Management and Resolution Strategies for Non-Performing Assets (NPAs)

Banks and lenders of all types should have a documented process for managing and resolving non-performing assets (NPAs). NPAs are a part and parcel of the lending business so having a systemized mechanism of handling the issue can reap significant dividends over time.

There are several aspects which a lender must consider when creating their NPA system. It must also be remembered that the process should not be set in stone. It should be an ever-evolving system that changes depending on feedback and should have the flexibility to give way to better processes.

Many lenders are still stuck with legacy processes that they have inherited and which were formulated decades ago. Due to newer technological capabilities and access to global best practices, it may be time for lenders to rethink these processes and inculcate a system that works best in 2024 and for the coming decade.

Let’s dive into some of the aspects that need to be covered in a good management and resolution strategy for NPAs.  

Early Detection and Prevention

Lenders can now implement systems that allow them to assess the risk profile of borrowers more effectively and accurately. It is now possible to detect a higher likelihood of a borrower defaulting on their loan. When such a situation arises, it is in the lender’s best interest to take proactive steps to ensure that the default never occurs.

These proactive steps can include speaking to the borrower and assessing their financial situation more closely. This can give lenders a more clear idea of where they stand with the borrower. Then lenders can help the at-risk borrower with timely assistance that makes sure that the borrower stays on track.

For example, many people have car loans these days. A common reason for a person to default on their car loan EMI is because they may have an unexpected expenditure that disrupts their regular financial life. In such a situation, it may work for the lender to offer a one-month or two-month moratorium to the lender.

Restructuring and Rehabilitation

Once a default has occurred, lenders should approach the issue with the aim of rehabilitating the borrower rather than with the aim to penalize the borrower. The best case scenario for a lender is that the borrower gets back on their feet and manages to repay the loan including all the interest.

That’s why lenders should be more open to restructuring the terms of the loan as long as the borrower is not a wilful defaulter or is not being wilfully negligent. To assess the situation more accurately, lenders need to dive into the root cause behind the default.

Was the default foreseeable and could it have been prevented? In case the default could have been prevented, then lenders need to be more strict with the borrower. Otherwise, it may be in the best interest of the lender to provide more leeway to the defaulting borrower so that they may better their financial circumstances and repay their obligations.

Asset Classification and Provisioning

There are different non-performing asset types and they must be classified accordingly. These different types of non-performing assets must be treated differently by the lender. For example, a first-time default should not be treated like a one-year default. The best way to tackle a non-performing asset depends on the non-performing asset’s classification.

The RBI has set strict guidelines which lay down how NPAs need to be classified. However, the lender needs to go deeper within these guidelines. A lender must make more exhaustive rules for itself on how to treat such different types of cases. These rules must be formulated based on the past experiences of the lender when handling such situations.

Further, its imperative for lenders to properly provision for non-performing assets. As mentioned earlier, non-performing assets arise quite predictably and they are notoriously hard to predict. That’s why a certain amount of money needs to be set aside by the lender to meet losses that will arise due to non-performing assets.

Asset Recovery and Debt Collection

It’s crucial to implement effective asset recovery and debt collection strategies. While automation can help to increase the efficiency of debt collection, in some circumstances, it may be better to use the human touch.

If a borrower has defaulted, then it may serve the purpose of the lender if an in-person meeting is held between the borrower and a debt collection officer. This can serve to drive home the urgency of meeting the debt obligations in the borrower’s mind.

Similarly, various debt collection strategies such as a multi-channel approach, a conciliatory approach, and a rehabilitative approach can be combined to make sure that the debt can be collected.

The best and most appropriate steps will depend on the non-performing assets type.

Proactive Management and Governance

It is in the lender’s best interest to establish a team of executives who have the responsibility of managing NPAs. Rather than the work being divided amongst a lot of teams, the specific nature of NPAs demands that a dedicated team is created.

This team can monitor, manage, and resolve NPAs based on the documented NPA resolution strategy that the bank formulates which is in line with all extant guidelines.

Further, proper corporate governance practices must be adhered to which can help to promote transparency, accountability, and compliance.

How Can Legodesk Help?

Legodesk has been built from the ground up to make the debt collection process easier for lenders and enterprises. Legodesk is a software platform that hosts a range of specially designed features such as legal notice automation, contact management, case management, and more.

Many banks and NBFCs already trust Legodesk as a trusty tool that helps their debt collection teams do more with less.

Wrapping Up

It’s important for lenders to approach NPA management through a well-thought-out strategy that keeps in mind the non-performing asset type and the particulars of each individual borrower. This systemized yet personalized approach can reap dividends by reducing the occurrence and severity of NPAs. Lenders should take a hard look at their existing legacy NPA processes and iterate based on experience and emerging technological capabilities.