Growing NPAs in Banks-Efficacy of Ratings, Accountability and

Transparency of CRAs

D. R. Dogra MD & CEO

Growing NPAs in Banks

Non- Performing Assets in the Banking Sector

A sample of 24 public banks and 15 private banks-

Trends in Gross NPAs (Rs. crore)Banks FY12 FY13 FY14Public (24) 1,13,467 1,58,822 2,17,671Gross NPA Ratio (%) 3.0 3.6 4.3Private (15) 18,435 20,715 23,744Gross NPA Ratio (%) 1.9 1.9 1.8All Banks 1,31,903 1,79,537 2,41,415Growth % 46.3 36.1 34.5Gross NPA Ratio (%) 2.8 3.3 3.8

Growing NPAs in Banks

Why are NPAs increasing?External factors

Slowing economic growthHigh interest rates

Prevailing high inflationInvestment related Policy uncertainty to stalled/ failed projects

Internal factors Not strong credit appraisal proceduresInadequate monitoring

Willful Default

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Growing NPAs in Banks

What Should the Banks Do?

Enhance institutional skill levelsSynchronization of credit lending with economic environment.Regular monitoring Pick up early warning signals

Better risk management systems

Growing NPAs in Banks

Role of Credit Rating Agencies

An independent risk assessment body Bridges information asymmetryHelps in efficient allocation of capitalProvides early warning signals for banksRegular monitoring through annual surveillance

..................But CRAs face three challenges

Growing NPAs in Banks

Efficacy of Ratings

Ratings need to be accurate Ratings need to be robust and indicative of changing

economic conditions. Should pick up signs before problems set in

Surveillance exercises brings this in Ex-post checks

Cumulative default ratios important here Transition studies to track movement of ratings

….Indian CRAs have done well on following global benchmarks

Growing NPAs in Banks

Accountability

Growing NPAs in Banks

A generalized view- CRAs actually do not have stake in the rating given and hence little accountability.

But Credibility is the most important test for CRA market belief is important

Investor decides whether or not to accept the rating given by any CRA

….CRAs have to continuously hone their skills and be updated with latest methodologies

Growing NPAs in Banks

Transparency

Growing NPAs in Banks

DisclosuresMethodologiesAssumptionsRating

Rationale to be provided Provide a summary of discussions with an issuer’s

management, auditors and bankers.Deal with the conflict of interest

Analysts separate from business teamsRemuneration not linked to ratings

Growing NPAs in Banks

Going Ahead…..

Growing NPAs in Banks

Given the ‘EAT’ principle is in place, banks can blend this knowledge, which is available to all, with their own portfolios to put additional controls and relook at their own quality of portfolio. Banks need to make use of ratings beyond meeting the specific objective of the Basel II norms for the purpose of capital adequacy. Hence, Banks should track ratings given by CRAs on daily basis for early signals.

Growing NPAs in Banks

Thank You