In an ideal world, a bank’s profitability would be a function of its net interest margin, fee income, and operational efficiency. But a well-known fact in the banking industry is that, a bank’s bottom line depends to a larger extent on the amount of non-performing assets (NPA) that are recognized and provisioned for, in the Profit and Loss account. It is therefore a common practice in banking to “extend and pretend”, i.e. provide borrowers more time beyond the contractual date, to repay their obligations thereby avoiding the NPA tag for the asset. “The Asset Quality review that was commissioned by the erstwhile Governor of the Reserve Bank of India (reference: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11218 )”, unearthed many hidden skeletons from the aftermath of the lending boom in the previous decade to companies in the steel, power and infrastructure sectors.
The stressed assets of Indian banks at 12.2 % as of September 2017, can neither be resolved overnight nor be provided for in the books of the affected banks at one shot. The former lacked a robust legal framework and the latter would result in wiping off capital for many large banks.
There is also an aspect of government’s prerogatives to support and encourage certain industries based on the budgetary and NITI aayog kind of bodies recommendations which most of the public sector banks are bound to support. With change of guard at central government level every 4 to 5 years, banks need to align themselves in terms of lending to such sectors.
The Insolvency and Bankruptcy Code was enacted into law in 2016 with the objective of consolidating and amending the laws relating to reorganisation and insolvency resolution in a time bound manner for maximisation of value of assets. The code stipulates that the evaluation and viability determination must be completed within 180 days, extendable up to 270 days. If not resolved in this time frame, liquidation proceedings will be initiated. Here are the other highlights of the code:

• Any financial/operational creditor can apply to the National Company Law Tribunal(NCLT) for insolvency on default by a borrower

• On acceptance, a Resolution Professional (RP) is appointed

• The RP will take over the running of the Company.

• A moratorium period will be declared during which no action can be taken against the company or the assets of the company.

• A resolution plan would have to be prepared and approved by the Committee of creditors. If the resolution plan is rejected by NCLT or no plan is worked out within the moratorium period, liquidation will be initiated.

RBI had a large number of schemes for resolution of stressed assets including Corporate Debt Restructuring Scheme (CDR), Flexible Structuring of Existing Long Term Project Loans, Strategic Debt Restructuring Scheme (SDR). To align with the Insolvency and the Bankruptcy Code, all the resolution schemes have now been withdrawn through a notification in February 2018 (reference: https://timesofindia.indiatimes.com/business/india-business/rbis-new-norms-on-bad-loans-wake-up-call-for-defaulters-government/articleshow/62902916.cms ). A revised framework for Resolution of Stressed Assets has now been introduced.
“As soon as there is a default in the borrower entity’s account, lenders need to initiate steps to cure the default (reference: http://indianexpress.com/article/business/banking-and-finance/rbis-new-norms-to-speed-up-resolution-of-stressed-assets-5062383/“).The resolution plan may involve reorganization including regularisation of the account by payment of all over dues by the borrower entity, sale of the exposure to other investors, change in ownership. Minimum credit rating by rating agencies has been stipulated for the residual debt after implementation of the plan. As per the new RBI norms, if a Resolution Plan in respect of large accounts is not implemented within 180 days of default, lenders have to file an insolvency application under the Insolvency and Bankruptcy Code.
The new framework can have a significant impact on a bank’s bottom line. “In case of restructuring, the accounts classified as ‘standard’ shall be immediately downgraded as non-performing assets (NPAs) (reference: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11218 “) . Borrowers who have committed frauds or are a wilful defaulter will not be eligible for restructuring.
There is also provision to impound passport of defaulters and even guarantors if banks move swiftly and avoid getting into the usual trap of unable to extradite these defaulters once they move out of the country.
Technological advancements – Blockchain, certainly will have major role to play in cases of syndication of loans. Though it may further increase the complexity of operation, but I believe it will definitely reduce the stress in the system and reduce NPA ratio. It will definitely act as multi factor safety net for banks and helps in building a national repository of black list of such corporates, which as of now is not very structured.
To conclude: My belief is that the framework is in line with the Insolvency and Bankruptcy Code and would strengthen the industry in the long term by providing a sound legal, technological and regulatory framework.

Corporate Loans occupy a significant size in the asset portfolio of large banks. Most banks have a well-defined corporate credit department comprising relationship managers, credit appraisal officers, risk officers, approvers and department heads. Corporate loans not only generate interest and fee based income but also build the asset side of a bank’s balance sheet. Related businesses of corporates such as current accounts, forex businesses, salary accounts of staff, financing options for employees of corporates, travel cards for top management/executives, remittance business, cash management are an added attraction for banks to pursue corporate banking clients.
Banks follow multiple methods for corporate credit appraisals and assessment. Credit appraisal and assessment has evolved from manual processing for balance sheet analysis, credit monitoring and assessment (CMA), credit worthiness and credit rating checks, to partially excel based tools for CMA analysis over a period of time. The complexity of the processing for corporate credit necessitated the need for development of a software with all the rules/checks/workflows built in, but it took a large time for a vendor to build the same. However currently most banks use software for corporate credit appraisals, decision making, etc.
The software is required to have organization level policy checks, customer specific checks, industry checks, credit worthiness checks and financial / cash flow comparison to ensure automatic credit decision. There could also be support in the software to overturn the workflow based system decision for credit approvals by manual intervention based on manual approvals/committee approvals with deviations and exceptions. Depending upon the criticality of exceptions to be overridden, multiple levels of approvals can be enabled. Any automated decision / manual process decision needs to be captured in the audit trail / report in the software, and stored so that the same can be referred to at a later point in time. Many a times, decision making is dependent on corporate relationships, reputation of share-holders, past history and precedence which may not reflect totally in the financials or cannot be captured in the credit report / software. It is important to have a decision from the software and record / capture the reason for overriding system approvals by a credit officer. The software can play the role of a watchdog oblivious of customer stakeholders and subjectivity. The software may also open up the hidden nexus between staff and corporate.
Corporate loans can go bad because of multiple reasons – non-performance or project failures, market risks, diversion of funds, operational failures, bad structuring of finances, people/process issues in the company, management issues etc. Needless to say, the quality of credit assessment using software or manual processes cannot be compromised, the credit projects should be in line with prevailing market conditions and the approving authorities should be aware of market trends for the future. The checks and expertise do not prevent a corporate loan from going bad.
However, the bank and the credit committee are always looked at with suspicion by the larger public when a loan goes bad for reasons beyond inaccurate credit assessment by the officer. The transparency which a software can provide with data capture, validations and workflow cannot be equated to a manual process, and the blame game can be avoided if the data and measures taken to approve with exceptions and deviations are recorded in the software with details of approval authorities.
To conclude, the software should have the capability and workflows for manual/automatic decision making, so that the policy makers at a bank can decide on the course to be followed to ensure transparency in the system. With mounting NPAs and bad loans, bankers are looked at with a great degree of skepticism by customers, fellow bankers, and the general public. It is high time banks come up with a mix of manual and automated credit decision skills where each and every action is captured, monitored, tracked and recorded. The staff cannot prevent some of the loans from going bad and cannot control the external factors contributing to bad loans. Inherent risk control measures need to be inbuilt in the software for monitoring and control. Furthermore, automated credit monitoring system during the life cycle of the loan must be put in place to provide an early alarm to banks to taking adequate measures before loans go bad beyond repair. This can go a long way in reducing the gross NPA of a bank.