a prominent objective especially during a period of economic downturn. recognising the importance of effective asset quality management, reserve bank has issued various guidelines to banks, from time to time, on various aspects of asset quality management. preventive management 6. reserve bank has advised banks that the management of credit risk should receive the top management ’ s attention and the process should encompass : a ) measurement of risk through credit rating / scoring ; b ) quantifying the risk through estimating expected loan losses and unexpected loan losses c ) risk pricing on a scientific basis ; and d ) controlling the risk through effective loan review mechanism and portfolio management. 7. further, reserve bank has also advised the banks to put in place a robust credit risk management system which is sensitive and responsive to various factors affecting credit risk. the guidelines entail involvement of top management, including the board of directors of the bank in actively managing the credit risk of the banks. banks are required to put in place proactive credit risk management practices like annual / half - yearly industry studies and individual obligor reviews, credit audit which entails periodic credit calls that are documented, periodic visits of plant and business site, and at least quarterly management reviews of troubled exposures / weak credits. recent regulatory initiatives 8. recently, in january 2014, the reserve bank of india had released a comprehensive “ framework for revitalising distressed assets in the economy ”. the framework outlines a corrective action plan that will incentivise early identification of problem cases, timely restructuring of accounts which are considered to be viable, and taking prompt steps by banks for recovery or sale of unviable accounts. in addition, to address the issue of information asymmetry as also to identify the problem early, a central repository of information on large credits ( crilc ) to collect, store, and disseminate credit data to lenders, was set up. under this arrangement, banks are reporting credit information, including classification of an account as sma to crilc on all their borrowers having aggregate fund - based and non - fund based exposure of ₹50 million and above with them. bis central bankers ’ speeches 9. while having a proper credit risk management is very important for managing asset quality, another issue which is equally important is proper structuring of the credit facilities extended to various borrowers. while granting credit facilities, banks should set realistic repayment schedules on the basis of a proper analysis of cash flows of the borrowers. this

rcs ) registered under the sarfaesi act. scs / rcs are expected to do a specialized task of recovering and reconstructing the npas thereby reducing the npas in the system. the purpose of creation of scs / rcs was to resolve npas of banking system by using their expertise. asset reconstruction companies 16. as on date 15 scs / rcs are registered with reserve bank. sale of npas to scs / rcs which was relatively sporadic has picked up substantially during the last two financial years. 17. however, only a few of them appear to be successful in acquiring assets from banks. of 15 registered scs / rcs, asset size in respect of top three scs / rcs ( viz., arcil, “ jm financial ” and “ edelweiss ” ) account for more than two thirds of total assets of all scs / rcs. bis central bankers ’ speeches 18. an analysis of purchase of npas by scs / rcs indicate that acquisition cost as a percentage to book value of assets increased sharply from 20. 8 per cent as on march 2013 to 44. 5 per cent as on march 2015. in other words, the discount rate at which scs / rcs are acquiring npas from the banks / fis decreased considerably, possibly on account of ( i ) developing of improved npa recovery methods by banks ( ii ) selling of relatively fresh npas ( iii ) outsourcing the valuation of npas ( iv ) presence of competition among scs / rcs while auctioning npas. 19. on the recovery side, the performance is not very encouraging. as on march 31, 2015, the average recovery rate ( assets resolved as a % to assets acquired ) of scs / rcs was at 31. 0 per cent. one of the reasons for a dip in the average recovery rate is due to the fact that substantial part of the assets under management of scs / rcs is acquired recently. further, a wide variation in recovery rates among scs / rcs is also observed for the same reason. 20. an analysis of investor class in security receipts ( srs ) does not depict any divergence. it is observed that seller banks / fis have been subscribing majority of srs. on an average seller banks / fis have been subscribing 74 per cent of total srs issued during the period march 2010 to march 2015. in past