The year 2008 financial crisis was no less than a roller coaster ride for the banking industry. The non-performing assets in public and private sector banks soared and impacted directly on the banks’ portfolio. Banks and other financial institutions (FIs) soon realised that they need to be more alert and proactive in maintaining their asset quality.
The Need for Early Warning Systems
Early Warning Systems are specialised tools, built using a set of parameters and processes that identify probable risks at a nascent stage. A comprehensive and well-structured EWS assists the top level management to predict possible defaults from borrowers that may adversely affect the institution. Such systems can prevent manual omissions and other oversights, thereby securing the bank’s valued assets.
Statistics suggest that monitoring of issued loans and borrowers, effectively and on time, can reduce the possibility of loan-losses by almost 10-20%.
Banks and FIs who use full-fledged early warning signals and have sound credit monitoring policies in place have a better regulation of cash, healthier loan portfolio, good capital yield and high Return on Equity (ROE).
What does EWS do?
Early Warning Signals (EWS) can:
1. Limits the chances of borrower default
It helps to get a closer view of the customer portfolio on a regular basis so as to ensure that the EMIs and instalments are paid on time, thus maintaining the quality of borrowed loans. For individual customers, based on certain parameters, early warning signals are issued while scanning the entire portfolio to keep them under ‘watchlist’ and also ‘red flag’ them, if required.
2. Helps in loan disbursement decisions
It integrates with third parties like CIBIL to check the borrower’s financial health, repayment capacity and will/intent to pay back etc. to give a clearer picture for deciding upon whether to disburse a loan or deny it.
3. Prevent exposure with defaulting borrowers
It monitors the different sectors, borrowers and their portfolios to access the at-risk segments and prevents exposure with such high-risk borrowers, backed by substantial explanations.
An Efficient Way to deal with NPAs
As the government and regulatory bodies have already been pressurising banks to bring down the NPA levels, an all-inclusive NPA management solution having Early Warning Signals can be their lifesaver. It not only helps in dealing with the existing NPAs but also prevents future loans to become delinquent by embracing numerous precautionary ways.
For more details NPA management solutions and Early Warning Signals (EWS), send us an enquiry now!