According to the RBI, the gross NPA plus stressed-assets in India’s banking system accounts for 12.3 per cent of the sector’s total assets (September 2016). The number keeps growing every successive quarter, beating expectations of the banks’ management, rating agencies and equity markets.

Estimating the size of the bad debt in banking and its likely trajectory is not as intractable a problem as may be popularly perceived. This may be done using the commercial credit information in credit bureaus. As a third-party aggregator and synthesiser of information, well-established credit bureaus are uniquely placed to provide unbiased information and analytical insights which can add tremendous value to various stakeholders of banks.

Availability of credit information-driven insights and solutions have significantly contributed to driving growth in the retail credit segment, fuelling credit penetration and financial inclusion. Since 2011, Indian economy has been affected at various times by macro disturbances such as rising consumer price inflation, economic slowdown and moderating wage growth. But the retail credit portfolio has grown steadily keeping default rate on a tight leash. It may be reasonably assumed that had banks been as extensive users of a credit commercial bureau as they are of the consumer bureau the stress in banks’ commercial assets may have been lesser.

The issue of intractability of the NPA rate trajectory’ of an individual bank may be addressed if credit bureau information is used to analyse the assets at the time of development of financial statement in banks. To explain, a bank would know the performance of the loans in their books. However, while deciding on the true asset quality of their overall book or to designate specific loans as stressed a bank needs to know from bureau whether the loans which may be performing in the bank’s books may have been tagged as NPA by another bank or have those corporate borrowers been delaying on payment to other banks even if they have not yet been tagged NPA.

If performing loans on a bank’s books are found to be having payment issues with other lenders then this is clearly a warning for the bank. Ideally, such information must be used by the bank’s management so that they may assess the actual asset quality of the bank’s book. Depending on just the credit rating of the borrower may not provide the most updated and complete picture of the riskiness of the corporates. The actual most recent payment behaviour of a borrower across all lenders is available only in credit bureaus.

The 360-degree view of an asset that a credit bureau provides will enable the board of the bank to communicate with exchanges and markets with higher certainty and assurance. This simple easily accessible information add to the corporate governance efforts of the banks. For enhanced level of transparency some boards may consider sharing aspects of bureau-enabled portfolio review with all stakeholders. This will provide investors with a third-party validation of the banks NPA numbers.

Early warning systems on banking assets, diligent tracking of lending portfolio and proactive communication of evolving asset quality will go a long way in further enhancing the credibility of Indian banking system. And the good thing is the tools for the same are near at hand-with the Credit Bureaus.

The writer is Chairman, TransUnion CIBIL

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