This article provides an insight into the quality of credit portfolio of banks for the period from 2007–2008 to 2020–2021. The objective is to study the transition of public sector and private sector banks in India from standardised approach (SA) to internal rating-based (IRB) approach of credit risk. The overall structure of the article gives clear insight into why it is important for the banks to improve credit portfolio quality, considering default and recovery risk estimates, which in turn affect the returns of the bank. The study concludes that there is a need to improve credit quality of banks in India with a focus on small banks in public sector and large banks in private sector, as these banks are saddled with high defaults. Low rate of recovery in small banks in public sector and private sector adds to credit loss severity and high risk weights for the banks in IRB regime. However, the recent merger of the public sector banks, considering asset quality concerns, is still an unanswered question.
AltmanE. I. (2006). Default recovery rates and LGD in credit risk modeling and practice: An updated review of the literature and empirical evidence. New York University, Stern School of Business.
2.
AltmanE., RestiA., & SironiA. (2004). Default recovery rates in credit risk modelling: A review of the literature and empirical evidence. Economic Notes, 33(2), 183–208.
3.
BaerT., MehtaA., & SamandariH. (2011). The use of economic capital in performance management for banks: A perspective (McKinsey Working Paper on Risk, Number 24, pp. 1–20). McKinsey & Company.
4.
BajajR. V. (2018). Credit risk capital estimation under IRB approach for banks in India. Journal of Quantitative Economics, 16(2), 475–500.
5.
BajajR. V., & KrishnakumarD. (2023). Overhang of NPAs problems in banks in India and SAARC countries: A survey based approach. Finance India, 37(2).
6.
BajajR. V., SanatiG., & LodhaC. (2021). Impact assessment study of NPAs and rate of recovery: Are private sector banks in India better off?Global Business Review, 25(3) 724–749. https://doi.org/10.1177/0972150920980305
7.
BandyopadhyayA. (2011). Internal assessment of credit concentration risk capital: A portfolio analysis of Indian public sector bank (MPRA Paper 28672). University Library of Munich.
8.
BandyopadhyayA., & GangulyS. (2011). Empirical estimation of default and asset correlation of large corporates and banks in India. Journal of Risk Finance, 14(1), 87–99.
9.
BandyopadhyayA., & SahaA. (2007). RAROC & EVA: The new drivers of business growth in Indian banks. MPRA.
10.
Basel Committee on Banking Supervision. (2005). An explanatory note on the Basel II IRB risk weight functions.
11.
Basel Committee on Banking Supervision. (2006). Basel II: International convergence of capital measurement and capital standards: A revised framework (Comprehensive Version).
12.
Basel. (2015). Regulatory Consistency Assessment Programme (RCAP)—assessment of Basel III risk-based capital regulations—India. https://www.bis.org/bcbs/publ/d320.pdf
13.
BawaJ. K., GoyalV., MitraS. K., & BasuS. (2019). An analysis of NPAs of Indian banks: Using a comprehensive framework of 31 financial ratios. IIMB Management Review, 31(1), 51–62.
BergerA. N., & DeYoungR. (1997). Problem loans and cost efficiency in commercial banks. Journal of Banking and Finance, 21(6), 849–870.
16.
BhardhanS., & MukherjeeV. (2016). Bank-specific determinants of nonperforming assets of Indian banks. IEEP, 13, 483–498.
17.
BonfimD. (2009). Credit risk drivers: Evaluating the contribution of firm level information and of macroeconomic dynamics. Journal of Banking and Finance, 33, 281–299.
18.
CareyM., & GordyM. (2001). Systematic risk in recoveries on defaulted debt. In Working paper presented at the 2001 financial management association meetings, Toronto.
19.
ChakrabartyK. C. (2013). Two decades of credit management in Indian banks: Looking back and moving ahead. Reserve Bank of India.
20.
DasA., & GhoshS. (2007). Determinants of credit risk in Indian state-owned banks: An empirical investigation. Economic Issues, 12(2), 27–46.
21.
DasS. (2019). Indian banking sector: Current status and the way forward (Speech by Mr Shaktikanta Das, Governor, Reserve Bank of India, delivered at the NIBM, 15th Annual Convocation of Post Graduate Diploma in Management, Pune, on June 8, 2019).
22.
DavisP. O., & WilliamsD. (2004). Credit risk measurement: Avoiding unintended results. Part 2: Weighting on defaults—knowing your institution’s default metrics. The RMA Journal, 82–85.
23.
EvaC., & GabrielaD. (2016). Comparison of different methods of credit risk management of the commercial bank to accelerate lending activities for SME segment. European Research Studies Journal, 19(4), 17–26.
24.
EvaC., & JaroslavB. (2012). Assessment of credit risk approaches in relation with competitiveness increase of the banking sector. Journal of Competitiveness, 4(2), 69–84.
GabrielJ., SalasV., & SaurinaJ. (2006). Determinants of collateral. Journal of Financial Economics, 81, 255–281.
27.
GoodhartC., & SegovianoM. A. (2004). Basel and procyclicality: A comparison of the standardised and IRB approaches to an improved credit risk method (Discussion Paper 524). Financial Markets Group, London School of Economics and Political Science.
28.
HaubenstockM. J. (1998). Linking RAROC to strategic planning. The Journal of Lending, and Credit Risk Management, 26–31.
29.
HuJ. L., LiY., & ChiuY. H. (2004). Ownership and nonperforming loans: Evidence from Taiwan’s banks. The Developing Economies, 42(3), 405–420.
30.
HuY. T., & PerraudinW. (2002). The dependence of recovery rates and defaults (Working Paper). Birkbeck College.
31.
HuangJ. B., LiZ. F., & DingJ. (2018) Research on fund performance measure with CVaR. Management Review, 30, 20–32.
32.
InwonS. (2002). Collateral in loan classification and provisioning (Working Paper WP|02|122). International Monetary Fund.
33.
JacobsonT., LindéJ., & RoszbachK. (2006). Internal ratings systems, implied credit risk and the consistency of banks’ risk classification policies. Journal of Banking & Finance, 30(7), 1899–1926.
34.
JarrowR. A. (2000). Estimating recovery rates and (pseudo) default probabilities implicit in debt and equity prices (Working Paper). Cornell University.
35.
KaurP., & KaurG. (2010). Impact of mergers on the cost efficiency of Indian commercial banks. Eurasian Journal of Business and Economics, 3(5), 27–50.
KeismanD., & MarshellaT. (2009). Recoveries on defaulted debt in an era of black swans. Moody’s Global Corporate Finance, Moody’s Investments Service.
38.
LopezJ. A. (2004). The empirical relationship between average asset correlation, firm probability of default, and asset size. Journal of Financial Intermediation, 13(2), 265–283.
39.
McCoyE. (2008). Maturity adjustments under asymptotic single risk factor models: A comparative analysis. Journal of Credit Risk, 4(3), 103–136.
40.
MemmelC., GündüzY., & RaupachP. (2012). The common drivers of default risk. Journal of Financial Stability, 16, 232–247.
41.
MertonR. C. (1974). On the pricing of corporate debt: The risk structure of interest rates. Journal of Finance, 2, 449–471.
42.
MishraA. K., JainS., AbidM., & RLM. (2021). Macro-economic determinants of non-performing assets in the Indian banking system: A panel data analysis. International Journal of Finance & Economics, 26(3), 3819–3834.
43.
MishraB., & DhalS. (2009). Pro-cyclical management of banks’ non-performing loans by the Indian public sector banks (DBOD No. BP. BC. 6/21.01.002/2009-10, RBI/2009-2010/37). RBI. www.rbi.org.in
44.
MiuP., & OzdemirB. (2006). Basel requirements of downturn loss given default: Modeling and estimating probability of default and loss given default correlations. Journal of Credit Risk, 2(2), 43–68.
45.
Moody’sKMV. (2009). The relationship between average asset correlation and default probability. https://www.moodysanalytics.com/-/media/whitepaper/before-2011/07-22-09-the-relationship-between-average-asset-correlation-and-default-probability.pdf
46.
MoradiS., & Mokhatab RafieiF. (2019). A dynamic credit risk assessment model with data mining techniques: Evidence from Iranian banks. Financial Innovation, 5(1), 1–27.
47.
OleiwiA. T., AliM., JassimS. H., NadhimM. H., GuemeG. M., & BujangN. (2019). The relationship between credit risk management practices and profitability in Malaysian commercial banks. International Journal of Engineering and Advanced Technology (IJEAT), 8(5C), 53–59.
48.
OngM. K. (2000). Internal credit risk models—capital allocation and performance measurement. Risks Books.
49.
PadganehY. (2014). Risk-adjusted return on capital (RAROC) (Working Paper No. 1499114). GARP.
50.
PECDC. (2013). Default rate study.
51.
RajanR. G. (2018). Note to parliamentary estimates committee on bank NPA (September 6th 2018, prepared at the request of the Chairman of the Parliament Estimates Committee, Dr. Murli Manohar Joshi, MP). https://www.thehindubusinessline.com/money-and-banking/article24924543.ece/binary/Raghuram%20Rajan%20Parliamentary%20note%20on%20NPAs
52.
RanjanR., & DhalS. C. (2003). Non-performing loans and terms of credit of public sector banks in India: An empirical assessment. RBI Occasional Papers, 24(3), 81–121.
53.
RBI. (1999). Guidelines on risk management systems in banks.
54.
RBI. (2001). Monetary and credit policy measure, 2001–2002.
55.
RBI. (2002). Guidance note on credit risk management.
56.
RBI. (2011). Implementation of the internal rating based (IRB) approaches for calculation of capital charge for credit risk.
57.
RBI. (2020). Financial stability report, issue no 21.
58.
RMA. (2005). Downturn LGDs for Basel II (RMA Capital Working Group).
59.
SalasV., & SaurinaJ. (2002). Credit risk in two institutional regimes: Spanish commercial and savings banks. Journal of Financial Services Research, 22(3), 203–224.
60.
SamantarayaA. (2016). Procyclical credit growth and bank NPAs in India. Economic & Political Weekly, 51(12), 112–119.
61.
TanwarD. N. (2017). Performance analysis of Indian banks using camel approach. International Journal of Commerce and Management Research, 3(1), 59–67.
62.
World Bank. (2018). India—systematic country diagnostic: Realizing the promise of prosperity (English). World Bank Group. http://documents.worldbank.org/curated/en/629571528745663168/India-Systematic-country-diagnostic-realizing-the-promise-of-prosperity
