10 tn in NPAs – where does the buck stop?

Reported by: |Updated: January 29, 2020

Jaya Vaidhyanathan
CEO, BCT Digital

I still remember the day the news broke, and the entire industry was in chaos and indulging in speculation. It was 2015 and the Indian banking system was witnessing one of the largest declarations of NPAs, following the RBI’s special Asset Quality Review that perhaps came a bit too late. So many discrepancies – things that thus far lay brushed under the carpet for many intricate reasons – had suddenly crawled out of the woodwork. We were in trouble, so deep that the repercussions could be immediate and long term.

As implosions go, the near collapse of India’s banking system was an acute one, from which we will take years to recover. Even today, the ripple effect continues – with resounding impact and looming concerns about not just the continuity of our banks and NBFCs, but on our country’s economic set-up and, at the end of the day, what’s sacrosanct – billions of citizens’ money.

NPAs: a contrarian viewpoint

Not to digress. We can all agree that NPAs are fundamental to our strength and viability as a nation. The current scenario challenges that stability. Anna Ilyina, formerly division Chief of IMF’s Monetary and Capital Markets department, had said:  “The level of non-performing loans (NPLs) in India remains high. And the level of the capitalization of some banks, particularly government-owned banks, should be bolstered.” And, we’re seeing more disclosures reported. Obviously, our first instinct is to blame the defaulters. This is understandable; after all, they are the ones who did not pay-off the loans that they so borrowed.

But in terms of accountability, where does this leave the banks? Was there something systemic in the Indian banking system which prevented banks from an early intervention?  Had the banks drawn due attention to the early warning signs, taken the right measures to mitigate red flags and adhered to a robust exit strategy, could the impact, if any, have been lesser? Could technology have helped in this regard?

The answer is yes, yes and yes.

Technology: Moving up the value chain from implementer to advisor

All this attention on NPAs means the RBI will continue to stay diligent on the issue. Not only is it taking an active stance on the issue, it is ensuring that the new system is functional and pragmatic. Consequently, there is an aggressive interest from banks to implement technology-enabled solutions like early warning systems. With efforts to bring NBFCs and HFCs under the remit of RBI, we can expect an increase in this trend.

And I believe this is the silver lining to emerge from this cloud of vagrancy. From an RBI perspective, it can no longer be just about resolution. In this regard, some prominent themes emerge – how can banks be empowered to a) identify incipient stress early b) take unbiased decisions on the next loan that can be, and c) ensure recovery before it can become a non-performing asset.

This is where technology steps up its act as an enabler for banks to predict, manage and mitigate incipient risk. Let us take the aviation sector as an example. The industry is no stranger to controversies. Recently, we have seen a number of bankruptcies and liquidity crises rocking the boat. It is likely that banks spotted the warning signs well ahead but were unable to report it centrally due to lack of processes and systems. What technology brings to the table is a set of well-defined and non-interfering processes and systems and the power to remain location-centric, transparent and multi-faceted in their outlook.

Now if we add early warning systems to this set-up, we have a wholesome, complete picture. The early warning systems of today are built on scalable and future-proof next-generation technologies. We are merging the mighty and multi-dimensional big data with the traditional data modelling; using predictive analytics to predict and counter incipient stress; leveraging AI to compare, contrast and strengthen portfolios; data mining to make intelligent decisions – the possibilities are limitless.

The role of a technology provider in the Indian banking sector has metamorphosed. This is no longer a secondary or transactional involvement. In future, technology providers will double as advisors, empowering banks to arrive at solutions that not only work for them but will also cater to the broader economic interests of our country. If the bank is not well-educated on this front, then that’s where we will start.

The sum of all things

One of the most favourable outcomes to arise from the Asset Quality Review of 2015 is that the system is now closely eyeing incipient stress, as opposed to the conventional ’real stress’. This is how we will prevent the NPA situation from escalating in future. Moreover, in 2015, the RBI mandated a hard-line stance on systems and processes – including compliance requirements for early warning systems. Additional initiatives like the Innovation Sandbox will be enablers in marrying technology with new and improved regulatory processes to transform the banking playground and bringing it back to viability – and most importantly, to reform and reposition banks as our primary custodians of trust.

  • Jaya Vaidhyanathan is CEO, BCT Digital