RBI Ups Pressure On Banks To Automate NPA Management

Banks are scrambling to comply with the Reserve Bank of India's requirement that most processes linked to the management of non-performing assets be automated.

While recognition of bad loans was first automated in 2011, in September 2020, the RBI issued a notification saying that banks are still seen to be resorting to manual identification and instances of overriding of IT systems has been detected. The regulator set a deadline of June 2021 for banks to fully automate the process.

A year later, a number of banks remain non-compliant.

The banking regulator has been sending so-called "letters of displeasure" and show-cause notices to lenders to speed up the compliance process, said four bankers who have received such communications from the RBI, speaking on condition of anonymity.

Lenders, on their part, are pointing to operational challenges in implementing the diktat.

While the process of recognising an account in default for more than 90 days, on a daily basis, was relatively easy to do, problems cropped up in other aspects of NPA recognition and management.

According to the central bank's circular from September 2020, banks had to automate all processes relating to the income recognition and asset classification guidelines. This not only included the automatic recognition of all borrowal accounts, including temporary overdrafts, irrespective of size, sector or types of limits.

The RBI also required banks to automate the process of income recognition or derecognition in case of impaired assets. Any amount required to be reversed from the income account had to be obtained from the system without any manual intervention. The system was also required to handle the process of downgrading or upgrading accounts, without any manual intervention.

All this had to be reconciled on a daily basis.

Bankers point to challenges, some of which are conceptual while others are related to specific portfolios.

Under the rules, banks would need to automate the process of NPA recognition even in the event of technical defaults. This includes cases where a restructuring plan is implemented and certain business targets are set for the borrower. An account becomes NPA the day these targets are breached.

To have an automated system for such accounts is challenging, one of the bankers quoted above said. These type of accounts will invariably need some manual intervention, he said.

A second challenge is in applying the rules to the securitised loan portfolios banks buy from non-bank lenders.

The RBI's automation norms require that all defaulting loan accounts, including the ones banks acquired through securitisation, must be automatically marked as NPA on a day-end basis.

The second banker quoted above, the retail head of a large public sector bank, said this was impractical. Since non-bank finance companies continue to mark NPAs on a month-end basis, recognition for banks gets delayed. For banks to instantly recognise bad loans, they would need to link their core banking system to the non-bank lender's system, which is a big ask, this banker said.

The RBI has introduced guidelines for NBFCs to start day-end recognition of NPAs. However, these lenders have time till Sept. 30 to comply.

Applying the rules to a bank's credit card portfolio is also difficult.

According to an executive director of a mid-sized private bank, credit card books tend to remain in a separate management system, outside the core banking system. If banks are required to follow a T+0 basis, it becomes a challenge to reconcile these credit card accounts immediately, the second banker said. Creating infrastructure bridging these two systems is not practical either, he said.

While banks have individually, as well as through the Indian Banks' Association, made representations to the RBI, there has been no concrete response from the regulator, the bankers quoted above said. Moreover, the RBI continues to issue communication to individual banks, complaining about the non-compliance.

Queries emailed to the RBI and the IBA on Tuesday didn't elicit a response.

To be sure, issuing show-cause notices is only the first step in the RBI's supervisory process. After giving ample time to the banks to respond, the regulator decides whether any non-compliance deserves punitive measures.

Amit Tandon of Institutional Investors Advisory Services is sympathetic to the banks' pleas.

"The regulator can often introduce new requirements, without fully appreciating the complexity of the IT system and how data is captured. Often times, changing an established system takes much more time than is envisaged," Tandon said. "Banks have to deal with multiple regulatory requirements at the same time, so they need to prioritise things. The RBI needs to take a step back and ask itself whether full compliance is absolutely essential from a materiality perspective and if more time can be extended to banks."