How Improvement in Growth Plans Comes at a Risk of Asset Quality Pressure

Focusing on bureau-tested customers, lenders prioritize borrowers with documented credit histories, reducing the risk of default by leveraging their proven creditworthiness. Abhay Bhutada emphasizes this strategy, steering clear of new-to-credit individuals or high-risk segments, safeguarding asset quality and ensuring a healthy, sustainable loan portfolio. This targeted approach aims to maintain a balance between growth aspirations and risk mitigation, relying on established credit data to inform lending decisions and uphold financial stability.

1. How Improvement in Growth
Plans Comes at a Risk of Asset
Quality Pressure

2. Introduction
●Growth and asset quality often sit on a delicate balance.
●Financial institutions, especially banks and lending companies, constantly strive to:
- Expand their portfolios.
- Enhance growth metrics.
●This ambition comes with the inherent risk of deteriorating asset quality.
●Striking a harmonious balance between aggressive growth and maintaining asset quality is a challenge.
●Achieving this balance requires a nuanced, risk-adjusted approach.

3. The Balancing Act: Growth and Asset Quality
● Banks and lending institutions are under constant pressure to:
Grow their loan books.
Increase market share.
● Growth is essential for:
Enhancing profitability.
Increasing shareholder value.
Improving competitive positioning.
● Rapid expansion can compromise asset quality if not managed prudently.
● Poor asset quality leads to higher non-performing assets (NPAs).
● Higher NPAs can erode:
Profitability.
Stability.

4. Risk-Adjusted Approach to Growth
Strategic Lending
- Focus on lending to creditworthy customers.
- Avoid high-risk segments.
Thorough Due Diligence
- Conduct comprehensive assessments of potential borrowers.
Robust Data Analytics
- Utilize advanced data analytics to inform decision-making.
Stringent Credit Assessment
- Implement rigorous credit assessment frameworks to evaluate and manage risk.
Sustainable Growth
- Aim for growth that does not compromise asset quality.

5. Focusing on Bureau-Tested Customers
Focusing on Bureau-Tested Customers
A crucial aspect of this risk-adjusted strategy is the emphasis on lending to bureau-tested customers.
These are borrowers with an established credit history, as documented by credit bureaus. Lending to such
customers mitigates the risk of default, as their creditworthiness has been vetted through their past
financial behavior.
We are not focusing on new to credit customers or riskier segments, says Abhay Bhutada. By avoiding
segments with high default probabilities, such as first-time borrowers or those with poor credit histories,
financial institutions can safeguard their asset quality. This targeted approach ensures that the loan
portfolio remains healthy and sustainable.

6. Leveraging Robust Databases
Comprehensive Data Access:
- Utilize extensive and reliable databases for risk management.
In-Depth Borrower Analysis:
- Assess financial health, repayment capacity, and creditworthiness.
Data-Driven Decision Making:
- Minimize bad loans through informed, data-based decisions.
- Approve loans only for the most creditworthy customers

7. Cash Flow-Based Lending
Focus on Stable Cash Flows:
Target borrowers with stable and verifiable cash flows.
Reduced Default Risk:
Ensure borrowers have the means to service their debt, reducing default likelihood.

8. Positive Performance Indicators
Improved Asset Quality Metrics:
Reduction in Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets
(NPA).
Indicative of effective and sustainable growth strategy.

9. Challenges and Mitigations
Proactive Risk Management:
Continuous monitoring, stress testing, and dynamic risk management practices.
Early identification and mitigation of potential risks.
Technological Advancements:
Integration of AI and ML for enhanced credit risk assessment.
Analyze data, identify patterns, and predict default probabilities accurately.

10. Conclusion
Risk-Adjusted Approach:
Focus on bureau-tested customers with stable cash flows.
Leverage robust databases and advanced technology for sustainable growth.
Future Outlook:
Adaptability and vigilance essential for navigating evolving financial landscapes.
Balance growth pursuits with measures to maintain and improve asset quality.