In the landscape of the financial sector, the management of Non-Performing Assets (NPAs) has evolved significantly. This evolution is marked by the transition from conventional Early Warning Systems (EWS) to sophisticated Real-Time Monitoring Solutions (RTMS), driven by advancements in technology and the pressing need for more proactive risk management strategies.
The genesis of Early Warning Systems
Early warning systems emerged as the first line of defense against the burgeoning problem of NPAs. These systems were designed to detect early signs of financial distress in borrowers, allowing banks to take preventive actions before borrowers defaulted. Key indicators monitored by Early Warning Systems include transactional/behavioral aspects such as missed payments, financial data points, such as declining revenues, and a host of external data including changes in market conditions.
In 2016, a survey on ‘Credit Monitoring Practices in India’ highlighted a significant gap in tech-enabled Credit Risk Management within the banking sector. Credit risk was one area that remained decidedly underserved; no point solutions were available to address the risks in the customer credit journey – from origination to collections. This served as a strong motivator for BCT Digital to create the rt360 Early Warning System, a groundbreaking solution that provided early alerts aligned with the Reserve Bank of India’s (RBI) guidelines. This innovation quickly gained traction, achieving dominant market share among public sector banks in India, including Union Bank of India and Indian Bank.
Today, rt360 Early Warning System tracks over Rs 21 lakh crore (USD 250 billion) of assets annually, with our partner banks having recorded a fall in slippages to bad loans, to the tune of around Rs 2,100 crore (USD 2.5 billion).
The move to real-time monitoring
As the financial markets became more dynamic and credit risks more complex, the need for more comprehensive solutions for unified, real-time transaction monitoring and fraud management gained urgency. For instance, the number of frauds in the banking sector went up to 13,530 in 2022-23 y-o-y, to the tune of Rs 30,252 crore. This need spurred the development of real-time monitoring systems under the RegTech umbrella. Simply put, real-time monitoring is a proactive approach that financial institutions use to scrutinize every transaction as it happens. Leveraging big data, artificial intelligence (AI), and machine learning (ML), these systems offer continuous surveillance of loan portfolios, enabling financial institutions to detect anomalies, frauds and risks as they occur.
Real-time monitoring offers several critical advantages, these include:
- Prevention of fraud: Advanced AI models can identify fraudulent activities in realtime, significantly reducing the risk of financial losses.
- Better risk detection: Continuous monitoring allows for the instant identification of risky transactions and emerging threats.
- Improved decision-making abilities: Access to real-time data supports better decisions regarding loan disbursals, restructuring, and recoveries.
- Meeting regulatory compliance: Real-time systems ensure ongoing adherence to regulatory standards, generating alerts for any deviations.
What and why: BCT Digital’s rt360 Real Time Monitoring System
BCT Digital’s rt360 Real Time Monitoring System exemplifies the cutting-edge advancements in this space. Recognized by the RBI under its regulatory sandbox initiative for “Prevention and Mitigation of Financial Frauds,” rt360 Real Time Monitoring System provides a comprehensive surveillance mechanism for monitoring transactions and events from loan accounts continuously in real time. This solution has been pivotal in preventing the escalation of NPAs and enhancing the overall financial stability of institutions that implement it.
rt360 Real Time Monitoring System is representative of BCT Digital’s vision to embrace proactive or preventive detection of potential frauds/defaults rather than the old approach of reactive or postmortem analysis.
How has this helped the financial sector?
The implementation of advanced monitoring systems has had a profound impact on the financial sector. According to the RBI, the gross non-performing asset (GNPA) ratio for scheduled commercial banks (SCBs) in India improved to 3.2% in March 2023 – the lowest in a decade. This marked improvement reflects the efficacy of real-time monitoring and robust credit risk management practices.
Stress tests conducted by the RBI further indicate that Indian banks are well-capitalized and capable of absorbing macroeconomic shocks. Under the baseline scenario, the GNPA ratio is projected to improve to 3.1% by September 2024 as per RBI. Even under severe stress scenarios, the banking sector is expected to maintain resilience, underscoring the robustness of the implemented monitoring systems.
Conclusion
All in all, the evolution from Early Warning Systems to real-time monitoring highlights a transformation in the management of NPAs over time. Financial institutions that adopt these advanced technologies are better equipped to manage credit risks, ensure regulatory compliance, and safeguard their financial stability.
In line with above, BCT Digital’s rt360 Early Warning System and Real Time Monitoring System stand out as exemplary solutions, providing the tools necessary to navigate the complexities of credit risk management in today’s dynamic environment.
Author
Shankar Ravichandran
Senior Manager, Credit RiskHis profound expertise in the field of corporate and retail banking spanning across Credit Risk, Transaction Banking, Service Delivery and Product Management is close to decade. He is an MBA graduate from Indian Institute of Management, Bangalore.
