New Age Solutions for the Age Old Problem of Bad Loans

Shailesh Jacob, Founder & CEO, Loan FrameThe bad loans problem has been a deadweight for India’s growth engine since the 2008 financial crisis. Belatedly, the issue is receiving its due attention from the government, regulators, and bankers. The proposed steps may not be entirely adequate considering the quantum of the problem.

As per the Reserve Bank of India’s (RBI’s) latest Financial Stability Report released in December 2016, the overall proportion of stressed assets (defined as Gross NPAs plus restructured loans) to total advances for all banks combined climbed to 12.3 percent as of September 2016. The ratio for Public Sector Banks, which dominate the Indian banking sector, stood at an egregious 15.8 percent while that for Private Banks stood at a still unhealthy 4.6 percent. Despite many measures to curb defaults, prosecution of promoters, and asset sales, the total stressed assets continue to climb, standing at an estimated Rs.10 lakh crores currently. India’s largest bank, State Bank of India alone accounts for bad loans of Rs 72,000 crores as of December 2017, up 48.6 percent from a year earlier.

While the problem on the lender’s side seems to be concentrated around the public sector banks, the problem on the borrower’s side too appears similarly concentrated. As per the same RBI report, though large borrowers – those with total exposure above Rs.5 crores - represented just 56.5 percent of Gross Advances, they constitute 88.4 percent of Gross NPAs as of September 2016! Ironically this dominance of large exposures in problem loans has consistently grown from 72.8 percent in March 2015 to 86.4 percent in March 2016, up to this current level of 88.4 percent.

MSMEs may not have the same scale,but
are not free from the same kind of stress. Factors such as low or no credit rating, lack of collaterals, fund diversion problems, demonetisation impact, and low turnover growth are affecting smaller firms too. Banks usually resort to the Strategic Debt Restructuring (SDR) route to settle loans with MSMEs. The SDR route is easier to implement with smaller borrowers since there are fewer stakeholders involved when compared with larger, listed companies. Through SDR, financially stressed MSMEs get more time for repaying their debt,reducing their immediate financial burden. However, this route hasn’t always been easy to implement.

The use of multiples sources of alternative data to predict repayment behaviour can help to preempt bad loans

The government and RBI are drawing up strategies on resolving this long-standing problem. The Economic Survey of 2016-17 advocated establishing a centralised Public Sector Asset Rehabilitation Agency (PARA). There is also a proposal to set up a ‘bad’ bank. Other options such as creation of Private Asset Management Company(PAMC), and National Asset Management Company (NAMC) are also being considered. A pure government-led solution seems unlikely due to the fiscal situation and the scale of the challenge requires a response at multiple levels.

Alternative lending platforms like Loan Frame can play a crucial role here. The FinTech sector’s entire value proposition is on improving procedural efficiencies and bring down costs. Beyond helping their customers, the innovative technology backbone used by FinTech firms can help banks to detect fraud.

One of the key areas where FinTech firms can play a key role is through their process of assessing credit worthiness of borrowers. The use of multiples sources of alternative data to predict repayment behaviour can help to pre-empt bad loans. The proprietary credit assessment algorithms, leveraging latest technology, and reliance on online verifications can improve the level of scrutiny thus helping the lending institution.

Apart from assisting clients in obtaining fresh funding, the FinTech firms also help them in systematically restructuring their existing loan book. This is achieved in one of two ways: a) refinancing existing loans to obtain better terms; or b) debt consolidation. Refinancing proves useful because the structured and disciplined approach we introduce to the loan application process leads to lower interest rates. Debt consolidation – wherein a lender consolidates all facilities, loans, and borrowings into a single arrangement – helps to enhance credibility of borrowers, reduces administrative costs, lowers cost of borrowing, and increases borrowing headroom.