India is witnessing an economic risk due to the rise in Non-Performing Assets (NPAs) for unrated loans. Data from the Reserve Bank of India (RBI) indicates that NPAs for unrated loans have surged to 24% in 2018 from approximately 6% in 2015. These unrated loans are those that remain unassessed by credit rating agencies. The hike in NPAs for such loans pose a significant threat to the banks.
Understanding the High Levels of NPAs in Unrated Loans
Unrated borrowers form about 60% of the total borrowers, and they account for 40% of the total exposure of large borrowers. Large borrowers are those who possess an aggregate fund-based working capital of Rs 150 crore or more. Banks are required by the central bank to report individual exposures of more than Rs 5 crore with the Central Repository of Information on Large Credits (CRILC) as it helps to accumulate data on large borrowers.
Strategies to Reduce NPAs in Unrated Loans
The RBI attempts to regularize credit ratings for loan exposure have resulted in increased risk-weighted assets on unrated loans. Higher risk-weighted assets on these loans restrict banks’ capacity to provide such loans, encouraging them to ensure these loans are rated. Risk-weighted assets are instrumental in determining the minimum amount of capital that must be held by banks to decrease the risk of insolvency.
Even though some private sector banks have experienced significant stress in their exposure to the BB category (and below) rated loan accounts, banks need to take into account rated exposures. The good news is that RBI’s Financial Stability Report projects a slight decrease in the gross NPA ratio of all banks, from 9.3% in March 2019 to 9.0% by March 2020.
Role of Central Repository of Information on Large Credits (CRILC)
RBI formed the Central Repository of Information on Large Credits (CRILC) in 2014. The primary role of CRILC is to compile, store and publish data on all borrowers’ credit exposures. To this end, banks are required to provide to CRILC credit information about their borrowers with an aggregate fund-based and non-fund based exposure of Rs.5 Crores or more.
| Year | NPA Ratio |
|---|---|
| 2015 | 6% |
| 2018 | 24% |
| 2019 | 9.3% |
| 2020 (projected) | 9.0% |
Road to Recovery
The recovery momentum seems promising due to the resolution of certain cases under the Insolvency and Bankruptcy Code, and banks writing off their bad loans. CRILC also aids financial institutions and banks to assess their NPAs and share this information among other institutions.
