworthiness of an intending borrower is checked well, it reduces the risk. Hence, a rigorous and appropriate credit appraisal mechanism improves the financial health of a bank. It lowers the financial risk and safeguards the money of investors.

Risk Management makes the life of borrowers easy

When a bank mitigates the risk and does NPA Management well, it does not mind giving loans to borrowers. Thus, they do not face any difficulty in arranging funds. The reduction in NPA has a drastic positive impact on the balance sheet of the bank. As a result, the bank is enthusiastic about sanctioning loans to genuine borrowers. When a bank takes measures to lower the numbers of NPA by taking a strategic approach, it becomes customer friendly.

Thus, we can say that risk management and NPA go hand in hand. If risks are managed well, then a bank does not have a lower risk of NPA.