Some Thoughts on Credit Risk and Bank Capital Regulation1
It is a privilege to be welcomed within the precincts of one of the premier
management institutes of the country and, more importantly, to get an opportunity to
engage with some of the promising young minds and aspiring future leaders. All of
you are going to enter the job stream at a very interesting point in our country's
economic history. We are all meeting today in the wake of a number of landmark
economic reforms, of which I would like to touch upon two in particular- the
Insolvency and Bankruptcy Code (IBC), 2016 and the RBI circular dated February
12, 2018 on the Revised Framework for Resolution of Stressed Assets. I will attempt
to give you a regulator's perspective on the above reforms, and about banking
industry in general while debunking a few fallacies. Using this background, I will also
segue into another contentious issue of adequacy or otherwise of prudential capital
for banks, particularly for credit risk.
Let us start with the fundamentals. Banks bring together the liquidity surplus agents
in an economy with the liquidity deficit agents by establishing an intermediation
channel, thus aiding the flow of savings in an economy towards investments. The
banking licence issued by the regulator allows these institutions to raise
uncollateralised funds from the public in the form of demand deposits. It is primarily
from these deposits that banks give out loans to the borrowers. Thus, it is not that
banks have a huge coffer like that of Uncle Scrooge, holding their own money, from
which they make loans, but it is the funds that they raise through deposits that are
used for making loans.
Do we need banks?
The above description, though, does not immediately make it clear why we need
banks to do this intermediation function - why the savers cannot directly lend to the
borrowers, and why we need an intermediation infrastructure. The answer is that the
information asymmetry inherent in such relationships makes direct monitoring by
individual savers of borrowers both costly and inefficient. In most cases, the
borrowers have more knowledge of their ability to pay than the lender. Through
contain default by a borrower and thus play the useful role of delegated monitors
(Diamond, 1984) in an economy, at substantially lower cost than direct monitoring by
agents.
This role of delegated monitors is codified by banks through inclusion of suitable
covenants in a loan contract. This formalisation has two dimensions - well drafted
covenants that protect the rights of banks if the borrower fails to perform as
expected, and proper enforcement of covenants in the event of a deviation in the
performance of the borrower from the expectations. A well-drafted covenant is to be
more of a deterrent in normal times, as it serves to remind the borrower about the
consequences of not honouring the loan contract. Such a contract would be the
result of strong appraisal and monitoring systems that are put in place by a lender.
The appraisal would properly price the risk the lender is taking upon by extending a
loan to a borrower. It would also involve proper understanding of the sector to which
the loan is extended, including the vagaries and various risks that could potentially
affect the projected cash flows of the venture that is being financed. A good loan
contract would account for all this and more, so that it serves as a blueprint for the
bank as to how to react in a given scenario during the lifetime of the loan.
However, when the monitoring by banks or action taken by them on covenant
breaches are inadequate, the deterrence effect is weakened leading to further
covenant breaks. Banks need to be exacting in their role as monitors of loans. This
in turn would force the other actors to perform their roles diligently. Say, for example,
if banks go easy on a particular borrower because the borrower has been affected by
delays in receipt of his claims from his client, the delays at the level of the client
would never get addressed, and in fact, may get accepted as the norm. When banks
perform their monitoring roles properly, the borrower would be forced to take up his
case with his client for timely realisation of his claims. Banks are not supposed to be
shock-absorbers of first resort of the difficulties faced by their borrowers as banks do
not have the luxury of delaying payments to their depositors. Of course, a bank can
renegotiate terms of a loan if circumstances warrant, but this must be for a good
reason and the bank should recognise the consequent risks. This renegotiation of
terms should be an exception rather than the rule, as resorting to it often would
endanger the safety of deposits, dent a bank's ability to lend further and imperil its
existence as an intermediating entity.
Thus, the next time we hear about a bank making efforts to recover loans from
borrowers, we should all note to remember that it is essentially trying to get back the
depositors' money. In this context, the most important objective of the Revised
Framework for Resolution of Stressed Assets is to alter the balance of power in
favour of creditors. For long, the balance of power in our country was in favour of
debtors, especially for debtors.
Debtor vs Creditor: The Change in Roles
This changing debtor-creditor equation disturbs the status quo and it is only natural
that it is facing resistance. The earlier debtor-friendly environment made it possible
for the defaulting debtors to secure moratoriums and force write-downs on debt
repayment, while retaining management control over the borrowing units or thwart
banks efforts to realise their dues by indulging in serial litigations. The out-of-court
restructuring mechanisms too suffered high failure rates resulting in the borrowing
entities continuing to indulge in repeated defaults, being confident that the balance of
power remained with them and the ability of banks to discipline errant borrowers was
weak2.
The debtor friendly environment had its effect on banks' business preference, while
also partly contributing to the ever-increasing stressed assets in the banking system.
Banks' ability and/or willingness to lend to persons or entities that needed credit
were hampered. The Bankruptcy Law Reforms Committee (2015) has observed and
I quote:
"When creditors know that they have weak rights resulting in a low recovery
rate, they are averse to lend. Hence, lending in India is concentrated in a few
large companies that have a low probability of failure. Further, secured credit
dominates, as creditors rights are partially present only in this case. Lenders
have an emphasis on secured credit. In this case, credit analysis is relatively
easy: It only requires taking a view on the market value of the collateral. As a
consequence, credit analysis as a sophisticated analysis of the business
prospects of a firm has shrivelled."
In India, before the enactment of IBC, the Reserve Bank as banking regulator had to
design resolution mechanisms that tried to emulate the desirable features of a
bankruptcy law as identified in the literature. However, in the absence of a
bankruptcy law in the country, those schemes could not result in meaningful
resolution of the stressed loans. This resulted in significant mismatches between the
book values of loans carried by banks and the inherent economic value of those
loans. In this context, the enactment of the IBC is a watershed event, which has
completely changed the legal framework governing the insolvency regime in the
country. The enactment of IBC also enabled the Reserve Bank to come out with a
revised framework for resolution of stressed assets. These initiatives by the
Government of India and the Reserve Bank are being challenged by the defaulting
borrowers in various judicial fora. The Hon'ble Supreme Court of India in the matter
of Innoventive Industries Ltd. vs ICICI Bank Ltd. (2017), observed that:
".......we thought it necessary to deliver a detailed judgment so that all Courts
and Tribunals may take notice of a paradigm shift in the law. Entrenched
managements are no longer allowed to continue in management if they
cannot pay their debts."
As observed by the Hon'ble Supreme Court of India, the judicial system of the
country has internalized the paradigm shift in the law and defaulting debtors' efforts
to stymie the insolvency regime with frivolous litigation have not met with success so
far.
In this context, it needs to be recognised that when banks take recourse to legal
remedies available to them when a borrower defaults on his debt servicing, including
that of security enforcement, they are essentially trying to recover the depositors'
money from a defaulting borrower, whatever be the reasons for default. However,
the defaulting borrowers portray such an action by banks as a case of a 'ruthless big
bank' taking over the assets of a 'hapless borrower'. This is the kind of portrayal
used even by the large corporates. Here, one needs to distinguish between a private
moneylender lending his own money for making a profit and a bank, which to a large
extent uses depositors' money (and tax payers' money, in case of public sector
banks). A correct portrayal of the situation would be: public interest (i.e., depositors
+ taxpayers) vs borrowers' interest.
Fallacy of 'Genuine' Defaulters
One argument that we hear quite often is that there are different reasons for default,
and the regulations should treat them differently based on the reasons which lead to
the default. The proponents of this line of thought argue that where the borrowers
are affected by external factors beyond their control, they should be treated as
'genuine' defaulters and some leniency in prudential norms is warranted. This is a
fallacy, even though it is important to appreciate that some defaults are inevitable
part of lending business. There are two issues here: recognition and resolution. The
recognition of default or accounting for deterioration in the quality of asset should be
independent of the reasons for such default or deterioration. Whereas, it is the
resolution plan which should be a function of ability and willingness of the borrower
to honour his obligations. Where a borrower has temporarily lost his ability to pay
due to circumstances beyond his control, a quick and efficient restructuring of the
debt either outside the courts or within the insolvency framework would be in order.
In case of wilful or strategic defaulters, i.e., borrowers with the ability but no
willingness to pay up their debt, change in ownership accompanied by punitive
action against the defaulting management is the way to go. Finally, if the business is
beyond revival, faster liquidation would help in reallocation of resources to productive
use. This is what the Revised Framework for Resolution of Stressed Assets seeks to
achieve. The following matrix illustrates this approach:
Type of borrower Has ability to pay Unable to pay
Willing to pay No action Restructuring or Ad-hoc
funding, failing which,
Change in ownership or
Liquidation
Unwilling to pay Change in ownership and Restructuring with change in
punitive action against the ownership or
defaulting management Liquidation
Another fallacy is the claim by the managements of defaulting borrowers that the
restructuring plan proposed by them will result in 'zero haircut' for banks; whereas, if
banks file insolvency application, new investor would be willing to take over the
defaulting entities only with 'huge haircuts' on debt. What one needs to understand
is that while the payments offered by the existing management are usually spread
over a long period, the new investors mostly come up with upfront cash payments.
The choice before banks is: 'illusory future payments' vs 'upfront real cash'. Banks
need to arrive at the present value of 'illusory future payments' by discounting it for
time value of money and more importantly for the uncertainty in receiving the
payments taking into account the existing management's past records.
A related issue is the liability of existing promoters. The share of creditors in a
successful project is limited to the agreed upon cash flows as per the loan contract,
as against the equity holders who enjoy unlimited upside in a successful project.
Further, if a project fails, the equity holders are protected by their limited liability even
if the creditors are set to lose the entire amount lent to the borrower in the absence
of strong creditor rights, given the capital structure of most of the projects. At this
juncture, it would be useful to clarify that limited liability, even though is enshrined in
modern corporate law as a right, should rather be viewed as a privilege of the
shareholders. While the argument for limited liability structure is that it promotes
entrepreneurship and innovation, an investment in a project is always a case of a
risky bet that is calculated. For the shareholders to enjoy limited liability in a venture
that has potential negative externalities to the society in the form of defaults and its
further ramifications, someone has to bear the costs when such externalities do
materialise.
In almost all such cases, the society ends up underwriting the limited liability enjoyed
by the shareholders through bearing the cost of default through lost jobs,
concessions granted by the state, and above all, the haircuts taken by banks, which
are in fact potential losses of depositors'/taxpayers' money. Societies allow
companies in default to reorganise themselves and attempt a resolution by allowing
to renegotiate and rewrite private contracts under a formal bankruptcy mechanism.
This is another reason why the equity holders are mostly wiped out in the bankruptcy
of a corporate borrower since they already enjoyed the benefits of limited liability.
While limited liability concept is fundamental for encouraging entrepreneurship and
innovation, piercing of corporate veil i.e., disregarding the limited liability and making
shareholders personally liable, is not uncommon now-a-days considering the
negative externalities created by defaulting firms. Macey and Mitts (2014) have
constructed a rational framework for conceptualizing the circumstances in which it is
appropriate and consistent with sound public policy to pierce the corporate veil. Their
hypothesis is that the corporate veil will be pierced if, and only if, doing so is required
for any one of the following three reasons: (1) to achieve consistency and
compliance with the goals of a clear and specific extant regulatory or statutory
scheme such as environmental law or unemployment law; (2) when there is
evidence of fraud or misrepresentation by companies or individuals trying to obtain
credit (and particularly where such misrepresentations lead a creditor erroneously to
think that an individual shareholder of a company is guaranteeing what ostensibly is
corporate indebtedness); (3) when respecting the corporate form facilitates or
enables favouritism among claimants to the cash flows of a firm and thus is
inconsistent with the well-established bankruptcy law value of achieving the
resolution of a bankrupt's estate that conforms both to contract law principles and to
the priorities among claimants established by state law. The Hon'ble Supreme Court
of India has also observed in its recent judgement in ArcelorMittal India Private
Limited versus Satish Kumar Gupta & Others (2018), as under:
".......where a statute itself lifts the corporate veil, or where protection of
public interest is of paramount importance, or where a company has been
formed to evade obligations imposed by the law, the court will disregard the
corporate veil. Further, this principle is applied even to group companies, so
that one is able to look at the economic entity of the group as a whole."
With this background I would like to move to the second but related subject of my
talk, prudential bank capital regulations. As I will explain later, the credit recovery
ecosystem has a bearing on prudential capital requirements, given that credit risk, in
the Indian context, like in many other jurisdictions, is the major risk on the balance
sheet of banks.
Basel Capital Norms - The Prudential Imperative
By nature, banks are susceptible to risks, viz., credit risk, market risk, liquidity risk
etc. A "run" on the bank is an extreme case of liquidity risk. Banks try to mitigate the
liquidity risk by holding liquid assets, which can easily be liquidated in times of need
to honour the payment commitments to its creditors, majority of whom are
depositors. Thus, the mitigants for liquidity risk are stable funding and holding liquid
assets. While banks need liquid assets to mitigate liquidity risk, they need capital to
avert solvency risk that the economic value of assets becomes lower than the
promised debt obligations. If banks don't have adequate capital, losses erode into
deposits. Banks have to maintain adequate capital to ensure that the probability of
deposits being eroded is close to zero.
Banks are likely to face losses on their assets as it cannot be expected that all the
loans will be repaid in full. There could be losses from other parts of the operations
as well. The losses can be either expected or unexpected. Expected losses on
account of credit risk can be reasonably estimated from historical data regarding a
particular class of borrowers (e.g., rating category) or sector to which loans are
made. However, the future can never be predicted perfectly - the actual losses
incurred may be higher than the expected losses. This may be because of various
reasons - for example, a systemic event where there are correlated defaults in a
particular sector. This leads to unexpected losses. The following figure (Chart 1)
explains the loss curve of a bank:
Chart 1: Loss curve for banks
The mitigants for expected losses are the provisions that are to be made from the
current earnings, and for the unexpected losses (i.e., difference between peak loss
for a given confidence level and average loss), it is the level of capital maintained by
the bank (Chart 2). There are potential losses beyond unexpected loss, which are
not covered by any buffer as it would be too costly to hold buffers to protect from
such losses.
Chart 2: Potential losses and mitigants
To be met by
To be met by
Partly covered by
provisions
capital
deposit insurance
While it can be argued that the quantum of capital to be held by banks for
unexpected loss should be left to the market forces, any failure of the market forces
has significant negative externalities, more particularly in the form of cost incurred
through loss of deposits or by taxpayers for recapitalising, say a government owned
bank. This calls for entry barriers as well as prudential regulation of activities of a
bank.
One of the important and widely adopted prudential regulations is capital adequacy
norms. Internationally, prior to the introduction of Basel I norms in 1988, the most
common approach was to lay down minimum capital requirements for banks in the
respective banking legislations and determine the relative strength of capital position
of a bank by ratios such as capital to deposit ratio, or its other variants for
measuring the level of leverage. However, there were vast variations in the method
and more importantly the risk sensitiveness of capital regulations across countries,
rendering comparability difficult.
Basel rules are an internationally accepted regulatory framework providing minimum
standards to be met by banks. Since 1988, the Basel framework has evolved
responding to various developments. While the concept of regulatory capital that is
aligned to risks in the balance sheet of a bank was enunciated through the capital to
risk weighted assets ratio (CRAR) under Basel I, the Basel II framework, introduced
in 2004, brought about better determination of risks by introducing greater
granulation of risks of various categories of assets of a bank.
Basel II norms hinged on three pillars - capital adequacy, supervisory review, and
market discipline. In particular, capital charges were to be made for credit risk,
market risk and operational risk that banks faced. The main incentives for adoption
of Basel II were (a) it was more risk sensitive; (b) it recognised developments in risk
measurement and risk management techniques employed in the banking sector and
accommodates them within the framework; and (c) it aligned regulatory capital closer
to economic capital. These elements of Basel II took the regulatory framework closer
to the business models employed in several large banks. In Basel II framework,
banks' capital requirements were more closely aligned with the underlying risks in
the balance sheet.
However, the weaknesses of Basel II standards were exposed during the Global
Financial Crisis of 2007-09 which forced a rethink of the regulatory approach towards
capital adequacy requirements. In September 2010, the Group of Governors and
Heads of Supervision (GHOS) announced higher global minimum capital standards
for commercial banks. This followed an agreement reached in July 2010 regarding
the overall design of the capital and liquidity reform package, now referred to as
"Basel III". The enhanced Basel framework revises and strengthens the three pillars
established by Basel II and extends it in several areas. Most of the reforms are being
phased in between 2013 and 2019. The important elements of the framework are the
following:
(i) stricter requirements for the quality and quantity of regulatory capital, in
particular reinforcing the central role of common equity;
(ii) an additional layer of common equity - the capital conservation buffer -
that, when breached, restricts discretionary pay-outs to help meet the
minimum common equity requirement;
(iii) a countercyclical capital buffer, which places restrictions on participation
by banks in system-wide credit booms with the aim of reducing their losses
in credit busts;
(iv) a leverage ratio - a minimum amount of loss-absorbing capital relative to
all of a bank's assets and off-balance sheet exposures regardless of risk
weighting;
(v) liquidity requirements - a minimum liquidity ratio, the Liquidity Coverage
Ratio (LCR), intended to provide enough cash to cover funding needs over
a 30-day period of stress; and a longer-term ratio, the Net Stable Funding
Ratio (NSFR), intended to address maturity mismatches over the entire
balance sheet; and
(vi) additional requirements for systemically important banks, including
additional loss absorbency and strengthened arrangements for cross-
border supervision and resolution.
In India, Basel III capital regulation has been implemented from April 1, 2013
onwards in phases and it will be fully implemented by March 31, 2019. The latest
round of reforms published by the Basel Committee in December 2017 have
implementation timelines stretching up to 2022.
Having understood the background for Basel regulations, let us go back to the issue
of mitigating expected and unexpected losses in the credit portfolio, which, among
other reasons, arise due to loans turning bad, leading to non-recovery or under-
recovery of the loan. Once a loan is recognised as a non performing asset (NPA),
the prudent action is to start recognising the expected losses from that loan upfront
so that when the actual losses do materialise, the impact on the profit and loss
statement of the bank is spread over a period of time. Since expected losses can be
reasonably estimated based on past experience, the provisions to cover the losses
are made from the current earnings of the bank. Provisions can be thought of as an
expense from the income of a bank to mark a non-performing loan to its economic
value in the books of banks. Sometimes, the actual realisation from a NPA could be
higher than its marked down value, in which case banks write back the excess
provision as profits in the accounting year in which the recovery takes place.
Provisions can, as such, be also thought of as prudential devices that smoothen the
impact of bad loans on profit and loss of banks, and not as a forced expense
mandated by the regulator. The basic prudent behaviour always demands that banks
should never be under provided.
Ideally, banks should be able to test the loans in their books for expected losses and
make provisions for such losses without any regulatory intervention. However, in the
absence of robust models built by our banks that would serve this purpose, the
Reserve Bank has prescribed minimum mandated levels of provisions that are linked
to the age of a NPA. Since the provision methodology should be tailored to
individual banks, and general regulations cannot do that, the regulatory expectation
is that the minimum provisions mandated would serve as a guiding floor and the
bank managements, using their insider knowledge about their assets, would make
adequate provisions. However, unfortunately, banks in India remain one of the most
under-provisioned ones, though there has been an improvement in this regard in the
last few quarters.
If the provisions required to be maintained by a bank exceed its earnings before
provision, it is bound to affect the equity of the bank. This leads to one of the poorly
understood aspects of banking regulation - capital norms for banks in general, and
Basel norms in particular. One of the widely heard complaints in this regard is that
the capital requirements for banks are unnecessarily high. In India, this relates to the
CRAR prescribed by Reserve Bank being 9 percent as opposed to 8 percent
required by Basel norms. To understand the response to this question, let us try to
understand why capital is needed in the first place.
Conceptually, the inherent unpredictable nature of unexpected losses calls for a
buffer, and that is the function served by the capital maintained by the bank. Before
we go any further, capital should be understood as the "own funds" used to create
assets by banks, as against borrowed funds like deposits. The capital maintained by
the bank merely shows the proportion of own funds brought in by the bank in the
total funds deployed towards creating assets. There is a misconception that capital
is a pile of money stacked away as some sort of "rainy-day fund", and that the
economy is deprived of that pile of money. The reality couldn't be farther from the
truth - the capital maintained by banks would have already been deployed on its
balance sheet towards creating assets, including loans.
Prudential capital regulations aim to enable banks to sustain unexpected losses
without defaulting on its obligations, especially deposits, by maintaining adequate
levels of bank capital. Higher capital levels in banks also have a stabilising effect on
a country's macro economy. Further, higher levels of capital increases the skin in
the game for shareholders, thus potentially leading to better credit appraisal and
screening. Raising capital does involve costs - there is no free lunch - but the costs
to the economy are offset by the savings made in the form of potential losses
avoided in averted banking crises. As the equity component in a bank goes up, the
leverage goes down, potentially making the bank safer, thus leading the investors in
the bank equity to demand lower returns on equity, and the depositors too may be
willing to accept a lower return in view of greater safety of their funds. The holy-grail
for banking regulators is to find the sweet spot for capital prescriptions for banks
where the benefits are equal to or slightly outweigh the costs involved.
Multiple recent studies (Cline, 2017) trying to derive the optimal Common Equity Tier
1 capital (CET 1) ratio for banks have arrived at figures on opposite ends of the
spectrum - Dagher, Dell'Ariccia, Laeven, Ratnovski, and Tong (2016) estimate the
optimal CET 1 ratio of 9-17% of the risk weighted assets, Admati and Hellwig (2013)
estimates optimal CET1 ratio to be 36-53% of risk weighted assets. The median
estimate arrived from these and other similar studies is about 13-14% of risk
weighted assets of banks. In contrast to the above estimates, Basel III norms
specify minimum CET 1 requirements of 4.5% of risk weighted assets. Thus, it can
be seen that Basel III prescription is much lower than the median estimates by
various researchers and should only be considered as a floor.
In India, we have prescribed overall capital requirements of 9% of risk weighted
assets, with the common equity tier 1 capital of 5.5 percent as against 8 percent and
4.5 percent, respectively, required under the Basel norms. As I said earlier, the
regulatory capital is meant to serve as a buffer against unexpected loss. The
cumulative unexpected loss in the assets of a bank will be an aggregation of the past
loss behaviour of various sub-portfolios of the asset portfolio. The sub-portfolios can
be built on the basis of riskiness of the assets. So, one can say government
securities can form one sub-portfolio with a zero loss probability and build other sub-
portfolios of different riskiness. The latter is normally classified on the basis of credit
rating because an unexpected loss behaviour can be assigned to portfolios of similar
rating. The risk-weights for each sub-portfolio are assigned based on the unexpected
loss behaviour, normally based on their cumulative default rates. It thus goes without
saying that the risk-weight assigned to a portfolio carrying a particular rating should
be a function of the observed default behaviour of that portfolio in a jurisdiction. The
higher CRAR of 9 percent prescribed by RBI basically reflects this difference. Under
Basel III norms, unexpected losses are a function of the cumulative default rates
(CDR) observed in the credit ratings provided by the credit rating agencies (CRAs).
The CDR is nothing but the probability of a non-default rating assigned by a CRA
turning into a default rating within a certain period of time.
Based on internationally observed CDRs and recovery rates, Basel norms have
prescribed risk weights for various credit exposures. However, the CDRs and the
loss given default observed in India are much higher than that observed
internationally, though there are signs of improvement in these parameters after the
enactment of the IBC and RBI's Revised Framework. The following graph (Chart 3)
shows the Basel capital requirement for various rating categories vis-à-vis the
unexpected loss computed using the observed CDRs of a portfolio of loans rated by
Indian CRAs3.
Chart 3: Actual capital requirements based on observed CDRs
It would be evident that with this kind of default behaviour, applying the Basel
specified risk weights would understate the true riskiness in the loan assets carried
on the books of Indian banks. This could be overcome by two ways: (i) by keeping
the minimum capital requirement at 8%, but recalibrating the Basel specified risk
weights for each type of credit exposure in accordance with the observed CDRs in
India; (ii) by using the Basel specified risk weights, but prescribing a higher minimum
capital requirement. We adopted the second approach and prescribed minimum
capital requirement of 9% while largely retaining the Basel specified risk weights. In
view of the above explanation it is clear that the suggestion by some that our capital
requirements are more onerous than international standards is not correct at all. As
the need for repeated recapitalisation has proved, banks in India need to aspire to
have higher capital levels.
Moreover, the current levels of provisions maintained by banks may not be enough
to cover the expected losses, and hence adequate buffers have to be built into the
capital maintained to absorb the expected losses which have not been provided for,
if and when they materialise. Chart 4 below demonstrates that the Indian banking
system has a high proportion of un-provided NPAs vis-à-vis the capital levels. As I
said, there are signs of improvement in the default rates and recovery rates after the
IBC and RBI's Revised Framework, which may result in lower unexpected losses for
banks in the future. However, a recalibration of risk-weights or minimum capital
requirements would need to wait till these trends are firmly entrenched in the
economy. Frontloading of regulatory relaxations before the structural reforms fully
set-in could be detrimental to the interests of the economy.
Chart 4: Net NPAs as a percentage of capital
100.00
NPAs Net of Provisions to Capital
(Source: IMF Financial Stability Indicators)
80.00
58.00
60.00
41.62 2010 2011 2012 2013
2014 2015 2016 2017
40.00
13.61
20.00
5.67
2.94
2.13
-8.25
-12.99
0.00
-20.00
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