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Rising NPAs: Banks’ exposure to unrated loans increased threefold in three years

Sunny Verma
This data is based on assessment of banks’ funded and non-funded exposure to large borrowers.

Banks’ non-performing assets (NPAs) for unrated exposure jumped to as much as 24 per cent by the end of 2018 from about 6 per cent in 2015, data from the Reserve Bank of India (RBI) shows.

This indicates the growing risks from loans that are not rated by credit rating agencies.

While the proportion of unrated loans to total loans has stayed constant at around 40 per cent in last four years, NPAs in unrated exposures have surged steadily each year.

This data is based on assessment of banks’ funded and non-funded exposure to large borrowers.

The central bank requires banks to report individual exposure of more than Rs 5 crore with the Central Repository of Information on Large Credits (CRILC), to capture data on large borrowers.

Unrated borrowers account for about 60 per cent of the total number and 40 per cent of the total exposure of large borrowers, as captured by CRILC, according to an RBI research study.

While most large loans are credit rated by rating agencies, in many cases, banks rely on their internal assessment of credit worthiness of borrowers before extending loans.

The RBI data shows that NPAs in case of unrated exposures have been steadily rising since June quarter 2014, as captured by CRILC database which came into operation in financial year 2014-15.

High levels of NPAs in unrated accounts indicate that these are inherently more risky for the banks.

In order to nudge banks to get credit ratings done for loan exposure, the Reserve Bank in 2016 raised risk weights on unrated exposures.

The banking regulator had raised the risk weights to 150 per cent for banks lending to corporates, asset finance companies and non-banking financial companies (NBFCs) having aggregate exposure from the banking system of over Rs 200 crore.

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Financial results declared by many banks for the July-September quarter show that their unrated loans, BB and below rated book has been turning into non-performing assets at a much faster pace. As many NBFCs and housing finance companies are still reeling under the financial squeeze, the high proportion of unrated exposure of banks poses risks to the financial system, even though many lenders have started shifting to rated loans in recent years.

This brought the risk weights on par to those for rated companies having a rating of BB or below. Higher weights on unrated exposures reduce capacity of banks to lend to such borrowers, encouraging them to switch towards ratings.

Share of large borrowers in banks’ total loan portfolios and their share in gross NPAs was at 53.0 per cent and 82.2 per cent, respectively, in March 2019; this was lower compared to 54.7 per cent and 83.9 per cent in September 2018, according to the RBI’s recent Financial Stability Report.

While the proportion of NPAs has risen in unrated exposures, banks have to take a hit even on their rated exposures in the last one year as many companies went into bankruptcy and defaulted on bank loans.

Some of the private sector banks experienced significant stress in their exposures to BB and below rated loan accounts.

Earlier this year, many companies also defaulted on some of the rated debt papers which were subscribed by mutual funds in their fixed maturity plans, resulting in delayed or partial payment for the investors.

At the macro level, however, the RBI’s Financial Stability Report projected the gross NPA ratio of all banks to come down from 9.3 per cent in March 2019 to 9.0 per cent by March 2020, as recoveries pick up pace due to resolution of some cases under the Insolvency and Bankruptcy Code and banks write off their bad loans.