Page 34 - Banking Finance August 2019

ARTICLE

who have deployed their fund in the bank do not incur any (GNPA) ratio rose from 10.2% in September 2016 to 11.60%
loss. Moreover, bank enter into a contractual relation with in March 2018.
the public that it will repay the amount deposited by the
public on their demand or after certain specified time as per Although there are several Micro & Macro economic factors
the terms & conditions of the contract. Thus, even if the contributing to increase in NPA level but it cannot also be
loan or investment leads to loss for the bank, it must repay denied that there are shortcomings in the assessment
the fund to the public. In other word, loss due to wrong methods used by banks while taking accredit decision.
lending or investment will be borne by the bank.
Credit Assessment:
It is observed that banks usually invests in bonds, T-Bills issued
It is the process of estimating the risk involved in the credit
by Government bodies, hence, the risk of loss due to decisions. "Risk cannot be eliminated but it can be
investment decision is almost negligible. The serious risk mitigated". Traditionally, banks consider 5 C's for any credit
which the bank encounters is "Credit risk" i.e. the risk of loss decision - Character (Integrity, commitment, sincerity of the
which may arise due to the lending activity of the bank.
promoter/borrower), Capacity (ability to execute the
purpose for which the loan is requested), Capital (promoter/
Measures to Mitigate Credit Risk: borrower ability to contribute own funds), Condition (ability
Banks are integral part of a country's economy. It is essential to comply with the Terms & Conditions of sanction which
that the bank must follow certain rules/regulations & will be advised by the bank for the loan facility) and Collateral
guidelines so that they don't get exposed to unmanageable (ability to offer additional security as a safeguard for
risks, which may in turn lead to their premature death. mitigating loss).

In India, the regulatory body Reserve Bank of India (RBI) The above mentioned parameters are being judged using
issues circulars, master directions advising banks to follow tools like Financial Statements, Income Tax Return, Wealth
certain standardised guidelines. Apart from this, bank also Tax Return, Credit Information Report etc. However, these
frames its own policies and procedures within the tools have not been able to prevent the occurrences of loan
framework of guidelines issued by Reserve Bank of India. default.

Despite these stringent monitoring measures it is observed There are certain limitations in the traditional
that level of NPA (Non Performing Assets) has increased approach of credit assessment which are as
rapidly in the entire banking industry.
follows:
As per the RBI's Financial Stability Report of June 2018, Security obsessed lending: Collateral is one of the
scheduled commercial bank's Gross Non Performing Asset parameter for credit decision but unfortunately it has
become "most important parameters" for credit decision.
Over a period of time, it is observed that with the increase
in complexity in business models, bank has identified an easy
way of sanctioning loan against certain percentage of
collateral offered.

Suppose a borrower is willing to offer collateral of
Rs.10,000/- then bank will be ready for sanction of Rs.6000
(i.e. 60% of security value). The major shortcoming in this
approach is that the ability to repay the loan by the
borrower was not ascertained and over a period of time the
marketability of the security also gets reduced. As a result,
the loans sanctioned based on "security obsessed approach"
have turned NPA over a period of time. Sub -prime crisis
happened due to security obsessed lending approach.

34 | 2019 | AUGUST | BANKING FINANCE