TransUnion CIBIL study reveals stock of distressed and high risk debt falling for two quarters in a row

Mumbai, 13 August, 2018 – TransUnion CIBIL continuously monitors banking system’s risk and credit trends. TransUnion CIBIL’s latest analysis suggests that from an economic perspective India’s bad debt problem may have peaked in September 2017. The bureau focusses on three components of the bad debt to not only evaluate the current situation, but also identify potential future Gross NPA Rate in the commercial lending portfolio which as of Mar’18 stands at ₹ 54.2 lakh Crores (Cr). The Three components of bad debt being- i) Gross NPA(Recognised) which as of Mar’18 this is to the tune of ₹ 10.4 Lakh Cr; ii) ‘Unrecognized NPA’ i.e.; standard exposure of borrowers who have a non-trivial portion of their total exposure recognized as NPA by other bank/s which as of Mar’18 is ₹ 3.1 Lakh Cr; iii) Irregular Exposure belongs to commercial borrowers who are “Special Mention Accounts” (SMA) of various severity or are otherwise overdue or exhibiting over-utilization .As of Mar’18 Irregular exposure is ₹ 6.6 Lakh Cr.

‘Unrecognized NPA’ occurs because banks in which an account was ‘Standard’ were prima facie not expected to tag it as NPA, even though the borrowing entity may have been tagged as NPA by other lender/s. However, this definitely classified these borrowers as imminent ‘NPA’ and more often than not they slipped into the NPA status with most of their lenders. On February 12, 2018 the circular by the RBI on “Resolution of Stressed Assets – Revised Framework” has appropriately guided in favour of a prompt recognition of NPAs. Going forward it is likely that significant portion of this ₹ 3.1 Lakh Cr exposure is formally recognized as NPA, unless of course the borrower’s economic fundamentals improve to such an extent that they become ‘Standard’ assets on an overall basis.However the spike in Gross NPA, if it happens, will not be because of incremental economic deterioration of the asset but due to formal recognistion of the same. Further,future NPA’s are also driven by the stock of “Irregular Accounts” which from a technicality perspective are equivalent to a ‘Default’ by Credit Rating Agencies who tend to follow the ‘one rupee, one day delay as default’ as per global best practices.

While Gross NPA has steadily increased from ₹ 8 Lakh Cr (Mar’17) to ₹ 10.4 Lakh Cr, ‘Unrecognized NPA’ has steadily decreased from ₹ 5.5 Lakh Cr (Mar’17) to ₹ 3.1 Lakh Cr (Mar’18). This may be attributed to regulatory push in ‘cleaning’ banks’ books. Exposure to ‘Irregular borrower’ has reduced from a peak of ₹ 7.9 Lakh Cr in Sep’17 to ₹ 6.6 Lakh Cr in Mar’18. This development to some extent may be owing to better payment discipline amongst corporate borrowers which coincided with implementation of Insolvency and Bankruptcy Code (IBC).

Explaining the report findings further, Mr. Satish Pillai, MD & CEO, TransUnion CIBIL said, “Indian bureau capability in terms of data quality and big data analytical ability has reached a stage of maturity where it can give precise and accurate reading of banking system risks and future evolution of the banking metrics. This analysis suggests that the cumulative effort of the RBI, Government and Banks together are showing early signs of success as the stock of stressed assets and high risk debt is coming down across India’s banking system. Just looking at the rising gross NPA rate may not give any indication that the inflection point in bad debt has been reached. Bureau can independently validate that observation. The silver lining is that the overall NPA growth is expected to stabilize post Sep’19 with a possibility of declining thereon if there is a strong recovery from identified NPAs.”

TransUnion CIBIL Iceberg Study: Key Findings

• As of 31 March 2018, ₹ 10.4 Lakh Cr has been recognized as NPA on commercial credit in the banking system. While the level of recognized NPA exposure has increased by ₹ 2.4 lakh Cr since March’17, it is important to note that overall level of stress has not increased. In the year ending Mar’18, significant amount has shifted to recognized layer from partially recognized layer mainly driven by the RBI Circular on stressed assets released in Feb’18

• ₹ 3.1 Lakh Cr exposure is owing to borrowers, who have at least one credit facility which has been recognized as NPA (Refer ‘Partially Recognized’ in the Chart above). This ₹ 3.1 Lakh Cr is currently not tagged as NPA.

• Exposure of ‘Irregular Borrowers’ (borrowers who have had at least one “overdue” in the last 6 months) is ₹ 6.6 Lakh Cr. These borrowers present higher risk of turning into NPA than borrowers who are regular/always current on their payments of credit dues to the lender. Under the current definition of ‘default’ as per RBI circular these ₹ 6.6 Lakh Cr may potentially be tagged as ‘default’ if not NPA.

• Estimated Potential NPA in Public Sector Banks:
  • ₹ 8.6 lakh Cr NPA is already recognized by Public Sector Banks while ₹ 1.7 lakh Cr falls in the partially recognized layer which implies that about 85% stress in the books has already been recognized by the PSU banks.
  • Based on the data available on partial NPA layer, it is probable that the acceleration in NPA addition as observed in FY18 at Public Sector Banks, will subside by Sep’19.
• Estimated Potential NPA in Private Sector Banks:
  •  ₹ 1.1 lakh Cr NPA is already recognized by Private Banks in entities with aggregate exposure above ₹ 100 Cr
  • ₹ 0.7 lakh Cr exposure in entities which have been reported NPA with 1 or more banks and are most likely to slip into NPA stage in the next few quarters as RBI pushes for resolution on these accounts
  • Overall Private Bank NPAs are estimated to increase by about ₹ 0.4 Lakh Cr in the next 2 quarters.