Impact of digitization on NPA

Introduction

Since Independence, the banking industry has expanded dramatically, especially following the LPG reforms. In India, the industry is presently valued at RS 115 lakh crore, and the value is anticipated to more than quadruple in the coming years. 

The NPAs constitute a significant source of worry, given the size of the banking sector. PSU banks conduct 70% of the activity in this sector. The market share that SBI holds in the overall banking industry is 22%, which is a remarkable figure!

In this guide, we will first cover the foundations of NPAs, followed by an understanding of their origins, the process of debt collection and effects, issues that the banks will confront as a result, and lastly, how digitization has made an impact on NPA. Let's get started!

What is an NPA (Non-Performing Asset)?

NPA is the most crucial information that should be compared between banks. A loan or advance that has gone on for 90 days without the principal or interest being paid is known as a non-performing asset (NPA). When the borrower is not repaying a loan, it may be categorized as a non-performing asset.

Banks make money by charging interest on loans they give out – that's their main source of income. However, there is always a risk that borrowers may not be able to pay back the loan, which puts the bank in an uncomfortable position. If this occurs, the loan summed is categorized as a non-performing asset.

If a loan's repayment is overdue by more than 90 days, it is categorized as a non-performing asset. It harms the bank's capacity to produce sufficient revenue and profitability. A bank's NPAs might impact other ratios, operations, and income. You'll know which bank operates better than its competitors if you properly analyze its NPA.

NPA classification of Assets

The three main categories into which the banks divide NPAs are as follows:

• Substandard assets: Anything that's been labelled as a Non-Performing Asset (NPA) for less than 12 months is known as a substandard asset.
• Doubtful assets: Assets that have been non-performing for more than a year are considered "doubtful assets" of NPAs.
• Loss assets: Loss assets occur when payments are delayed for an extended time. Basically, an auditor makes sure to find all the loans that won't ever be paid back. These need to be marked as total losses for the banks in their records.

What are the issues causing the rise in NPAs in the Indian market?

As per the current Indian market, the following are the main reasons that contribute to increasing in NPAs in the banking industry:

• Back in the early 2000s, India was doing really well economically and because of that, banks were handing out an abundance of loans to entrepreneurs and businesses. Unfortunately, these businesses could not keep up with their operations and could not settle their debt collection. As a result, prices skyrocketed, greatly influencing the recession.
• There are many more NPAs (Non-Performing Assets) in the banking sector due to looser lending standards for large corporations. In addition, banks are disbursing unsecured loans without conducting adequate evaluations, increasing the number of bad debts.
• When mining projects were heavily regulated, it had a huge impact on sectors like iron and steel. Due to their excessive spending, they ran into serious problems with the banks. Indian public sector banks have thus been the ones most impacted by this issue.
• Due to loans being provided for agriculture, education, MSMEs, and housing under the priority sector lending category, NPAs have risen. For example, 20% of SBI's overall NPAs are massively related to education loans.

How might data analytics be applied to the frequent issues with NPA management?

Today's banking industry is constantly exposed to a variety of hazards. Non-performing assets are some of their biggest dangers. In these situations, using data analytics for non-performing purchases is beneficial. 

Analytics enables the bank to chart a pattern of time and reasons why borrowers miss payments, which helps it monitor its health. Both corporate and private borrowers must follow this.

For instance, a decrease in expected rainfall or unfavorable weather conditions raises the likelihood that an agricultural enterprise, a person, or a company that depends on rural markets for business may default. 

Consequently, the cost of capital or credit for such companies or people would be higher than what it is typically for others (solvent individuals or companies). Therefore, knowing about risks helps banks avoid them and stop unwarranted anguish.

What advantages do data analytics have for non-performing assets?

We already know that data analytics is a tremendously helpful tool for managing non-performing assets.

• Data analysis can help in anticipating NPAs because many businesses aren't performing well financially and might become a big problem after COVID-19. This can help identify loans that are likely to become non-performing assets (NPA) shortly so that preventative steps can be taken.
• Businesses attempting to recover from financial losses can benefit significantly from having data analytics specialists on board. They can perform mathematical calculations and develop situation-appropriate strategies. In addition, it's a helpful tool for formulating the appropriate methods and tactics. 
• The use of cartelization by borrowers to prevent banks from recovering the total value of their security can be stopped with the help of analytics.
• Data analytics is anticipated to speed up procedures, automate trustworthy databases, and promote decision-making transparency, which is advantageous. Restarting the system has the significant benefit of reducing bankers' concerns about future accountability.

Which steps are being taken to address the NPA crisis?

How does RBI manage NPA? The process of restructuring loans and advances involves changing the terms and circumstances of an existing loan to make it easier for the borrower to repay it in the event of temporary cash flow issues or a general economic slump. Only when there is a failure to make interest or principal payments on the designated due dates can these loans/advances be labeled as NPAs. 

The Government of India (GOI) and RBI implemented several measures and are still doing so to address the massive NPA crisis:

• Debt Recovery Tribunals are being created.
• Asset Reconstruction Businesses will grow.
• Introduced the Insolvency and Bankruptcy Code and corporate debt restructuring.
• Mission Indradhanush proposed the SAMADHAN scheme for asset management and debt restructuring to bailout PSBs and brought about changes in the public sector banks (PSBs).
• One of the major steps to stimulate the economy was the merger of PSBs, which reduced the number of these institutions from 27 to 12 while improving liquidity, diversifying risk, and addressing the NPA problem.
• The process of restructuring loans and advances involves changing the terms and circumstances of an existing loan to make it easier for the borrower to repay it in the event of temporary cash flow issues or a general economic slump.
• Review of Asset Quality in Banks.

NPAs threaten banking, but technology and digitization can help- explain.

Digitization can completely change how non-performing assets are managed in our nation. Therefore, debt collection is a crucial area where adopting a focused, agile, and data-oriented strategy, supported by a comprehensive and uniform collections capacity, can be very beneficial.

NPAs can be significantly decreased with the help of streamlined collections procedures, efficient performance monitoring, and strategy alignment. The contribution of technology to the decline of non-performing assets is enormous. Some strategies that work include:

• A single platform that allows for end-to-end visibility- To make better decisions, it might be helpful to identify patterns and trends in consumer behavior. This can be done with a unified platform that gathers all pertinent data in one location and offers much-needed visibility and analytics support.
• Automation to streamline and standardize communication- Despite significant advancements in digitization aiming at automation in banking, many complex or manual customer interaction points in collections are tiresome, time-consuming, and ineffective.
• Effective controls and tracking- Due to a lack of central visibility and the inability to pinpoint precisely where things are not operating as intended, there are frequently many overlaps and inefficiencies in the collection procedures. This results in wasted effort, a lack of focus, and low productivity. However, cutting-edge technology platforms like CLXNS Technologies Pvt Ltd offer real insight through detailed dashboards and real-time, granular data.
• Putting the customer's needs first- Customers today want an educated, individualized, and responsive approach to communications, and the days of one-size-fits-all robotic outreach are long gone. Innovative technology platforms with multi-channel, multilingual capabilities and the ability to interpret results and adjust in real-time make it possible to engage customers through communication.

Final Thoughts

The NPAs on public sector banks were over 7.3 trillion INR in 2019 compared to 6 trillion INR in 2021. However, digitization and the advanced use of technology have helped the nation to a considerable extent. 

In terms of handling NPAs globally, India comes in fifth place. Under the extreme stress scenario, it is expected, the gross NPA ratios of PSBs might increase from 6.5% in September 2022 to 9.4% in September 2023 at the bank group level, while they would increase for private banks from 3.3% to 5.8% and foreign banks from 2.5% to 4.1%, according to the RBI.

Several steps can be taken to eradicate the NPA problem from the Indian banking sectors, including holding the senior executive accountable, good governance, stringent rules by the government, etc. 

We hope by now you have clarity on the NPA and the impact of digitization on Non-performing Assets. Stay with us for more information on the Indian market.