System-Based NPA Reporting Improves Transparency

Abhishek Raval 12th April, 2012 in BFSI



When recently asked about the reason for spike in Non Performing Assets (NPAs) of select Indian banks, RBI's Deputy Governor Subir Gokarn attributed it to the migration of NPA calculation from manual reporting to an IT system-based approach . By bringing to the fore previously unreported NPAs the system based approach led to an increase in the overall NPA reporting.


The recent Financial Stability Report points out a 25.5% growth in NPAs in the first half of 2011-12, the highest in the past six years. NPAs continue to be a grave area of concern for the banks and regulators alike. And, the key to addressing this issue lies in having a correct picture of NPAs. After all, unreported NPAs mean unaddressed NPAs.


Manual Reporting: Where Is Transparency?


"Manual system, due to lack of visual ease, involves going through scores of ledgers, manuals etc. Due to lack of scope for verification this gives leeway to banks to show a rosy picture about the financial numbers. On the other hand, software based system gives a single window view of the lifecycle of the loan from the day it is disbursed. This avoids manipulation of any kind and ensures complete transparency," explains R.B.Barman, Former ED- RBI.


A rulebased tool providing an organised display replacing the wide ledgers also enables the employees of RBI's Department of Banking Supervision to quickly check the veracity of the account entries and numbers and find if there are any aberrations.


As a result, both the finance ministry and RBI have directed Indian banks to automate NPA management and eliminate manual intervention. Moreover the implementation date for BASEL III norms is around the corner. Indian banks should abide them between 2013 and 2019. 


How System-Based Approach Works


IT Tools have features to act as a repository of the payment history of the borrowers. Thus, pre-emptive action can be taken when there is a possibility of an account entering the NPA category . Various categories of loans and the rules and payment periods associated with them can be tracked using a tool, as opposed to a manual system where one has to scan through scores of manuals, ledgers, etc.


To quote an example, the NPA norm for an agricultural loan for a crop of a long gestation period is different from a loan relating to an industry product of short gestation period. These complex rules can be better taken care of by a software tool than handled manually. Moreover there are various stages of NPA management requiring with different approaches required at each stage. For instance, a different approach is required at a stage when the account is categorised as an NPA than at a stage when the borrower is relentless and not making payments, which requires a legal notice to be sent. The rule based system triggers the alert.


Besides building greater transparency moving to a system based approach has its advantage in reducing the cost of NPA management. A manual setup requires large scale hiring of manpower while a technology tool streamlines the process using much lesser resources. Also, there is a possibility of slippages in people-managed systems, whereas a technology tool will improve productivity by managing set processes on rule-based systems.


Cosmos Bank And Indi Soft Partner For NPA Management


Urban Co-operative Banks (UCBs), which form a significant part of the lending community in India, are also stressed with high NPAs. Targeting the co-operative banking sector Indisoft Consultancy has recently launched an Indian version of its NPA management product, i.e. 'Rx Office NPA'. The product is customised for the Indian market based on the incumbent law viz. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) that government uses for NPA management, informs Prasad Nagool, CEO-Indisoft Consultancy Services.


Cosmos Bank has provided the business knowledge and regulatory know how for designing the product. "The team from Cosmos gave insights of business services from a co-operative bank perspective. Working with the Cosmos team enabled us to design the product from a user angle," shares Nagool. The bank is also using the product for their NPA management. "Rx Office NPA will help banks to reduce their NPAs to a great extent," states Sunil Sabnis, Director- Cosmos Co-operative Bank. 


Cosmos Bank is running on Infosys' Finacle Core Banking Solution (CBS), which is unable to handle NPAs on its own and manual intervention is required. "After implementing Rx Office NPA there is seamless bidirectional data transfer between the CBS and Rx Office NPA eliminating manual intervention. It has benefited in terms of regular tracking of the lifecycle of default. Meanwhile, the Finacle system is also updated accordingly so as to provide an end-to-end view from the loan disbursal date to the latest update of loan default," explains Sanjeev Dahiwadkar, CEO, Indisoft LLC. 


There are four pillars of 'Rx Office NPA' - Information management, document management, rule based workflow management and communication