Bank reforms: Bad debt in the form of NPAs is not bad news if banks choose to clean up

Our fears outnumber our dangers, goes an old Latin saying. We are reminded of this in the context of the sentiment regarding bad debts on the books of Indian banks.

The concern is valid. But sentiments have overshot. All but one state-owned bank are trading below book value. Actually, banks are in good shape.

Between 2010-11 and 2012-13, overall non-performing asset (NPA) levels of banks went up from 2.5%to 3.5%. This was driven by corporate and small and medium enterprise credit, which accounted foralmost 90% of the growth in badassets.

However, the NPA level in the retail segment has gone down from 3.4% to 2% in these two years. Every category of banks - public sector, old and new private sector - saw a reduction in bad debt in almost all segments of retail lending.

The credit for this goes to the adoption of the credit information bureau in retail lending by the banking industry. Such use of information and technology is not seen yet in commercial funding or agriculture. That is where bad debts have swelled. We have a four-pronged agenda for banks.

First, banks need to leverage information and analytics. Lending is all about information asymmetry. The borrower has the real information. Lenders have to put their money on what they can gather.

All banks have had high-quality core banking platforms for many years. They sit on a massive amount of data that tracks customer transactions for several years.

Enhanced use of analysis on this data should enhance decision making. It can be used to identify warning signals and trigger action before a crisis sets in among borrowers. In some markets, banks are deploying techniques like psychometric profiling of customers to assess risk worthiness.

In India, where financial data is taken with a pinch of salt, surrogate information like utility bill payments could be sourced to enhance the power of analytical techniques. Information bureau services can be adopted with higher fervour.

This Article is written by CMA Samir Biswal. He can be reached at cmasamirbiswal@gmail.com

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