A Project Report on Non Performing Asset of Commercial Bank in India at Idbi

NON PERFORMING ASSET OF COMMERCIAL BANK IN INDIA AT IDBI

EXECUTIVE SUMMARY The Indian commercial banks have come a long way. The development over the years with regards to branch expansion, deposit mobilization of credit facilities and other services has shown tremendous growth and developments. The difficulties and the problems have also increased and one such major problem is NPA. This project is “ A STUDY STUDY ON NPA OF COMMERCIA COMMERCIAL L BANKS BANKS IN INDIA”. INDIA”.

Objectives:

•

To study the banking operations in general, in India.

•

The study the various reasons for NPA in Indian banking.

•

To analyze different categories of Nap’s of selected banks.

•

To compare the efficiency of operations with respect to NPA between public sector banks and private banks/ foreign foreign banks. banks.

•

To study the various steps taken by the banks to bring down the Nap’s in respective bank branches. branches.

•

To arrive at methods to bring down NPA to acceptable level.

SUGGESTIONS:

1. Fixing up the budget for profits and recovery rather than for advances. Budget oriented approach at times leads to release of credit facilities without ensuring compliance of covenants of sanction. A suitable mechanism could be drawn at each bank level to provide monetary benefits/ reorganization of the operating staff particularly for recovery in Nap’s write-off cases.

2. Projects with old technology should not be considered for finance.

3. Large exposure for big corporate/single project should be avoided.

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4. There is a need for shift in PSB’s approach from collateral security to viability of the project and intrinsic strength of the promoters.

5. Up gradation of credit skills of the operating staff working in advance.

6. Timely sanction/ release to avoid time and cost overruns.

7. It is suggested for possible restructuring of banks through mergers and acquisitions to keep themselves competitive in the high credit risk market in India. 8. Possibly one time solution like Asset Reconstruction Fund (ARF) may be relevant India. 9. Unless the magnitude f NPA’s is brought down and ROA levels improved banks may not be able to infuse the confidence in the market in general and capital market in particular order to meet their capital adequacy needs.

Limitations: •

The study is based mostly on secondary data.

•

Collection of primary data has been difficult due to time and corporate location. It has been generated with the help of secondary data.

•

Data has been drawn from journals, so information may not be complete.

CONCLUSION:

An attempt is made in this study to present a comprehensive picture of non-performing advances of commercial banks in India, touching upon various quantitative and qualitative trends in the post reform period, besides carrying out with some policy and strategic implications. Undoubtedly India is one of the few countries where NPA levels are very high as there is an increase in the percentage of gross advances eroding their ROA by major basic points, after netting the provision. The net


NPA’s constitute a major percentage of the tangible net worth of the public p ublic sector banks, which represent a huge chunk of the banking system business. Not withstanding a lower proportion of NPA’s. NPA’s. Private banks NPA’s has shown a sudden spurt in the recent years making them vulnerable. The proportion proportion of credit credit risk among the the priority priority sector advances advances is double double that of non-priority non-priority advances advances implying the irrationality of (administered) price controls, which still exists in some form.


CHAPTER SCHEME 1. THEORETICAL BACK GROUND: - To banking industry. This chapter contains history, types, functions and role of banks in economic development structure and performance of Indian banks. It also includes the legal aspect of the Indian banking system.

2. RESEARCH DESIGN: - Based on the statement of the problem, objectives, scope of the study, limitations, research methodology and operational definitions.

3. INTRODUCTION TO NPA: - Contains meaning, reasons and NPA’s in commercial banks. It focuses on the gross and the net NPA’s in public, private and foreign banks. 4. ANALYSIS AND INTERPRETATION: - It is the analysis and overview part of the study. The graphs are based on the tables and so is the analysis. (Quadrant analysis used where the banks are put in 4 quadrants)

5. SUGGESTIONS AND CONCLUSION: - Conclusion can be drawn from the findings and some suggestions are given to control NPA’s. 6. ANNEXURES & BIBLIOGRAPHY: -This part deals with the collection of the data.



INTRODUCTION TO THE STUDY The Indian commercial banks have come a long way. The development over the years with regards to branch expansion, deposit mobilization of credit facilities and other services has shown tremendous growth and developments. The difficulties and the problems have also increased and STUDY ON NPA OF COMMERCIA COMMERCIAL L one such major problem is NPA. This project is “ A STUDY BANKS BANKS IN INDIA”. INDIA”.

Objectives:

•

To study the banking operations in general, in India.

•

The study the various reasons for NPA in Indian banking.

•

To analyze different categories of Nap’s of selected banks.

•

To compare the efficiency of operations with respect to NPA between public sector banks and private banks/ foreign foreign banks. banks.

•

To study the various steps taken by the banks to bring down the Nap’s in respective bank branches. branches.

•

To arrive at methods to bring down NPA to acceptable level.

Scope of the study: The study is limited to all banks having NPA’s. This report provides as a reference for the net and gross NPA’s in public sector banks, private sector banks and foreign banks.

Research Methodology: Methodology: Type of research: This research covers all banks operating in India, thus making it a descriptive

research.

NON PERFORMING ASSET OF COMMERCIAL BANK IN INDIA AT IDBI Sources Sources of data: The study is mainly based on secondary data; however a general interview with

the bank officials has been conducted. Primary data has been generated with the help of the financial statements. Research has been carried out with the help of journals, magazines, articles, newspapers, bank journals and general interview with the bank officials.

Methodology: Methodology: The NPA figures for various banks have been calculated with the help of the

financial statements for further analysis

Plan of analysis: analysis: In this study quadrant analysis is used on the calculated figures.

Limitations: •

The study is based mostly on secondary data.

•

Collection of primary data has been difficult due to time and corporate location. It has been generated with the help of secondary data.

•

Data has been drawn from journals, so information may not be complete.



Definition of Banking Business ‘Banking’ as defined in the Section 5 (b) of the Bank ing ing Regulations Act, 1949 is the business of "Accepting deposits of money from the public for the purpose of lending or investment". These deposits are repayable on demand or otherwise, and withdraw able by a cheque, draft, order or otherwise. The deposits accepted by Banking Company are different from those accepted by Non Banking Finance Company Company or any other company in the nature in which these are repayable. repayable. Banks are the only financial institutes, which can accept demand deposits (Saving / Current), which can be withdrawn by a cheque. Section 6 of Banking Regulations Act, 1949 elaborately specifies the other forms of business, which a banking company may carry in addition to banking as defined in section 5. These include in a nutshell •

Issuing Demand Drafts & Travelers Cheques

•

Collection of Cheques, Bills of exchange

•

Discounting and purchase of Bills

•

Safe Deposit Lockers

•

Issuing Letters of Credit & Letters of Guarantee

•

Sales and Purchase of Foreign Exchange

•

Custodial Services

•

Investment services

•

Doing all such other things as are incidental or conducive to the promotion or advancement


of the business of the company; •

Any other form of business, which the Central Government may, by notification in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage.

No banking banking company company shall engage engage in any any form of business business other other than those those referred referred to above above

History & Evolution of Indian Banking System:

India's banking system has several outstanding achievements to its credit, the most striking of which is its reach. An extensive banking network network has been established in the last thirty years, and India's banking system is no longer confined to metropolitan cities and large towns: in fact, Indian banks are now spread out into the remote corners of our country. country. In terms of the number of branches, branches, India's banking system system is is one of the the largest, largest, if not the the largest largest in the world world today. today. An even even more more signifi significant cant achieve achievement ment is the close close associa associatio tion n of India's India's banking banking system system with with India's India's development efforts. The diversification and development of our economy, and the acceleration of the growth process, are in no small measure due to the active role that banks have played in financing economic activities in different sectors. The history of Indian Banking can be identified in three distinct phases 1. Earl Early y phas phasee from from 1786 1786 to 1969 1969 2. Nationalizatio Nationalization n of Banks Banks and up to 1991 1991 prior prior to banking sector Reforms Reforms 3. New phase phase of Indian Indian Banking Banking with with the advent advent of Financial Financial & Banking Sector Sector Reforms Reforms after after 1991. The first phase is from 1786 to 1969, the early phase up to the nationalization of the fourteen largest of Indian scheduled banks. It was also the traditional or conservative phase of Indian Banking. The advent of banking system of India started with the establishment of the first joint stock bank, The General Bank of India in the year 1786. After this first bank, Bank of Hindustan and Bengal Bank came to existence. In the mid of 19th century, East India Company established three banks The Bank of Bengal in 1809, The Bank of Bombay in 1840, and bank of Madras in


1843. These banks were independent units and called Presidency banks. These three banks were amal amalga gama mate ted d in 1920 1920 and a new new bank, bank, Imper Imperial ial Bank Bank of India India was was establ establis ished hed.. All All thes thesee institutions started as private shareholders banks and the shareholders were mostly Europeans. The Allah bad Bank was established in 1865. The next bank to be set up was the Punjab National Bank Ltd. which was established with its headquarters at Lahore in 1894 for the first time exclusively by Indians. Most of the Indian commercial banks, however, owe their origin to the 20th century. Bank of India, Central Bank of India, Bank of Baroda, the Canara Bank, the Indian Bank, and the Bank of Mysore were established established between 1906 and 1913. The last major commercial bank to be set up in this phase was the United Commercial Bank in 1943. Earlier the establishment of Reserve Bank of India in 1935 as the central bank of the country was an important step in the development of commercial banking in India. The history of joint stock banking in this first phase was characterized by slow growth and periodic failures. There were as many as 1100 banks, mostly small banks, failed during the period from 1913 to 1948. The Government of India concerned by the frequent bank failures in the country causing miseries to innumerable small depositors and others enacted The Banking Companies Act, 1949. The title of the Act was changed as "Banking Regulation Act 1949", as per amending Act of 1965 (Act No.23 of 1965). The Act is the first regulatory step undertaken by the Government to streamline the functioning and activities of commercial banks in India. Reserve Bank of India as the Central Banking Authority of the country was vested with extensive powers for banking supervision. At the time of Independence of the country in 1947, the banking sector in India was relatively small small and extrem extremely ely weak. weak. The banks banks were were largely largely confined confined to urban urban areas, areas, extending extending loans primarily primarily to trading sector dealing with agricultural agricultural produce. There were a large number of commercial banks, but banking services were not available at rural and semi-urban areas. Such services were not extended to different sectors of the economy like agriculture, small industries, professionals professionals and self-emplo self-employed yed entrepreneurs entrepreneurs,, artisans, artisans, retail retail traders traders etc Deficiencies of Indian Banking System before Nationalization

Commer Commercial cial banks, banks, as they they were were privatel privately y owned, owned, on regiona regionall or sectari sectarian an basis basis result resulted ed in development of banking on ethnic and provincial basis with parochial outlook. These Institutions did not play their due role in the planned development of the country. Deposit mobilization was


slow. Public had less confidence in the banks on account of frequent bank failures. The savings bank facility facility provided provided by the Postal department department was viewed a comparatively comparatively safer field of investment of savings by the public. Even the deficient savings thus mobilized by commercial banks were not channeled channeled for the development development of the economy of the country. Funds were largely given to traders, who hoarded agricultural produce after harvest, creating an artificial scarcity, to make a good fortune in selling them at a later period, when prices were soaring. The Reserve Bank of Indi Indiaa had had to step step in at thes thesee occas occasio ions ns to intro introdu duce ce sele selecti ctive ve cred credit it contr control olss on sever several al commodities to remedy this situation. Such controls were imposed on advances against Rice, Paddy, Wheat, Other food grains (like jowar, millets, ragi etc.) pulses, oilseeds etc. Initial Phase of Nationalization Nationalization

When the country-attained independence Indian Banking was exclusively in the private sector. In addition addition to the Imperial Imperial Bank, there were five big banks each holding public deposits aggregating aggregating Rs.100 Crores and more, viz. the Central Bank of India Ltd., the Punjab National Bank Ltd., the Bank of India Ltd., the Bank of Baroda Ltd. and the United Commercial Bank Ltd. Rest of the banks were were exclusively exclusively regional regional in character character holding holding deposits deposits of less than than Rs.50 Crores. Crores. Government first implemented the exercise of nationalization of a significant part of the Indian Banking system in the year 1955, when Imperial Bank of India was Nationalized in that year for the stated objective of "extension of banking facilities on a large scale, more particularly in the rural and semi-urban areas, and for diverse other public purposes" to form State Bank of India. SBI was to act as the principal agent of the RBI and handle banking transactions of the Union & State Governments Governments throughout throughout India. The step was in fact in furtherance of the objectives objectives of supporting supporting a powerful rural credit cooperative movement in India and as recommended by the "The All-India Rural Rural Credit Credit Survey Survey Commit Committee tee Report, Report, 1954". State Bank of India India was obliged obliged to open open an accepted number of branches within 5 years in unbaked centers. Government subsidized the bank for opening opening unremune unremunerat rative ive branches branches in non-urba non-urban n centers centers.. The seven seven banks banks now formin forming g subsidiaries of SBI were nationalized in the year 1960. This brought one-third of the banking segment under the direct control of the Government of India. But the major process of nationalization was carried out on 19th July 1969, when the then Prime Minister of India, Mrs.Indira Gandhi announced the nationalization of 14 major commercial banks in the country. One more phase of nationalization was carried out in the year 1980, when seven


more more banks banks were were nati nationa onali lize zed. d. This This broug brought ht 80% of the the banki banking ng segm segment ent in India India under under Government ownership. The country entered the second phase, i.e. the phase of Nationalized Banking with emphasis on Social Banking in 1969/70. Chronology of Salient steps by the Government after Independence to Regulate Banking Institutions in the Country

1. 1949

: Enactme Enactment nt of Banking Banking Regulat Regulation ion Act. Act.

2. 1955(Pha 1955(Phase se I) : Nationa Nationaliz lizatio ation n of of State State Bank Bank of India India 3. 1959(Pha 1959(Phase se II) II) : Nationa Nationaliz lizati ation on of SBI subsidi subsidiari aries es 4. 1961

: Insura Insurance nce cover cover extende extended d to deposit depositss

5. 1969(Pha 1969(Phase se III) III) : Nationa Nationaliz lizati ation on of 14 major major banks banks 6. 1971

: Creati Creation on of credit credit guarante guaranteee corpora corporation tion

7. 1975

: Creati Creation on of regional regional rural rural banks banks

8. 1980(Phase 1980(Phase IV) IV) : Nationalizatio Nationalization n of seven banks with deposits deposits over over 200 crores. crores. Shortcomings in the Functioning of Nationalized Banking Institutions

However nationalized banks in their enthusiasm for development banking, looking exclusively to branch opening, deposit accretion accretion and social banking, neglected neglected prudential prudential norms, norms, profitability profitability criteria, risk-management and building adequate capital as a buffer to counter-balance the ever expan expandi ding ng riskrisk-inh inher eren entt asse assets ts held held by them them.. They They fail failed ed to reco recogni gnize ze the the emer emergi ging ng nonnon performing performing assets assets and to build adequate adequate provisions to neutralize neutralize the adverse effects effects of such assets. Basking in the sunshine of Government ownership that gave to the public implicit faith and confidence about the sustainability of Government-owned institutions, they failed to collect before hand whatever is needed for the rainy day. And surfeit blindly indulged is sure to bring the sick hour. In the early Nineties after two decades of lop-sided policies, these banks paid heavily for their misdirected performance in place of pragmatic and balanced policies. The RBI/Government of India has to step in at the crisis-hour to implement remedial steps. Reforms in the financial and banking sectors sectors and liberal recapitalizati recapitalization on of the ailing and weakened weakened public sector banks followed. However it is relevant to mention here that the advent of banking sector reforms brought


the era of modern banking of global standards in the history of Indian banking. The emphasis shifted to efficient, and prudential banking linked to better customer care and customer service. The old ideology of social banking was not abandoned, but the responsibility for development banking is is blended blended with the the paramount paramount need for for complying complying with with norms of prudency prudency and efficiency. efficiency.

Composition of Indian Banking System

The banking system has three tiers. These are the scheduled commercial banks; the regional rural banks, which operate in rural areas, not covered by the scheduled scheduled banks; and the cooperative and special purpose rural banks. There are approximately approximately 80 scheduled scheduled commercial banks, Indian and foreig foreign; n; almost almost 200 regiona regionall rural rural banks; banks; more more than than 350 central central cooperative cooperative banks, 20 land development banks; and a number of primary agricultural credit societies. In terms of business, the public sector banks, namely the State Bank of India and the nationalized nationalized banks, dominate dominate the banking sector. sector. At present the number of nationalized banks is 20. Several Foreign banks were allowed to operate as per the guidelines of RBI. At present the banking system can be classified in following categories: PUBLIC SECTOR BANKS: •

Reserve Bank of India

•

State Bank of India and its 7 associate Banks

•

•

Nationalized Nationalized Banks Banks (20 in number) number) Regional Rural Banks sponsored by Public sector Banks

PRIVATE SECTOR BANKS: •

•

•

Old Generation Private Banks New Generatio Generation n Private Banks Foreign Banks in India

NON PERFORMING ASSET OF COMMERCIAL BANK IN INDIA AT IDBI •

•

Scheduled Co-operative Banks Non Scheduled Scheduled Banks Banks

CO-OPERATIVE SECTOR BANKS: •

State Co-operative Banks

•

Central Co-operative Banks

•

Primary agriculture Credit Societies

•

Land Development Banks

•

Urban Co-operative Banks

•

State Land Development Banks

DEVELOPMENT BANKS: •

Industrial Finance Corporation of India (IFCI)

•

Industrial Development bank of India (IDBI)

•

Industrial Credit & Investment corporation of India (ICICI)

•

Industrial Investment Bank of India (IIBI)

•

Small Industries Development Bank of India (SIDBI)

•

•

National Bank for for Agriculture Agriculture & Rural Developme Development nt (NABARD) (NABARD) Export-Import Bank of India

India had a fairly well developed commercial banking system in existence at the time of independence in 1947. The Reserve Bank of India (RBI) was established in 1935. While the RBI became a state owned institution from January 1, 1949, the Banking Regulation Act was enacted in 1949 providing a framework framework for regulation and supervision supervision of commercial commercial banking activity.


Operational definitions: NPA: An asset is classified as non-performing asset (NPA’s) (NPA’s ) if the borrower does not pay dues in

the form of principal and interest for a period of 90 days. Standard Standard Assets: Assets: Such an asset is not a non-performing asset. In other words, it carries not more

than normal risk attached to the business. Sub-standard Sub-standard Assets: Assets: It is classified as non-performing asset for a period not exceeding 18 months Doubtful Doubtful Assets: Assets: Asset that has remained NPA for a period exceeding 18 months is a doubtful

asset. Loss Assets: Here loss is identified by the banks concerned or by internal auditors or by external

auditors or by Reserve Bank India (RBI) inspection Cash Reserve Ratio (CRR): It is the reserve which the banks have to maintain with itself in the

form of cash reserves or by way of current account with the Reserve Bank of India (RBI), computed as a certain percentage of its demand and time liabilities. The objective is to ensure the safety and liquidity of the deposits with the banks. Statutory Statutory Liquidity Liquidity Ratio (SLR) (SLR) : It is the one which every banking company shall maintain in

India in the form of cash, gold or unencumbered approved securities, an amount which shall not, at the close of business on any day be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time.

INTRODUCTION

It's a known fact that the banks and financial institutions in India face the problem of swelling non performing performing assets assets (NPAs) (NPAs) and the issue is becoming more and more unmanageable. unmanageable. In order to bring the situation situation under control, control, some steps have been taken recently. recently. The Securitisation Securitisation and


Reconstructio Reconstruction n of Financial Assets and Enforcement Enforcement of Security Security Interest Interest Act, 2002 was passed passed by Parliament, which is an important step towards elimination or reduction of NPAs. MEANING OF NPA’s:

An asset is classified as non-performing asset (NPAs) if the borrower does not pay dues in the form of principal and interest for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facilities granted by bank to a borrower becomes non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exist certain advances / credit facility.

NPA IN INDIAN BANKING SYSTEM:

NPA surfaced surfaced suddenly suddenly in the Indian banking scenario, scenario, around the Eighties, Eighties, in the midst of turbulent structural changes overtaking the international banking institutions, and when the global financial markets were undergoing sweeping changes. In fact after it had emerged the problem of NPA kept hidden and gradually gradually swelling swelling unnoticed unnoticed and unperceived, unperceived, in the maze of defective defective accounting standards that still continued with Indian Banks up to the Nineties and opaque Balance sheets. In a dynamic world, it is true that new ideas and new concepts that emerge through such changes caused by social evolution bring beneficial effects, but only after levying a heavy initial toll. The process process of quickly integrating integrating new innovations innovations in the existing existing set-up leads to an immediate immediate disorde disorderr and unsettled unsettled conditio conditions. ns. People People are not accusto accustomed med to the new models models.. These These new formations take time to configure, and work smoothly. The old is cast away and the new is found difficult to adjust. Marginal and sub-marginal operators are swept away by these convulsions. Banks being sensitive institutions entrenched deeply in traditional beliefs and conventions were unable to adjust themselves to the changes. They suffered easy victims to this upheaval in the initial phase. Consequently banks underwent this transition-syndrome and languished under distress and banking crises surfaced in quick succession one following the other in many countries. But when the banking industry in the global sphere came out of this metamorphosis to re-adjust to


the new order, they emerged revitalized and as more vibrant and robust units. Deregulation in developed capitalist countries particularly in Europe, witnessed a remarkable innovative growth in the banking banking industr industry, y, whethe whetherr measure measured d in terms terms of deposit deposit growth, growth, credit credit growth, growth, growth growth intermediation instruments as well as in network. During all these years the Indian Banking, whose environment was insulated from the global context and was denominated by State controls of directed credit delivery, regulated interest rates, and investment structure did not participate in this vibrant banking revolution. Suffering the dearth of innovative spirit and choking under undue regimentation, Indian banking was lacking objective and prudential systems of business leading from early stagnation to eventual degeneration and reduced or negative profitability. profitability. Continued political political interference, interference, the absence of competition competition and total total lack lack of scient scientific ific decision-m decision-maki aking, ng, led to consequ consequence encess just just the opposite opposite of what was happening in the western countries. Imperfect accounting standards and opaque balance sheets served as tools for hiding the shortcomings and failing to reveal the progressive deterioration and struc structu tural ral weak weaknes nesss of the the count country ry's 's banki banking ng insti institu tuti tions ons to publi publicc view. view. This This enable enabled d the the nationalized banks to continue to flourish in a deceptive manifestation and false glitter, though stray symptoms of the brewing ailment were discernable here and there. The government hastily introduced the first phase of reforms in the financial and banking sectors after the economic crisis crisis of 1991. This was an effort to quickly resurrect the health of the banking system and bridge the gap between Indian and global banking development. Indian Banking, in particular particular PSB’s suddenly woke up to the realities realities of the situation situation and to face the burden of the surfeit of their woes. Simultaneously major revolutionary transitions were taking place in other sectors of the economy on account the ongoing economic reforms intended towards freeing the Indian economy from government controls and linking it to market driven forces for a quick integration with the global economy. Import restrictions were gradually freed. Tariffs were brought down and quantitative controls were removed. The Indian market was opened for free competition to the global players. The new economic policy in turn revolutionaries the environment of the Indian industry and business and put them to similar problems of new mixture of opportunities and challenges. As a result we witness today a scenario of banking, trade and industry in India, all undergoing the convulsions of total reformation battling to kick off the decadence of the past and to gain a new strength and vigor for effective links with the global economy. Many are still


languishing unable to get released from the old set-up, while a few progressive corporate are making a niche for themselves in the global context. During this decade the reforms have covered almost every segment of the financial sector. In particular, particular, it is the banking sector, which experienced major reforms. reforms. The reforms reforms have taken the Indian banking sector far away from the days of nationalization. Increase in the number of banks due to the entry of new private and foreign banks; increase in the transparency of the banks' balance sheets through through the introduction introduction of prudential prudential norms and norms of disclosure; disclosure; increase in the the role role of the the mark market et forc forces es due due to the the dere deregu gula late ted d inte intere rest st rate rates, s, toge togeth ther er with with rapi rapid d computerization and application of the benefits of information technology to banking operations have all significantly affected the operational environment of the Indian banking sector. In the background of these complex changes when the problem of NPA was belatedly recognized for the first time at its peak velocity during 1992-93, there was resultant chaos and confusion. As the problem in large magnitude erupted suddenly banks were unable to analyze and make a realistic or complete assessment of the surmounting situation. It was not realized that the root of the problem of NPA was centered elsewhere in multiple layers, as much outside the banking system, more particularly in the transient economy of the country, as within. Banking is not a compartmentalized and isolated sector delinked from the rest of the economy. As has happened elsewhere in the world, a distressed national economy shifts a part of its negative results to the banking industry. industry. In short, banks are made ultimately ultimately to finance the losses incurred by constituent constituent industries and businesses. The unprepared ness and structural weakness of our banking system to act to the emerging scenario and de-risk itself to the challenges thrown by the new order, trying to switch switch over over to global globalizat ization ion were were only only aggrav aggravatin ating g the crisis. crisis. Partial Partial percept perceptions ions and hasty hasty judgments judgments led to a policy of of ad-hoc-ism, ad-hoc-ism, which which characterize characterized d the approach approach of the authorities authorities during the last last two-dec two-decade adess towards towards finding finding solutio solutions ns to banking banking ailment ailmentss and disman dismantli tling ng recover recovery y impediments. Continuous concern was expressed. Repeated correctional efforts were executed, but positive positive results results were were evading. The The problem problem was defying defying a solution. solution. The threat of NPA was being surveyed and summarized by RBI and Government of India from a remote perception looking at a bird's-eye-view on the banking industry as a whole delinked from the rest rest of the econo economy my.. RBI RBI looks looks at the the banki banking ng indus industr try's y's averag averagee on a macr macro o basis basis,, consolidating and tabulating the data submitted by different institutions. It has collected extensive


statistics about NPA in different financial sectors like commercial banks, financial institutions, urban cooperatives, NBFC etc. But still it is a distant view of one outside the system and not the felt view of a suffering participant. Individual banks inherit different cultures and they finance diverse sectors of the economy that do not possess identical attributes. There are distinct diversities as among the 29 public sector banks themselves, between different geographical regions and between between different different types of customers customers using bank credit. There are three weak nationalized nationalized banks that have been identified. But there are also correspondingly two better performing banks like Corporation and OBC. There are also banks that have successfully contained NPA and brought it to single digit like Syndicate (Gross NPA 7.87%) and Andhra (Gross NPA 6.13%). The scenario is not so simple to be generalized for the industry as a whole to prescribe a readymade package of a common solution for all banks and for all times. Similarly NPA concerns of individual Banks summarized as a whole and expressed, as an average for the entire bank cannot convey a dependable picture. It is being statistically stated that bank X or Y has 12% gross NPA. But if we look down further within that Bank there are a few pockets possessing possessing bulk segments of NPA ranging 50% to 70% gross, which should consequently convey that there should also be several other segments with 3 to 5% or even NIL % NPA, averaging the bank's whole performance performance to 12%. Much criticism criticism is made about the obligation obligation of Nationalized Nationalized Banks to extend priority sector advances. But banks have neither fared better in non-priority sector. The comparative performance under priority and non-priority is only a difference of degree and not that of kind. The assessment of the mix-of contributing factors includes: 1. Human factors factors (those (those pertaining pertaining to to the bankers bankers and the credit customers), customers), 2. Environmental Environmental imbalanc imbalances es in the the economy economy on account account of wholesale wholesale changes changes and also 3. Inherit Inherited ed problem problemss of Indian Indian banking banking and and industr industry. y. Variable skill, efficiency and level integrity prevailing in different branches and in different banks accounts for the sweeping disparities between inter-bank and intra-bank performance. We may add that while the core or base-level NPA in the industry is due to common contributory causes, the inter inter-se -se variat variatio ions ns are are on accou account nt of the struc structu tura rall and opera operati tion onal al disp dispar arit itie ies. s. The The heavy heavy


concentrated prevalence of NPA is definitely due to human factors contributing to the same. No bank appears to have conducted conducted studies studies involving involving a cross-section cross-section of its operating operating field staff, including the audit and inspection functionaries for a candid and comprehensive introspection based on a survey of the variables variables of NPA burden under different different categories categories of sectoral sectoral credit, different regions and in individual Branches categorized as with high, medium and low incidence of NPA. We do not hear the voice of the operating personnel in these banks candidly expressed and explaining their failures. Ex-bankers, i.e. the professional bankers who have retired from service, but possess a depth of inside knowledge do not out-pour candidly their views. After three decades of nationalized banking, we must have some hundreds of retired Bank executives in the country, who can boldly and independently, but objectively voice their views. Everyone is satisfied in blaming the others. Bank executives hold 'willful defaulters' responsible for all the plague. Industry and business blames the government policies. Important fact-revealing information for each NPA account is the gap period between the date, when the advance was originally made and the date of its becoming NPA. If the gap is long, it is the case of a sunset industry. Things were all right earlier, but economic variance in trade cycles or market sentiments have created the NPA. Credit customers who are in NPA today, but for years were earlier rated as good performers and creditworthy clients ranging within the top 50 or 100. Significant part of the NPA is on account of clout banking or willfully given bad loans. Infant mortality in credit is solely on account of human factors and absence of human integrity. Credit to different sectors given by the PSB’s in fact represents different products. Advance to weaker sections below Rs.25000/- represents the actual social banking. NPA in this sector forms 8 TO 10% of the gross amount. Advance to agriculture, SSI and big industries each calls for different strategies in terms of credit assessment, credit delivery, project implementation, and post advance advance supervision supervision . NPA in different sector is not caused by the same resultant factors.

Containing quantum of NPA is therefore to be programmed by a sector-wise strategy involving a role of the actively engaged participants who can tell where the boot pinches in each case. Business and industry has equal responsibility to accept accountability for containment of NPA. Many of the present defaulters defaulters were once trusted trusted and valued customers of the banks. Why have they become unreliable now, or have they?


The credit portfoli portfolio o of a nationa nationaliz lized ed bank also includes includes a number number of low-ri low-risk sk and risk-f risk-free ree segments, which cannot create NPA. Small personal loans against banks' own deposits and other tangible and easily marketable securities pledged to the bank and held in its custody are of this category. Such small loans are universally given in almost all the branches and hence the aggregate constitutes a significant figure. Then there is food credit given to FCI for food procurement and simila similarr credits credits given to major major public public Utilit Utilities ies and Public Public Sector Sector Underta Undertaking kingss of the Central Central Government. It is only the residual fragments of Bank credit that are exposed to credit failures and reasons for NPA can be ascertained by scrutinizing this segment. Secondly NPA is not a dilemma facing exclusively the Bankers. It is in fact an all pervasive national scourge swaying the entire Indian economy. NPA is a sore throat of the Indian economy as a whole. The banks are only the ultimate victims, where life cycle of the virus is terminated. Now, how does the the Government Government suffer? What What about the recurring recurring loss of revenue revenue by way of taxes, excise to the government on account of closure of several lakhs of erstwhile vibrant industrial units and inefficient usage of costly industrial infrastructure erected with considerable investment by the nation? As per statistics collected three years back there are over two and half million small industrial units representing over 90 percent of the total number of industrial units. A majority of the industrial work force finds employment here and the sector's contribution to industrial output is substantial and is estimated at over 35 percent while its share of exports is also valued to be around 40 percent. Out of the 2.5 million, about 10% of the small industries are reported to be sick involving involving a bank credit outstanding outstanding around Rs.5000 to 6000 Crores, Crores, at that period. It may be even more now. These closed units represent some thousands of displaced workers previously enjoying gainful employment. Each closed unit whether large, medium or small occupies costly developed industrial land. Several items of machinery form security for the NPA accounts should either be lying idle or junking out. In other words, large value of land, machinery and money are locked up in industr industrial ial sicknes sickness. s. These These are the assets assets created created that have turned turned unproduc unproductiv tivee and these these represent the real physical NPA, which indirectly are reflected in the financial statements of nationalized banks, as the ultimate financiers of these assets. In the final analysis it represents instability in industry. NPA represents the owes of the credit recipients, in turn transferred and parked with with the banks. banks. Recognizing NPA as a sore throat of the Indian economy, the field level participants should first


address themselves to find the solution. Why not representatives of industries and commerce and that of the Indian Banks' Association come together and candidly analyze and find an everlasting solution heralding the real spirit of deregulation and decentralization of management in banking sector, sector, and accepting self-discipline self-discipline and self-reliance self-reliance?? What are the deficiencies in credit delivery that leads to its misuse, abuse or loss? How to check misuse and abuse at source? How to deal with erring Corporate? In short, the functional staff of the Bank along with the representatives of business business and industry has to accept a candid introspection introspection and arrive at a code of discipline in any final solution. And preventive action to be successful should start from the credit-recipient level and then extend to the bankers. bankers. RBI and Government of India can positively positively facilitate the process by providing enabling measures. measures. Do not try to set right industry industry and banks, but help industry industry and banks to set right themselves. themselves. The new tool of deregulated deregulated approach has to be accepted in solving NPA.

REAS REASON ONS S FOR FOR TH THE E EXIS EXISTE TENC NCE E A HUGE HUGE LE LEVE VEL L OF NPAS NPAS IN TH THE E INDI INDIAN AN BANKING SYSTEM (IBS):

The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures measures in place namely, fixing pre-sanctioning pre-sanctioning appraisal appraisal responsibilit responsibility y and having an effective effective post-disburs post-disbursement ement supervision. supervision. Banks concerned should continuously monitor loans to identify accounts that have potential to become non-perf non-performing. orming. To start with, performance in terms of profitability is a benchmark for any business enterprise inclu includi ding ng the banki banking ng indust industry. ry. Howe However ver,, incre increasi asing ng NPAs NPAs have have a direc directt impac impactt on banks banks profitability profitability as legally legally banks are not allowed allowed to book income on such accounts and at the same time banks are forced to make provision on such assets as per the Reserve Bank of India (RBI) guidelines. Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrowers since NPAs affects the repayment capacity of banks. Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through


various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning non-performing assets. Some of the other reasons were: •

After the nationalization of banks sector wise allocation of credit dispercements became compulsory.

•

Banks were compelled to give credit to even those sectors, which were not considered to e very profitable, keeping in mind the federal policy.

•

People in the agricultural sector were hardly interested in returning the loans as they were confi confiden dentt that that the the loans loans with with the inte intere rest st woul would d be writ writte ten n off off by the succe success ssive ive governments.

•

The small-scale industries also availed credit even though they were not sure of performing to the extent of returning the loans.

•

Banks were also not in the position to press enough securities to cover the loans in calls of timings.

•

Even if the assets were provided they proved to be substandard assets as the values that could be realized were very low.

•

Free distribution done during “loan mails” (congress regime) also contributed to the heavy increase in NPA’s.

•

The slackness in effort by the bank authorities authorities to collect or recover loan advances in time also contributes to the increase in NPA’s.

•

Lack of accountability of the officers, who sanctioned the loans led to a caste whole approach by the officers recovering the loans.

•

Loans sanctioned to under servicing candidates due to pressure from he ministers and other politicians also led to the non-recovery of debts.

•

Poor credit appraisal system, lack of vision while sanctioning credit limits.


Lack of proper monitoring.

•

Reckless advances to achieve the budgetary targets.

•

Lack Lack of since sincere re corpor corporat atee cultu culture re,, inadeq inadequat uatee lega legall provi provisi sions ons on fore foreclo closu sure re and bankruptcy. bankruptcy.

•

Change in economic policies/environment.

•

Lack of co-ordination between banks.

Some of the internal factors of the organization leading to NPA’s are: •

Divisio Division n of funds funds for expansio expansion, n, divers diversific ificati ation, on, modern modernizat ization, ion, underta undertaking king new projects projects and for helping helping associate associate concerns, concerns, this this is coupled coupled with with recessionary recessionary trends trends and failure to tap funds in the capital and debt markets.

•

Busine Business ss failure failure (product (product,, market marketing ing etc.,), etc.,), ineffic inefficient ient managem management ent,, straine strained d labor labor relations, inappropriate technology, technical problems, product obsolescence etc.,

•

Recess Recession, ion, shortag shortagee of input, input, power power shortag shortage, e, price price escalat escalation, ion, accident accidents, s, natural natural calamities, besides externalization problem in other countries leading to non payment of overdue.

•

Time/cost overrun during the project implementation stage.

•

Government policies like changes in the excise duties, pollution control orders.

•

Willful default, siphoning off of funds, fraud, misappropriation, promoters/directors disputes etc.,

•

Deficiencies Deficiencies on the part of the banks like delay in release release of limits limits and delay in release of payments/subsidies by the government.

INDIAN ECONOMY AND NPA’S:


Undoubtedly the world economy has slowed down, recession is at its peak, globally stock markets have tumbled and business itself is getting hard to do. The Indian economy has been much affected due to high fiscal deficit, poor infrastructu infrastructure re facilities, sticky legal system, cutting of exposures exposures to emerging markets by FIs, etc. Further, international rating agencies like, Standard & Poor have lowered India's credit rating to sub-investment grade. Such negative aspects have often outweighed positives such as increasing forex reserves and a manageable inflation rate. Under such a situation, it goes without saying that banks are no exception and are bound to face the heat of a global downturn. One would be surprised to know that the banks and financial institutions institutions in India hold non-performing non-performing assets assets worth Rs. 1, 10,000 crores. Bankers have realized realized that unless the level of NPAs is reduced drastically, they will find it difficult to survive. GLOBAL DEVELOPMENTS AND NPA’S:

The core banking business is of mobilizing the deposits and utilizing it for lending to industry. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes which results into economic growth. However lending also carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. A question that arises is how much risk can a bank afford to take? Recent happenings in the business business world - Enron, WorldCom, WorldCom, Xerox, Global Crossing Crossing do not give much confidence confidence to banks. In case after case, these giant corporate corporate became bankrupt and failed failed to provide investors with with clearer clearer and more more complet completee informa information tion thereby thereby introduc introducing ing a degree degree of risk risk that many investors could neither anticipate nor welcome. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. Due to this, banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default. RBI GUIDELINES ON INCOME RECOGNITION (INTEREST INCOME ON NPA’s)

In the peak crisis crisis period in early early Nineties Nineties,, when when the first Series of Banking Banking Reforms Reforms were were


introd introduce uced, d, the worki working ng posit positio ion n of the the Stat State-o e-own wned ed banks banks exhib exhibit ited ed the the seve severe rest st stra strain. in. Commenting on this situation the Reserve Bank of India has pointed out as under: "Till "Till the adoptio adoption n of prudent prudential ial norms norms relating relating to income income recogni recognition tion,, asset asset classi classifica ficatio tion, n, provisioning provisioning and capital adequacy, adequacy, twenty-six twenty-six out of twenty-seven twenty-seven public sector banks were reporting profits (UCO Bank was incurring losses from 1989-90). In the first post-reform year, i.e., 1992-93, the profitability of the PSB’s as a group turned negative with as many as twelve national nationalized ized banks banks report reporting ing net losses losses.. By March March 1996, 1996, the outer time time limit limit prescr prescribe ibed d for atta attaini ining ng capit capital al adeq adequac uacy y of 8 per cent, cent, eight eight publi publicc sect sector or banks banks were were stil stilll short short of the the prescribed." prescribed." Consequently PSB’s in the post reform period came to be classified under three categories as •

Healthy banks (those that are currently showing profits and hold no accumulated losses in their balance sheet)

•

Banks showing currently profits, but still continuing to have accumulated losses of prior years carried forward in their balance sheets

•

Banks, which are still in the red, i.e. showing losses in the past and in the present.

Banks recognize income including interest income on advances on accrual basis. That is, income is accounted for as and when it is earned. The prima-facie prima-facie condition for accrual of income is that it should not be unreasonable unreasonable to expect its ultimate collection. However, NPAs involves significant uncertainty with respect to its ultimate collection. Considering this fact, in accordance with the guidelines for income recognition issued by the Reserve Reserve Bank of India (RBI), banks should not recognize interest interest income on such NPAs until it is actually realized. RBI GUIDELINES ON CLASSIFICATION OF BANK ADVANCES

Reserve Bank of India (RBI) has issued guidelines on provisioning requirement with respect to bank advances. advances. In terms terms of these guideline guidelines, s, bank advances advances are are mainly classified classified into: into:


Standard Standard Assets: Assets: Such an asset is not a non-performing asset. In other words, it carries not more

than normal risk attached to the business. Sub-standard Sub-standard Assets: Assets: It is classified as non-performing asset for a period not exceeding 18 months Doubtful Doubtful Assets: Assets: Asset that has remained NPA for a period exceeding 18 months is a doubtful

asset. Loss Assets: Here loss is identified by the banks concerned or by internal auditors or by external

auditors or by Reserve Bank India (RBI) inspection. In terms of RBI guidelines, as and when an asset becomes a NPA, such advances would be first classified as a sub-standard one for a period that should not exceed 18 months and subsequently as doubt doubtful ful asse assets ts.. It shoul should d be noted noted that that the above above clas classi sific ficat atio ion n is only only for the the purpos purposee of computing the amount of provision that should be made with respect to bank advances and certainly not for the purpose of presentation of advances in the banks balance sheet. The Third Schedule to the Banking Regulation Act, 1949, solely governs presentation of advances in the balance sheet. Banks have started issuing notices under the Securitization Act, 2002 directing the defaulter to either pay back the dues to the bank or else give the possession possession of the secured secured assets mentioned in the notice. However, there is a potential threat to recovery if there is substantial erosion in the value of security given by the borrower or if borrower has committed fraud. Under such a situation it will be prudent to directly classify the advance as a doubtful or loss asset, as appropriate. RBI GUIDELINES ON PROVISIONING REQUIREMENT OF BANK ADVANCES

Reserve Bank of India (RBI) has issued guidelines on provisioning requirements of bank advances where the recovery is doubtful. Banks are also required to comply with such guidelines guidelines in making adequate provision to the satisfaction of its auditors before declaring any dividends on its shares. In case of loss assets, guidelines specifically require that the concerned bank should make full provision provision for the amount outstanding. outstanding. This is justified justified on the grounds that such an asset is considered uncollectible and cannot be classified as bankable asset.


Also in case of doubtful assets, guidelines requires the bank concerned to provide entirely the unsecured portion and in case of secured portion an additional provision of 20%-50% of the secured portion should be made depending upon the period for which the advance has been considered as doubtful. For instance, for NPAs, which are up to 1-year old, provision, should be made of 20% of secured portion, in case of 1-3 year old NPAs up to 30% of the secured portion and finally in case of more than 3-year-old NPAs up to 50% of secured portion should be made by the concerned bank. In case of a sub-standard asset, a general provision of 10% of total outstanding should be made. Reserve Bank of India (RBI) has merely laid down the minimum provisioning requirement that should be complied with by the concerned bank on a mandatory basis. However, where there is a substantial uncertainty to recovery, higher provisioning should be made by the bank concerned.

ACCOUNTING STANDARD 9 (AS 9) ON REVENUE RECOGNITION ISSUED BY ICAI:

The Accounting Standard 9 (AS 9) on `Revenue Recognition' issued by the Institute Of Chartered Accountants of India (ICAI) requires that the revenue that arises from the use by others of enterpr enterprise ise resourc resources es yieldi yielding ng interest interest should should be recogni recognized zed only only when when there there is no signifi significant cant uncertainty as to its measurability or collects ability. Also Also,, inter interes estt incom incomee shoul should d be recog recogniz nized ed on a time time propo proport rtio ion n basis basis afte afterr taki taking ng into into consideration rate applicable and the total amount outstanding. In view of the guidelines issued by the Reserve Bank of India (RBI), interest income on NPAs should be recognized only when it is actually realized. As such, a doubt may arise as to whether the aforesaid guidelines with respect to recognition of interest income on NPAs on realization basis are consistent with Accounting Standard 9, `Revenue Recognition'. For this purpose, the guidelines issued by the RBI for treating certain assets as NPAs seem to be based on an assumption that the collection of interest on such assets is uncertain. Therefore complying with AS 9, interest income is not recognized based on uncertainty involved but is recognized recognized at a subsequent subsequent stage when actually actually realized realized thereby thereby complying complying with RBI guidelines as well.


In order to ensure proper appreciation of financial statements, banks should disclose the accounting policies policies adopted in respect respect of determination determination of NPAs and basis on which income is recognized recognized with other significant accounting policies. Credit Risk and NPAs

Quite often credit risk management (CRM) is confused with managing non-performing assets (NPAs). However there is an appreciable difference between the two. NPAs are a result of past action whose effects are realized in the present i.e. they represent credit risk that has already materialized and default has already taken place. On the other hand managing credit risk is a much more forward-looking approach and is mainly concerned with managing the quality of credit portfolio before default takes place. In other words, an attempt is made to avoid possible default by properly managing credit risk. Considering the current global recession and unreliable information in financial statements, there is high credit risk in the banking and lending business. To create a defense against such uncertainty, bankers are expec expecte ted d to devel develop op an effec effecti tive ve inter internal nal cred credit it risk risk mode models ls for the purpos purposee of credi creditt risk risk management.

IMPORTANCE OF CREDIT RATING IN ASSESSING THE RISK OF DEFAULT FOR LENDERS

Funda Fundame menta ntall lly y Cred Credit it Rati Rating ng impl implie iess eval evaluat uating ing the the cred credit itwo wort rthin hines esss of a borr borrow ower er by an independent independent rating agency. Here objective objective is to evaluate the probability of default. As such, credit rating does not predict loss but it predicts the likelihood of payment problems. Credit rating has been explained explained by Moody's a credit credit rating agency as forming forming an opinion opinion of the future ability, ability, legal obligation and willingness of a bond issuer or obligor to make full and timely payments on principal principal and interest interest due due to the investor investors. s. Banks do rely rely on credit credit rating agencies agencies to measure measure credit credit risk and assign a probability of default. Credit rating agencies generally slot companies into risk buckets that indicate company’s company’s credit risk and are also reviewed reviewed periodically. periodically. Associated Associated with each risk bucket is the probability probability of default that is derived derived from historical historical observations of default behavior in each risk bucket. However, However, credit rating is not foolproof. foolproof. In fact, Enron was rated


investment grade till as late as a month prior to it's filing for Chapter 11 bankruptcy when it was assigned assigned an in-default in-default status by the rating agencies. It depends on the information information available to the credit rating agency. Besides, there may be conflict of interest, which a credit rating agency may not be able to resolve in the interest of investors and lenders. Stock prices are an important (but not the sole) indicator of the credit risk involved. Stock prices are much much more more forwar forward d looking looking in assess assessing ing the credit creditwor worthin thiness ess of a busines businesss enterpri enterprise. se. Historical data proves that stock prices of companies such as Enron and WorldCom had started showing a falling trend many months prior to it being downgraded by credit rating agencies. USAGE OF FINANCIAL STATEMENTS IN ASSESSING THE RISK OF DEFAULT FOR LENDERS

For banks and financial institutions, both the balance sheet and income statement have a key role to play by providing valuable information on a borrower’s viability. However, the approach of scrutinizing financial statements is a backward looking approach. This is because, the focus of accounting is on past performance and current positions. The key accounting accounting ratios generally used for the purpose of ascertaining ascertaining the creditworthine creditworthiness ss of a business business entity are that of debt-equity debt-equity ratio and interest interest coverage coverage ratio. Highly rated companies companies generally have low leverage. This is because; high leverage is followed by high fixed interest charges, non-payment of which results into a default. Capital Adequacy Ratio (CAR) of RBI and Basel committee on banking supervision (BCBS):

Rese Reserve rve Bank Bank of India India (RBI (RBI)) has issued issued capit capital al adequa adequacy cy norms norms for the India Indian n banks banks.. The minimum CAR, which the Indian Banks are required to meet at all, times is set at 9%. It should be taken into consideration consideration that the bank's capital refers refers to the ability of bank to withstand losses losses due to risk exposures. To be more precise, capital charge is a sort of regulatory cost of keeping loans (perceived as risky) on the balance sheet of banks. The quality of assets of the bank and its capital are often closely related. Quality of assets is reflected in the quantum of NPAs. By this, it implies that if the asset quality were poor, then higher would be the quantum of non-performing assets and vice-versa.


Market Market risk is the risk arising due to the fluctuations in value of a portfolio portfolio due to the volatility volatility of market prices. Operational risk refers to losses arising due to complex system and processes. It is important for a bank to have a good capital base to withstand withstand unforeseen unforeseen losses. losses. It indicates indicates the capability capability of a bank to sustain sustain losses losses arising arising out out of risky risky assets. assets. The Basel Committee on Banking Supervision (BCBS) has also laid down certain minimum risk based capital standards that apply to all internationall internationally y active commercial commercial banks. That is, bank's capital should at least be 8% of their risk-weighted assets. This infact helps bank to provide protection protection to the depositor depositorss and the credito creditors. rs. The main objective here is to build a sort of support system to take care of unexpected financial losses thereby ensuring healthy financial markets and protecting depositors. IMPACT OF EXCESS LIQUIDITY:

One should also not forget that the banks are faced with the problem of increasing liquidity in the system. Further, Reserve Bank of India (RBI) is increasing the liquidity in the system through various rate cuts. Banks can get rid of its excess liquidity by increasing its lending but, often shy away from such an option due to the high risk of default. In order to promote certain prudential norms norms for healthy banking practices practices,, most most of the develope developed d economi economies es require require all banks banks to maintain minimum liquid and cash reserves broadly classified into Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR). Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain maintain with itself itself in the form of cash reserves or by way of current account with the Reserve Bank of India (RBI), computed as a certain percentage of its demand and time liabilities. The objective is to ensure the safety and liquidity of the deposits with the banks. On the other hand, Statutory Statutory Liquidity Ratio (SLR) is the one which every banking company shall maintain in India in the form of cash, gold or unencumbered approved securities, an amount which shall not, at the close of business on any day be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time.


A rate cut (for instance, instance, decrease in CRR) results results into lesser lesser funds to be locked up in RBI's vaults and further infuses greater funds into a system. However, almost all the banks are facing the problem problem of bad loans, burgeoning burgeoning non-performing non-performing assets, assets, thinning margins, margins, etc. as a result result of which, banks are little reluctant in granting loans to corporate. As such, though in its monetary policy RBI announces rate cut but, such news are no longer warmly greeted by the bankers.

HIGH COST OF FUNDS DUE TO NPA’s:

Quite often genuine borrowers face the difficulties in raising funds from banks due to mounting NPAs. Either the bank is reluctant reluctant in providing the requisite requisite funds to the genuine borrowers or if the funds are provided, they come at a very high cost to compensate the lender’s losses caused due to high level of NPAs. Therefore, Therefore, quite often corporate prefer to raise funds through commercial papers (CPs) where the interest rate on working capital charged by banks is higher. With the enactment of the Securitisation Securitisation and Reconstructio Reconstruction n of Financial Assets and Enforcement Enforcement of Security Interest Interest Act, 2002, banks can issue notices notices to the defaulters defaulters to pay up the dues and the borrowers borrowers will have to clear their dues within 60 days. Once the borrower receives a notice from the concerned bank and the financial financial institution, institution, the secured secured assets mentioned in the notice cannot be sold or or transferre transferred d without the consent consent of the lenders. lenders. The main purpose of this notice is to inform the borrower that either the sum due to the bank or financial institution be paid by the borrower or else the former will take action by way of taking over the possession of assets. Besides assets, banks can also takeover the management of the company. Thus the bankers under the aforementioned aforementioned Act will have the much needed authority to either sell the assets of the defaulting companies or change their management. But the protection under the said Act only provides a partial solution. What banks should ensure is that they should move with speed and charged with momentum in disposing off the assets. This is because as uncertainty uncertainty increases increases with the passage passage of time, there is all possibility possibility that the


recoverable value of asset also reduces and it cannot fetch good price. If faced with such a situation than the very purpose of getting protection under the Securitisation Act, 2002 would be defeated and the hope of seeing a must have growing banking sector can easily vanish. NPA in Indian Banks-Year 2001-02 - Review at the end of A Decade.

Indian Banking in 2002 represents a sea change from what it was a decade back. It is a decade of Professional banking moving towards Global Standards. NPA in 1992-93 was a nightmare. Today it is still a problem (albeit a major problem, but under process of firm control). The Government of India is not recapitulating PSB’s in 2001-02, though it released the last installment of an earlier committed amount to Indian Bank (a single case). Banks in general have performed extremely well in 2001-02. There are no public sector banks termed as "weak Bank" today. PSB’s now are in a mood to compete and face competition form private & foreign Banks. In 1992-93, "the profitability of the PSB’s as a group turned negative with as many as twelve national nationalized ized banks banks report reporting ing net losses losses.. By March March 1996, 1996, the outer time time limit limit prescr prescribe ibed d for attaining capital adequacy of 8 per cent, eight public sector banks were still short of the prescribed Limit." The public sector banks which suffered losses of Rs.3, 293 crores in 1992-93 and Rs.4, 349 crores in 1993-94, i.e. in the initial years of introduction of prudential norms, have ended the year 1997-98 with a net profit of Rs.5027 crores. Net NPAs of public sector banks formed formed 8.2% of the net advances and 3.3% of the total assets as at the end of March 1998. Corresponding figures as at 31.03.2002 31.03.2002 is 5.82% and 2.42%. PSB’s recorded an aggregate net profit of Rs.8, 301.24 Crores in 2001-02. NPAs as at 2001-2002 group-wise can be seen from this Table: Table:

Non-Performi Non-Performing ng Assets Assets as Percentage Percentage of of Total Assets Assets - All Scheduled Scheduled Commer Commercial cial Banks Banks Sr No

Name of of the Bank Bank

Net NPAs/Tot NPAs/Total al Assets Assets

Gross NPAs/Total NPAs/Total Asset Asset

1998-

1999-

2000-

99

2000

01

2001-02 2001-02 1998-99 1998-99

1999- 2000-01

2001-02

2000

1 Na Nationalized Banks

6.83

6.0

5.44

5.21

3.26

3.15

2.95

2 St State Bank Group

6.52

5.88

5.11

4.39

2.94

2.60

2.35 2.00

2.16


3 To Total PSB’s

6.71

5.95

5.31

4.89

3.14

2.94

2.72 2.42

4 Pr Private Sector Banks (old)

5.78

5.22

5.14

5.20

3.56

3.27

3.28

2.26

1.60

2.05

3.91

1.59

1.08

1.18 2.10

3.10

3.16

3.04

2.43

1.10

1.03

0.77

5

Private Sector Banks (new)

6 Foreign Banks

3.22

0.82

Various measures introduced since 1993 to arrest and contain the growth of NPAs are described below: 1. Dismantling Dismantling of controls controls and deregulati deregulation on of working working of commerci commercial al banks, banks, permitting entry of new private sector Banks and permission for Foreign Banks to open more branches are steps that were carried out under Banking Sector Reforms. These steps had the effect of opening Indian Banking to Global standards by making them to function efficiently in a competitive environment. This is the initial step to create a structural framework for the public sector sector banks to enable them them to adjust to the new environment environment and turn turn into dynamic and self-reliant operating units. 2. The process of deregulation freed the banks from the control of the Finance Ministry and RBI . Reserve Bank of India, hereafter, acts not as a controller, but a regulator. In the year 1994 RBI further fine-tuned the process by constituting a separated a Board of Financial Supervision with the objective of segregating the supervisory role from the regulatory functions functions of RBI. Banks now operate independently independently in a competitive financial market, market, but have to comply with prudential norms and safeguards essential for their well-being. They have to report due compliance to RBI. Complete particulars about system of Supervision of Financial Institutions by RBI in the Post Reforms Period (since 1994) are summarized in web-page Supervision of the Indian Financial System by Reserve Bank of India 3. RBI in the year 1993 introduced introduced prudential prudential norms as conveyed by Basel Accord of 1988 applicable to Indian banks. banks. These included standards relating to Capital Adequacy, Income Recognition, Asset Classification and Provisioning for non-performing assets. These are detailed in web-page Capital Adequacy Standards - Basel Accord, 1988. 1988. This had the effect of providing a much-needed transparency with regards to the state of affairs of each bank and enabled instant corrective measures to be executed.


4. Avenues of New New Recovery Forums/ Forums/strate strategies: gies: DRTS were made more functional to dispose of pending litigation quickly. More DRTS and DARTs were established. Banks were encouraged to avail the forum of Lok Adalats for quick settlement of overdues under small loans. loans. RBI to promote promote comprom compromise ise settle settlement mentss for differ different ent categor categories ies of borrowe borrowers rs approved a number of one-time settlement schemes. The Recovery of Debts due to Banks and Finan Financi cial al Inst Instit ituti utions ons (ame (amendm ndmen ent) t) Act, Act, passe passed d in Marc March h 2000 2000 has helpe helped d in stre strengt ngthen hening ing the the funct function ioning ing of DRTs DRTs.. Provi Provisi sions ons for for place placeme ment nt of more more than than one Recover Recovery y Office Officer, r, power power to attach attach defenda defendant's nt's propert property/as y/asset setss before before judgmen judgment, t, penal penal provisions provisions for disobedience disobedience of Tribunal's order or for breach of any terms of the order and appoi appoint ntme ment nt of recei receiver ver with with power powerss of real realiza izati tion, on, mana manage geme ment, nt, prot protect ectio ion n and preservation preservation of property property are expected to provide necessary necessary teeth to the DRTs and speed up the recovery of NPAs in the times to come. Though there are 22 DRTs set up at major centers in the country with Appellate Tribunals located in five centers viz. Allah bad, Mumbai, Delhi, Calcutta and Chennai, they could decide only 9814 cases for Rs.6264.71 crores crores pertain pertaining ing to public public sector sector banks banks since since inceptio inception n of DRT mechanism mechanism and till till September 30, 2001.The amount recovered in respect of these cases amounted to only Rs.1864.30 crores. 5. Banks were were permitted permitted to seek seek infusion infusion of fresh fresh equity equity from the public public retaining retaining Government Government share of equity capital capital at 51%. 51%. A number of PSB’s entered the market and raised Tier I and Tier II capital accordingly. Their public issues are now listed in Stock Exchanges. This has created a new class of stake-holder (albeit share-holders) vitally interested in the well-being of the banks and qualified/empowered to question the Board of Directors at the appropriate forum. Annual General Meetings hence forth for the PSB’s cannot be a tame show. 6. Asset Reconstru Reconstruction ction & Securitisa Securitisation tion:: The suggestion for creation of Asset Reconstruction Company to tackle problem of hangover of piled up past NPAs was first suggested by Narasimhan Narasimhan Committee Committee Report II. To Quote there from - "An important important aspect of the continuing reform process is thus to reduce further the high level of NPAs as a means of institutional strengthening. While there is reason to expect that with a combination of policy and institutional institutional developme development, nt, new NPAs could could in future be lower lower than hitherto, hitherto, the problem remains remains of the huge backlog of existing NPAs which impinges impinges severely on banks


performance performance and their their profitabilit profitability. y. Several approaches approaches are are possible. possible. The earlier earlier Committ Committee ee had suggested the creation of an Assets Reconstruction Fund (ARF) to take these assets off banks books at a discount. Recapitalizati Recapitalization on through infusion infusion of capital is another approach and has been used in the case of some banks. In the last six years massive massive budgetary funds have been used for recapitalizat recapitalization ion of public sector banks. This a costly and over time, not a sustainable option. The problem, however, remains and consideration would need to be given to revisiting the concept of an ARF." The Ordinance for creation of ARCs for recovery of NPAs of Banks was passed during June 2002 and this was upgraded as an Act of the Parliament Parliament in December 2002. This is an important measure, measure, as handicaps posed by the infirmities of the legal system were undone 7. Prompt Corrective Corrective Action: PCA is a regulatory and remedial mechanism and correctional strategy strategy designed designed by RBI, intended for implementati implementation on towards resurrecting resurrecting a commercial commercial bank that exhibits exhibits symptoms symptoms of a progress progressive ive downward downward trend in its operational operational paramete parameters rs and quality of assets. It diagnoses and identifies the symptoms of an impending crisis developing in the banking institution and responds towards arresting and preventing further decadence on the one hand and promoting quick resurgence through timely restorative measures. 8. Norms of Lenders' Lenders' Liability Liability: While While success successful fully ly piloti piloting ng the "The Securi Securitis tisatio ation n and Reconstruction of Financial Assets and Enforcement of Security Interest Bill" in the houses of the Parliament by way of moderating the possible misuse of the powers under the legislation by Banks and Financial Institutions, the Finance Minister gave an assurance to bring out a code of Fair Practices defining defining Lenders Liability Liability to the borrowers borrowers in respect of loans loans and and advanc advances es exte extende nded d by them. them. Conse Conseque quent nt to the assu assura rance nce by the Fina Finance nce Minister, Minister, RBI during December, December, 2002 has come out with broad guidelines guidelines for framing framing the Fair Practices Code with regard to lenders' liability “to be followed by commercial banks and finan financi cial al insti institu tuti tions ons,, empha emphasi sizin zing g on trans transpar paren ency cy and and prope properr asse assess ssme ment nt of borrowers' borrowers' credit requirements". requirements". RBI has issued a draft of the model code and has advised the individual banks to adopt model guidelines for framing their respective Fair Practices Code with the approval of their Boards. 9.

Risk Assessment & Risk Management : Risk management is a discipline for dealing with


the possibility that some future event will cause harm. It provides strategies, techniques, and an approach to recognizing and confronting any threat faced by an organization in fulfilling its mission. There can be minimum risk in a captive controlled economy, where industry is protected by high tariff walls and banks by directed credit and directed interest rates, and directed investments. But along with such minimum risk, there would also be minimum growth of the economy. In India after total regulation for several decades, the economy witness around 3% average growth. The Indian economy has now been freed of State controls. Consequently in today's corporate world, it is a challenge for corporate leaders leaders to run a busines businesss with with the objecti objective ve of maximi maximizing zing sharehold shareholders ers'' value. value. The changing environment, on account of on-going process of liberalization and reforms all round, of easing of import restrictions, resulting in an emerging new economic order increases risks content whilst also unfolding new opportunities. In this environment while decision making is the prerogative of the management, sound risk management is also their prime responsibility responsibility - as it provides provides them with the frame work to proactively proactively identify and manage risk associated with their decisions. Banks in the process of financial intermediation are confronted with various kinds of financial and non-financial risks viz., credit, interest rate, foreign exchange rate, liquidity, equity price, commodity price, legal, regulatory, reputation, operational, etc. These risks are highly interdependent and events that affect one area of risk can have ramifications for a range of other risk categories. It therefore becomes very essential for top management of banks to attach considerable considerable importance importance to improve the ability to identify, identify, measure, measure, monitor and control the overall level of risks undertaken. This is a new development in Indian Banking. All these decades before the advent of Reforms the exercise of risk assessment and risk management were never seriously considered or attempted, as the banks were were operating operating in a captive captive economy. economy. Since the year 1998 RBI have been giving serious efforts and attention towards evolving suitable and comprehensive models for Risk-management by the Banks and to integrate this new discipline in the working systems of the Banks. RBI has identified risk-prone areas in Asset-Liability Management, Credit Management, Changes in Market conditions and counter-party & Country Risks and has evolved suitable models for managing all such


risk. RBI has also evolve a system system of Risk based Supervision Supervision Banks. It also advised advised banks a parallel scheme for carrying out internal audit based on risk perception. 10. E-Banking & VRS : The influence of these areas of banking reforms may not appear directly relevant for handling reduction of NPAs. But computerization provides for dataaccuracy and operational efficiency and results in better Management Information Service. VRS rationalizes the work force, which in turn results in better productivity and operational efficiency. Present Prudential Regulations: Regulations:

"The prudential norms on income recognition, asset classification and provisioning thereon, are implemented from the financial year 1992-93, as per the recommendation of the Committee on the Financial System (Narasimhan Committee I). These norms have brought in quantification and objectivity into the assessment and provisioning for NPAs. We at the central bank constantly endeavor to ensure that our prescriptions in this regard are close to international norms. We are neither strict nor lax but just correct in tune with our needs and capabilities. "Under the prudential norms laid down by RBI •

Income should not be recognized on NPAs on accrual basis but should be booked only when it is actually received in respect of such accounts.

•

An asset is considered as "non-performing" if interest or installments of principal due remain unpaid for more than 180 days (the lag would get reduced to 90 days from March 31, 2004 to conform to international norms). Any NPA would migrate from sub-standard to doubtful category after 18 months (as against 12 months under international norms). It would get classified as loss asset if it is irrecoverable or only marginally collectible.

•

The banks should make full provision for loss assets, 100 per cent of the unsecured portion of the doubtful asset plus 20 to 50 per cent of the secured portion (depending (depending on the period for which the account is doubtful), and a general 10% (it is 20 per cent under international international norms) of the outstanding balance in respect of sub-standard assets."

"Detailed guidelines have been issued by RBI in October 2000 on valuation and provisioning for investment portfolio including credit substitutes"


While NPA cannot be eliminated, but can only be contained, it has to be done not at a heavy cost of provisioning and increasing the portfolio of credit. Along with recovery fresh inflow of NPA should be brought down at a level much less than the quantum of its exit. If this specific goal is reached, there is an eventual solution for this problem. THE NARASIMHAN COMMITTEE'S FIRST REPORT

The banking sector reforms in India, initiated initiated since 1992 in the first phase has h as provided necessary necessary platform platform to the banking sector sector to operate on the basis of operational operational flexibility flexibility and functional functional autonomy, thereby enhancing efficiency, productivity and profitability. The reforms brought out structural changes in the financial sector, eased external constraints in their working, introduced transpa transparenc rency y in reporti reporting ng procedur procedures, es, restru restructu cturing ring and recapit recapitali alizat zation ion of banks banks and have increased the competitive element in the market. The salient features of these reforms include: •

Phasing out of statutory pre-emption - The SLR requirement have been brought down from 38.5% to 25% and CRR requirement from 7.50% to 5.75%. (Presently 4.5%)

•

Deregulation Deregulation of interest interest rates - All lending rates except for lending to small borrowers and a part part of expor exportt financ financee have have been been de-re de-regul gulate ated. d. Banks Banks excep exceptt on savin savings gs depos deposit itss determine interest on all deposits.

•

Capital adequacy - CAR of 9 % prescribed with effect from March 31, 2000.

•

Other prudential norms - Income recognition, asset classification and provisioning norms has been been made made appli applicab cable le.. The The provi provisi sioni oning ng norms norms are are more more prud prudent ent,, objec objecti tive, ve, transparent, and uniform and designed to avoid subjectivity.

•

Debt Recovery Tribunals - 22 DRTs and 5 DRATs have already been set up and 7 more DRTs will be set up during the current financial year. Comprehensive amendment in the Act has been made to make the provisions for adjudication, enforcement and recovery more effective.

•

Transparency in financial statements - Banks have been advised to disclose certain key parameters parameters such as CAR, percentage percentage of NPAs, provisions provisions for NPAs, net value of investment, Return on Assets, profit per employee and interest income as percentage to working funds.


Entry of new private sector banks - 9 new private sector banks have been set up with a view to induce greater competition and for improving operational efficiency of the banking system. Competition has been introduced in a controlled manner and today we have nine new private sector banks and 36 foreign banks in India competing with the public sector banks both both in retail retail and corporate corporate banking banking

•

Functional autonomy - The minimum prescribed Government equity was brought to 51%. Nine nationalized banks raised Rs.2855 crores from the market during 1994-2001. Banks Boards have been given more powers in operational matters such as rationalization of branches, branches, credit deliver delivery y and recruitment recruitment of of staff. staff.

•

Hiving off of regulatory and supervisory control - Board for financial supervision was set up under the RBI in 1994 bifurcating the regulatory and supervisory functions.

India has made significant progress in payment systems by introducing modern payment media viz., smart/credit cards, electronic funds transfer, debit/credit clearing, e banking, etc. RBI would soon soon put in place place Real Real Time Time Gross Gross settle settlement ment System (RTGS) (RTGS) to facilit facilitate ate efficie efficient nt funds funds management and mitigating settlement risks. Indian banking has made significant progress in recent years. The prudential norms, accounting and disclo disclosur suree standar standards ds and risk risk managem management ent practi practices ces,, etc. etc. are keeping keeping pace with global global standards. The financial soundness and enduring supervisory practices as evident in our level of compliance with the Basle Committee's Core Principles for Effective Banking Supervision have made our banking system resilient to global shocks. The need for further refinements in our regulatory and supervisory practices has been recognized and steps are being taken by RBI to move towards the goal in a phased manner without destabilizing the system. Success of the second phase of reforms reforms will depend primarily primarily on the organizational organizational effectivenes effectivenesss of banks, for which the initiatives will have to come from banks themselves. Imaginative corporate planning combined with organizational restructuring is a necessary pre-requisite to achieve desired results. Banks need to address urgently the task of organizational and financial restructuring for achieving greater efficiency. The Emergence of NPA in Indian Banking & Financial Institutions and its Dimensions:


Non-performing Non-performing Asset (NPA) has emerged emerged since over a decade as an alarming alarming threat to the banking industry industry in our country country sending sending distress distressing ing signals signals on the sustainability sustainability and and endurability endurability of of the affected banks. The ill effects effects of this surging threat have neutralized neutralized the positive positive results of the chain of measures affected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary period. Despite various correctional steps administered to solve and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. The severity of the problem problem is however however acutely acutely suffered suffered by National Nationalized ized Banks, Banks, followed followed by the SBI SBI group, group, and the all all India Financial Institutions. Table No. I NPA Statistics -All Scheduled Commercial Banks

Year

(Amount in Crores)

%-age of Gross NPA to total advances

%-age of Net NPA to net advances

Total Advances

Gross NPA

Net Advances

Net NPA

352697

50815

325522

25734

14.4

7.3

1999-2000

399496

58722

367012

27892

14.7

7.6

2000-2001

475113

60408

444292

30211

12.7

6.8

2001-2002

558766

63883

526329

32632

11.4

6.2

1998-1999

As at 31.03.2002 31.03.2002 the aggregate aggregate gross NPA of all scheduled scheduled commercial banks amounted to Rs.63, 883 Crores. Table No. I give the figures of gross and net NPA for the last four years. It shows an increase of Rs.13, 068 Crores or more than 25% in the last financial year, indicating that fresh accretion to NPA is more than the recoveries that were affected, thus signifying a losing battle in containing this menace. The apparent reduction of gross NPA from 14.4% to 11.4% between 1999 and 2002 provides little comfort, since this accomplishment is on account of credit growth, which was higher than the


growth of Gross NPA and not through appreciable recovery of NPA. There is neither reduction nor even containment of the threat. The gross NPA and net NPA for PSB’s as at 31.03.2002 are 12.39% and 6.74% are higher than the figures for SCBs at 11.4%and 6.2%. Comparative figures for PSB’s, SBI Group and Nationalized Banks are as under. Table -2: NPA of PSB’s

(Amount in Crores)

%-age Year

Total Advances Gross NPA

Net NPA Gross

of of %-age NPA to

Net net

NPA to total advances advances 1997-1998

244214

43577

20285

17.8 %

9.2 %

1998-1999

284971

45563

21232

16.0 %

8.2 %

1999-2000

325328

51710

24211

15.9 %

8.1 %

2000-2001

380077

53033

26188

14.00 %

7.9%

2001-2002

442134

54773

27967

12.39 %

6.74%

Table -3: NPA of State Bank Group

Year

Total Advances

(Amount in Crores)

%-age %age of Gross Gross %-age of to Gros Grosss NPA NPA Net Net NPA NPA NPA to total NPA advances advances

1998-1999

113360

15522

6829

14.57%

6.98 %

1999-2000

118959

18641

7764

15.67 %

7.74 %

2000-2001

129253

19773

7411

14.08 %

6.77 %

2001-2002

150390

20586

8125

12.73 %

6.26 %


Net net

Table -4: NPA of Nationalized Banks.

Year

Total Advances

(Amount in Crores)

%-ag %agee of Gros Grosss %-age of to Gross oss NP NPA Net NP NPA NPA to total NPA advances advances

1998-1999

166222

30130

14441

16.88

8.91

1999-2000

188926

33069

15759

16.02

8.35

2000-2001

224818

33521

17399

13.99

7.80

2001-2002

264237

34609

16096

12.19

7.01

Net net

Further it is revealed that commercial banks in general suffer a tendency to understate their NPA figures. There is the practice of 'ever-greening' of advances, through subtle techniques. As per report appearing in a national daily the banking industry has under-estimated its non-performing assets (NPAs) by whopping Rs. 3,862.10 Crores as on March 1998. The industry is also estimated to have under-provided to the extent of Rs 1,412.29 Crores. The worst "offender" is the public sector banking industry. Nineteen nationalized banks along with the State Bank of India and its seven associate banks have underestimated their NPAs by Rs 3,029.29 Crores. Such deception of NPA statist statistics ics is executed executed through through the following following ways. ways. •

Failure to identify an NPA as per stipulated guidelines: There were instances of `substandard' assets being classified as `standard';

•

Wrong classification of an NPA: classifying a `loss' asset as a `doubtful' or `sub-standard' asset; classifying a `doubtful' asset as a `sub-standard' asset.

•

Classifying an account of a credit customer as `substandard' and other accounts of the same credit customer as `standard', throwing prudential norms to the winds.

Essentially arising from the wrong classification of NPAs, there was a variation in the level of loan loss provisioning provisioning actually held by the bank and the level required to be made. This practice can be logically explained as a desperate attempt on the part of the bankers, whenever adequate current


earnings were not available to meet provisioning obligations. Driven to desperation and impelled by the desire not to accept defeat, defeat, they have chosen to mislead mislead and claim compliance compliance with the provisioning provisioning norms, without actually actually providing. providing. This only shows that the problem has swelled swelled to graver dimensions. The international rating agency Standard & Poor (S & P) conveys the gloomiest picture, while estimating estimating NPAs of the Indian banking sector sector between 35% to 70% of its total outstanding credit. credit. Much of this, up to 35% of the total banking assets, as per the rating agency would be accounted as NPA if rescheduli rescheduling ng and restructuring restructuring of loans to make make them good assets assets in the book are not taken taken into account. However RBI has contested this dismal assessment. But the fact remains that the infection if left unchecked will eventually lead to what has been forecast by the rating agency. This invests an urgency to tackle this virus as a fire fighting exercise.

Table 5 NPA NPA Stat Statis isti tics cs of the the thre threee Majo Majorr Term erm Le Lend ndin ing g Inst Instit itut utio ions ns as at 31.0 31.03. 3.20 2002 02.. (Amount in Crores)

Name of Tota Totall

Loan Loanss Total otal

Loans oans NPA

NPA-%

age NPA

NPA-%

FI

31.3.2002

31.3.2003

31.3.2002

31.3.2002

31.3.2003

31.3.2003

IDBI

57099

56477

7665

13.4

8363

13.9

ICICI

52341

57507

3959

07.6

2782

05.2

IFCI

19841

18715

4103

20.7

3897

20.8

age

Financial Financial institutions have not far lagged behind. NPAs of ten leading institutions institutions have reported a rise of 11.89 per cent, or Rs 1,929 Crores, to Rs 18,146 Crores during the year ended March 2002 from Rs 16,217 Crores Crores last year. The NPA statistics statistics of the three leading Financial Institutions Institutions for


the last two years are given in Table-5 IDBI tops the list by notching up bad loans worth Rs 7665 Crores by March 2002. In fact, its NPAs have gone up by Rs 1,185 Crores from Rs 6,490 Crores in the previous year. IFCI followed with NPAs of Rs 4,103 Crores, but it reported fall of Rs 134 Crores from the previous year's level of Rs 4,237 Crores. ICICI's NPAs went up to Rs 3,959 Crores from Rs 3,623 Crores in the previous year. Emergence of NPA as an Alarming Threat to Nationalized Banks:

NPA is a brought forward forward legacy legacy accumulated accumulated over the past three three decades, when prudent prudent norms of banking were were forsaken forsaken basking basking by the halo of security security provided provided by governme government nt ownership. ownership. It is not wrong to have pursued social goals, but this does not justify relegating banking goals and fiscal discipline to the background. But despite this extravagance the malaise remained invisible to the public eyes due to the practice practice of not following transparent transparent accounting standards, standards, but keeping the balance sheets sheets opaque. This artificially artificially conveyed conveyed picture of 'all is well' with PSB’s PSB’s suddenly came to an end when the lid was open with the introduction of the prudential norms of banking in the year 1992-93, bringing total transparency in disclosure norms and 'cleansing' the balance sheets of commercial banks for the first time in the country. Adverse Effects of NPA on the Working of Commercial Banks:

NPA has affected affected the profitability, profitability, liquidity and competitive competitive functioning of PSB’s and finally the psychology psychology of the bankers in respect of their disposition disposition towards towards credit delivery delivery and credit expansi expansion. on. Betwee Between n 01.04.9 01.04.95 5 to 31.03.2 31.03.2003 003 Commer Commercial cial banks banks incurre incurred d a total total amount amount of Rs.31251 Crores towards provisioning NPA. This has brought Net NPA to Rs.32632 Crores or 6.2% of net advances. To this extent the problem is contained, but at what cost? This costly remedy is made at the sacrifice of building healthy reserves for future capital adequacy. The enormous provisioning of NPA together with the holding cost of such non-productive assets over the years has acted as a severe drain on the profitability of the PSB’s. In turn PSB’s are seen as poor performers performers and unable to approach the market for raising additional additional capital. Equity issues of nationalized banks that have already tapped the market are now quoted at a discount in the secondary market. Other banks hesitate to approach the market to raise new issues. This has alternatively alternatively forced PSB’s to borrow heavily from the debt market to build Tier II Capital to meet capital adequacy norms putting severe pressure on their profit margins, else they are to seek the


bounty of the Central Central Government Government for repeated repeated Recapitalizati Recapitalization. on. Considering Considering the minimum minimum cost of holding NPAs at 7% p.a. (reckoning average cost of funds at 6% plus 1% service charge) the net NPA of Rs.32632 Rs.32632 Crores Crores absorbs absorbs a recurring recurring holding holding cost of Rs.2300 Rs.2300 Crores Crores annually. annually. Considering Considering the average provisions made for the last 8 years, which works out to average of Rs.3300 crores from annum, a sizeable portion of the interest income is absorbed in servicing NPA. NPA is not merely non-remunerative. It is also cost absorbing and profit eroding. In the context of severe competition in the banking industry, the weak banks are at disadvantage for leveraging the rate of interest in the deregulated market and securing remunerative business growth. The options for these banks are lost. "The spread is the bread for the banks". This is the margin margin between the cost of resources employed employed and the return there from. In other words it is gap between between the return on funds deployed deployed (Interes (Interestt earned on credit credit and investments) investments) and cost cost of funds employed employed (Interest paid on deposits). deposits). When the interest interest rates were directed directed by RBI, as heretofore, there was no option for banks. But today in the deregulated market the banks decide their lending rates rates and borrowi borrowing ng rates. rates. In the competi competitive tive money and capital capital Markets, Markets, inabilit inability y to offer offer competitive market rates adds to the disadvantage of marketing and building new business. In the face of the deregulated banking industry, an ideal competitive working is reached, when the banks are able to earn adequate amount of non-interest non-interest income to cover their entire operating operating expenses i.e. a positive burden. In that event the spread factor i.e. the difference between the gross interest income and interest cost will constitute its operating profits. Theoretically even if the bank keeps 0% spread, it will still break even in terms of operating profit and not return an operating loss. The net profit is the amount of the operating profit minus the amount of provisions to be made including for taxation. On account of the burden of heavy NPA, many nationalized banks have little option and they are unable to lower lending rates competitively, as a wider spread is necessitated to cover cost of NPA in the face of lower income from off balance sheet business yielding non-interest income. Interest on Recapitalization Bonds is a income earned from the Government, who had issued the Recapitalization Bonds to the weak banks to sustain their capital adequacy under a bail out package. The statistics statistics above show the other weaknesses of the nationalized banks in addition to the heavy burden they have to bear for servicing servicing NPA by way of provisioning and holding cost as under:


1. Their operating operating expenses expenses are are higher due due to surplus surplus manpower manpower employed. employed. Wage costs costs to total assets are much higher to PSB’s compared to new private banks or foreign banks. 2. Their earnings earnings from from sources sources other than interest interest income income are meager. meager. This This is due to failure failure to develop off balance sheet business through innovative banking products

Effects of NPA on the Liquidity of the Nationalized Banks:

Though nationalized banks (except Indian Bank) are able to meet norms of Capital Adequacy, as per RBI guidelines guidelines,, the fact that their their net NPA in the average average is as much much as 7% is a potential potential threat threat for them. RBI has indicated the ideal position as Zero percent Net NPA. Even granting 3% net NPA within within limits limits of tolerance tolerance the nationalized nationalized banks are holding an uncomfortable uncomfortable burden at 7.1% as at March 2001. They have not been able to build additional capital needed for business expansion through internal generations or by tapping the equity market, but have resorted to II-Tier capital in the debt market or looking to recapitalization by Government of India. IMPACT OF NPAS ON BANKS' PROFITS AND LENDING PROWESS:

"The efficiency of a bank is not always reflected only by the size of its balance sheet but by the level of return on its assets. NPAs do not generate interest income for the banks, but at the same time banks are required to make provisions for such NPAs from their current profits. NPAs have have a deleterious deleterious effect on on the return return on assets assets in several several ways ways •

They erode current profits through provisioning requirements

•

They result in reduced interest income

•

They require higher provisioning requirements affecting profits and accretion to capital funds and capacity to increase good quality risk assets in future, and

•

They limit recycling of funds, set in asset-liability mismatches, etc There is at times a tendency among some of the banks to understate the level of NPAs in order to reduce the provisioning provisioning and boost up bottom lines. It would only postpone the In the context of crippling effect on a bank's operations in all spheres, asset quality has been placed as one of the most important parameters in the measurement of a bank's performance under the


CAMELS supervisory rating system of RBI.


NPA to net advan vances (% (%))

Adva dvances(c es(crrores) res)

NPA(crores)

2003

2004

2003

2004

2003

Allahabad Ba Bank

7.08

2.37

12,543.60

15,341.54

0.056443

Andhra Bank

1.79

0.93

11,512.94

12,885.47

0.015547

Bank of Baroda

3.72

2.99

35,348.08

35,600.88

0.010523

Bank of India

5.37

4.5

42,633.18

45,855.90

0.012595

Bank of Maharashtra

4.82

2.46

9,508.14

11,731.51

0.050693

Canara Bank

3.59

2.89

40,471.60

47,638.63

0.008870

Central Bank

6.74

5.57

22,251.75

22,804.11

0.030289

Corporation Ba Bank

1.65

1.8

12,029.17

13,889.72

0.013716

Dena Bank

11.83

9.4

8,435.60

9,411.79

0.140238

Indian Bank

6.15

2.7

12,274.99

14,126.08

0.050101

Indian Overseas Bank Oriental Bank Of Commerce

5.23

2.85

17,447.00

20,294.86

0.029976

1.4

NIL

15,677.24

19,680.76

0.008930

Punjab & Sind Bank

10.89

9.62

5,892.09

6,030.01

0.184824

Punjab National Bank

3.86

0.98

40,228.12

47,224.72

0.009595

SB Of Bikaner & Jaipur

4.13

1.24

6,773.33

8,596.55

0.060974

SB Of Hyderabad

3.25

0.65

9,662.60

11,813.68

0.033634

SB Of Indore

2.66

NIL

5,182.95

6,406.06

0.051322

SB Of Mysore

5.19

2.96

5,260.67

6,306.72

0.098656

SB Of Patiala

1.49

NIL

10,746.40

13,086.34

0.013865 0.013865

SB Of Saurashtra

3.53

NIL

4,648.80

5,540.48

0.075933

SB Of Travencore

3.06

1.39

9,170.66

11,132.43

0.033367

State Bank Of India

4.5

3.48

137,758.46

157,933.54

0.003266

Syndicate Bank

4.29

2.58

16,305.35

20,646.92

0.026310

UCO Bank

4.36

3.65

15,923.10

20,626.44

0.027381

Union Bank Of India

4.91

2.87

25,514.84

29,425.91

0.019243

United Bank Of India

5.52

3.75

7,351.69

7,963.34

0.075084

Vijaya Bank

2.61

0.91

7,884.26

11,045.31

0.033103

2004

0.015448 0.007217 0.008398 0.009813 0.020969 0.006066 0.024425 0.012959 0.099874 0.019113 0.014042 0 0.159535 0.002075 0.014424 0.005502 0 0.046934 0 0 0.012486 0.002203 0.012495 0.017695 0.009753 0.047090 0.008238


PUBLIC SECTOR BANKS INFERENCE:


Banks

Quadrant analysis 2003

Allahabad Bank

LH

Andhra Bank

LL

Bank of Baroda

HL

Bank of India Bank of Maharashtra Qua Qu adran drants ts Canara Bank LL Central Bank LH Corporation Bank HL Dena Bank HH Indian Bank Total Indian Overseas Bank

HH LH 200 2003 HL 12 HH 8 LL 4 LH 3 LH 27 LH

Oriental Bank Of Commerce

LL

Punjab & Sind Bank

LH

Punjab National Bank SB Of Bikaner & Jaipur

HL LL

SB Of Hyderabad

LL

SB Of Indore

LL

SB Of Mysore

LH

SB Of Patiala

LL

SB Of Saurashtra

LL

SB Of Travencore

LL

State Bank Of India

HL

Syndicate Bank

LL

UCO Bank

LL

Union Bank Of India

HH

United Bank Of India

LH

Vijaya Bank

LL

2004

LL LL HH HH LL 2004 2004 HH 13 LH 8 LL 1 LH 5 LH 27 LH LL LH HL LL LL LL LH LL LL LL HH LL LH HH LH LL


Credit risk path of the PSB’s: A Quadrant Analysis

In the chart below an attempt is made to trace the relationship between NPA proportion and the size size of cred credit it portf portfol olio io (adva (advanc nces es)) of PSB’ PSB’s. s. For this this purpos purposee propor proporti tion on of gros grosss NPA’ NPA’ss representing credit risk inherent is taken on the Y- axis and gross credit levels are taken on the Xaxis. Since these two parameters are assets, which are stock concept variables, they have been


plotted plotted on the basis basis of 2 years years 2003 2003 and 2004 for for a comparati comparative ve analysis. analysis.

QUADRANT TABLE- 2003.

NPA LEVEL CREDIT LEVEL

LOW (BELOW AVG)

HIGH (ABOVE AVG)

(L)

LOW

LL (12)

HIGH

HL (4)

(H)

LH (8) HH (3)

QUADRANT TABLE- 2004


LOW (BELOW AVG)

HIGH (ABOVE AVG)

(L)

LOW

LL (13)

HIGH

HL (1)

(H)

LH (8) HH (5)

As depicted in the tables, the banks are divided into 4 quadrants namely LL, LH, HL and HH (the figures are arrived at by taking the averages). Where ‘L’ represents low or below average of the PSB’s and ‘H’ represents high or above average. E.g. while LL means low in credit size and low in NPA’s, NPA’s, LH implies low in credit size and high in NPA’s. The following facts are visible visible from the quadrant table:

1).In the year 2003 the average of the NPA’s was4.6%.25 banks had single digit (<10%) NPA levels. 2 banks were above 10% i.e. Dena Bank and Punjab and Sind Bank. The average of NPA’s


was 4.6%, out of which 20 banks were low or below average and 7 were high or above average. PSB’s are mostly in the medium (10-20%) and higher risk (>20%) categories. However, for the purpose of simplicity simplicity only 2X2 matrix matrix of risk risk levels is depicted. depicted. In the year 2004 the average of NPA’s was 2.7%, all banks were below 10% and Dena Bank with a 9.4%. 14 banks remained in the low category and the remaining 13 banks were in the high category.

2).Among the nationalized banks most of he “weak banks” are in the LH quadrant. LH in the most undesirable undesirable quadrant one can find ones banks to be in. SB of Mysore Mysore was in this quadrant in 2003 and 2004. The weakest in this quadrant being Dena Bank (11.84% in 2003 and 9.4% in 2004 still in LH), Punjab and Sind Bank (10.89% in 2003 and 9.62% in 2004 still in LH), Allahabad Bank (7.08% in 2003 which turned to LL in 2004), Indian Bank (6.15% in 2003 and 2.7% in 2004 still in LH), Punjab National Bank (5.23% in 2003 and 2.85% in 2004 still in LH), United Bank of India (582% in 2003 and 3.75% in 2004 still in LH), SB of Mysore (5.19% in 2003 and 2.96% in 2004 still in LH) & Bank of Maharashtra (4.82% in 2003 moved to LL in 2004). 2 banks in the year 2004 moved to LH quadrant, Central Bank from HH moved to LH with 5.57% and UCO Bank moved from LL to LH with 3.65%. Punjab and Sind Bank and Allahabad Allahabad Bank have wriggled out of this knot by making necessary provisions and readying themselves to tap capital markets for augmenting their capital adequacy ratio.

3).In 2003 there were 3 banks in the HH quadrant which increased to 5 in 2004. 4 banks which were in the HL quadrant in 2003, dropped to 1 in 2004.banks in the HH quadrant can move into HL quadrant with some strategic and determined efforts of recovery either on their own or through mergers.


NON PERFORMING ASSET OF COMMERCIAL BANK IN INDIA AT IDBI PRIVATE BANK: NPA to net advances (%)

Advances(cr ores)

2003

2004

2003

2004

2003

Bank Of Punjab

7.17

4.69

1,797.13

2,353.46

0.398969

Bank Of Rajasthan Bharat Overseas Bank Catholic Syrian Bank

6.8

2.99

2,221.24

2,431.63

0.306135

3.31

2.26

1,153.09

1,391.52

0.287054

7.9

4.65

1,470.70

1,898.24

0.537159

Centurion Bank

7.51

4.43

1,313.72

1,556.41

0.571659

City Union Bank Development Credit Bank

8.25

6.37

1,212.05

1,546.98

0.680664

7.76

4.87

2,488.37

2,439.52

0.311850

Dhanalakshmi Bank

9.25

6.68

1,080.49

1,138.59

0.856093

Federal Bank

4.95

2.89

6,217.52

7,700.53

0.079613

HDFC Bank

0.37

0.16

11,754.86

17,744.51

0.003147

ICICI Bank

5.21

2.25

53,279.41

62,095.52

0.009778

IDBI Bank

1.18

0.25

4,325.19

7,398.92

0.027282

Induslnd Ba Bank

4.25

2.75

5,347.85

7,812.23

0.079471

ING Vysya Bank

3.55

2.6

5,611.61

7,046.51

0.063261

J&K Bank

1.58

1.48

8,010.95

9,284.94

0.019723

Karnataka Bank

7.36

4.98

3,899.70

4,667.92

0.188732

Karur Vysya Bank Kotak Mahindra Bank

4.2

2.32

3,344.40

4,023.24

0.125583

0.11

0.17

1,240.58

2,097.02

0.008866

Lakshmi Vilas Bank

7.15

5.4

1,763.70

2,038.70

0.405397

Lord Krishna Bank

6.33

6.05

915.04

1,117.90

0.691773

Sangli Bank

6.89

6.56

568.15

648.25

1.212707

4,196.82

0.165516

2,113.99

0.443882

3,744.47

0.302023

South Indian Bank 5.98 4.55 3,612.94 Tamilnad Mercantile Bank 8.7 5 1,959.98 United Western Babasabpatilfreepptmba.com Bank 9.5 8.95 Page 3,14557 .45 UTI Bank

2.39

1.29

7,179.92

9,362.95

NPA(crores)

0.033287

2004

0.199281 0.122962 0.162412 0.244963 0.284629 0.411770 0.199629 0.586690 0.037529 0.000901 0.003623 0.003378 0.035201 0.036897 0.015939 0.106685 0.057664 0.008106 0.264874 0.541193 1.011955 0.108415 0.236519 0.239019 0.013777

INFERENCE:


Banks

Quadrant analysis 2003

Bank Of Punjab

LH

Bank Of Rajasthan

LH

Bharat Overseas Bank

LL

Catholic Syrian Bank

LH

Centurion Bank

LH

City Union Bank

LH

Devel velopme pment Credit Bank ank

LH

Dhanalakshmi Bank

LH

Federal Bank

HL

HDFC Bank

HL

ICICI Bank

HL

IDBI Bank

LL

Induslnd Bank

LL

ING Vysya Bank

HL

J&K Bank

HL

Karnataka Bank

LH

Karur Vysya Bank

LL

Kotak Mahindra Bank

LL

Lakshmi Vilas Bank

LH

Lord Krishna Bank

LH

Sangli Bank

LH

South Indian Bank

LH

Tami Tamiln lnad ad Mer Merca cant ntil ilee Bank Bank

LH

United Western Bank

LH

2004

LH LL LL LH LH LH LH LH HL HL HL HL HL HL HL LH LL LL LH LH LH LH LH LH

HL U T I B a n k H L Babasabpatilfreepptmba.comPage 59

Quadra drants

20 2003

2004

LL

5

4

LH

14

13

HL

6

8

HH

0

0

Total

25

25


QUADRANT TABLE- 2003.

NPA

LOW (BELOW AVG)

LEVEL CREDIT LEVEL

HIGH (ABOVE AVG)

(L)

LOW

LL (5)

HIGH

HL (6)

(H)

LH (14) HH (0)


NPA

LOW (BELOW AVG)

LEVEL CREDIT LEVEL

HIGH (ABOVE AVG)

(L)

LOW

LL (4)

HIGH

HL (8)

(H)

LH (13) HH (0)

1).As depicted in the tables, most of the private sector banks fall in the LH quadrant. In 2003 there were 14 banks which reduced to 13 in 2004. As seen in the quadrants, the credit size is low in the private sector banks banks and has has a high NPA NPA level level compared compared to its its credit size. 2).There were 6 banks in the in the HL quadrant in 2003 which increased to 8 in 2004. 3). Bank of Rajasthan moved from LH to LL maintaining the low level of advances and reducing their NPA levels from high to low. 4).IDBI Bank and Induslnd Bank moved from LL to HL increasing their advances and maintaining


low levels of NPA. 5).the best performing bank in this sector was the ICICI Bank which was high in its credit size compared to the rest of the banks and still maintained a low NPA level.

Quadrant analysis

Banks NON PERFORMING ASSET OF COMMERCIAL BANK IN INDIA AT 2004 2003 IDBI HL ABN Amro HL

Abu Dhabi Dhabi Commercial Commercial Bank American Express Express Bank Bank Antwerp Diamond Bank Bank N.V.

LH LH L L

Arab Bangladesh Bangladesh Bank Bank International Indonesia

LL LH

Bank Of America Bank Of Bahrain & Kuwait

HL

Bank Of Ceylon

LH

Bank Of Nova Scotia

LH

Bank Of Tokyo

LL

LH

Barclays Bank

LL

BNP Paribas

LL

Calyon Bank

LL

Cho Hung Bank

LL

City Bank

HL

Credit Lyonnais

LL

DBS

LH

Deutsche Bank HSBC ING Bank JP Morgan Chase Bank

L

LH LL LL LL LH

HL LH LH HH LL

LL LL LL LL HL LL

LL

L HL L HL HL L LL L LL L

Krung Thai Public Bank L LL Co. L Babasabpatilfreepptmba.comPage 63 L LL L Mashreq Bank

Qua Qu adran drants ts

200 2003

2004 2004

LL

15

17

LH

10

6

HL

5

6

HH

0

1

Total

30

30

NON PERFORMING ASSET OF COMMERCIAL BANK IN INDIA AT IDBI QUADRANT TABLE- 2003.


LOW (BELOW AVG)

HIGH (ABOVE AVG)

(L)

LOW

LL (15)

HIGH

HL (5)

(H)

LH (10) HH (0)



LOW (BELOW AVG)

HIGH (ABOVE AVG)

(L)

LOW

LL (17)

HIGH

HL (6)

(H)

LH (6) HH (1)

1). Most of the banks in the foreign banks category fall into the LL quadrant. In 2003 there were 15 banks in this quadrant which increased to 17 in 2004. 2).The second highest is the LH quadrant which had 10 banks in 2003 which reduced to 6 in 2004. 3).The effective quadrant being HL had 5 banks in it in 2003 which increased to 6 in 2004. 4).In 2003 there were no banks in the HH quadrant but in 2004 1 bank (Bank of Nova Scotia) moved unto this quadrant.

HIGH CREDIT RISK PATH


With the type of scatting visible in the charts, relation between the size of the credit portfolio and the proportion proportion of NPA may not be a linear one. It is obvious that the relation is not non linear and will be significant if other relevant variables are also taken into account. Not withstanding the same, a smooth non linear hand curve has been drawn indicating the possible credit risk path of e banks which can be extrapolated extrapolated to the banking system itself. itself. The path indicates that for any bank which tries to expand its credit portfolio its NPA levels may cross and hover around the horizontal (credit risk avg) line. At the same time after it crosses the vertical (avg credit size) line, it may be sucked into the orbit of vicious “spindle” line around the horizontal line. In other words, external factors like the legal system and socio economic ad political factors for recovery do undergo change for the better; the credit risk path of the Indian banking system is likely to be high due to high gross NPA levels. No wonder the number of banks in the HL quadrant is low both in the private sector sector and and foreign foreign banks operating operating in India. India. It is is also a warning warning for for multinational multinationalss and other mega international banks and financial institutions which are aspiring to venture into the Indian banking system system . To make it big they they must realize realize that that the can can succeed succeed and survive survive only when when they are prepared to travel on the high credit risk path. It is also doubtful that big international banks will venture into India in a big way. They have bulldozed into consumer industries, given the above depicted high credit risk path of Indian banks. Such dilemma will come into place more so often when these mega MNC banks have opportunities in other countries to expand with lesser credit risk levels and without any threat of a high risk spindle spinning like a Damocles sword. Not withstanding the above, a multiple correlation and regression analysis, perhaps, will be more appropriate to throw further light in this context which is beyond the scope of the study.

FACTORS DETEMING THE CREDIT RISK PATH .

At any point of time the credit risk of a banks portfolio depends on two broad categories. The first is the banks internal set of factors like: size of the credit portfolio, proper data and infor informa mati tion on based based cred credit it polic policy, y, plann planning ing and budge budgeti ting ng syst system ems, s, cred credit it risk risk appra apprais isal al possessed possessed at various levels of the organization, organization, adequacy adequacy of monitoring and follow follow up systems and machinery in vogue, marketing and prompt service standards maintained etc., The other set of factors which are external are: the policy of the regulator and the government, growth of the economy, the efficiency of the legal system in enforcing the contracts, law and


order situation, ethical standards of the society, other socio- political factor.


SUMMARYOF FINDINGS

The brightest spot in the Indian banking industry in 2003-2004 was the massive cleaning up of banks’ balance balance sheets by reducing reducing non performing performing assets assets (NPA’s). (NPA’s). The net NPA’s of 82 banksbanks- 27 public, 25 private private and 30 foreign foreign banksbanks- studied, declined declined 25.8% or by a whooping Rs. Rs. 8,232 crore


to Rs. 23,640 crore in 2004. Treasury income played a major role in reducing the net NPA’s as banks liberally used treasury profit to clean up their books by making large doses of provisions. provisions. The NPA’s of public sector banks declined by Rs. 6, 324 crore to Rs. 18,141 crore. Private Banks, with less red ink on their books, reduced their NPA’s by Rs.1, 919 crore to Rs. 4,618 crore. Surprisingly, the NPA’s f foreign banks rose by Rs. 13 crore to Rs. 882 crore during 2003-2004. Most banks were able to take advantage of fat profits from treasury operations, brought about by the lower interest rates, to make higher provisions for bad debts. As a result, 4 state owned banksOriental Bank of Commerce, State Bank of Indore, State Bank of Patiala And State Bank of Saurashtra- became zero NPA banks by the end of 2003-2004. 4 other public sector banks- Andhra Bank, Punjab National Bank, State Bank of Hyderabad and Vijaya Bank- were able to reduce their NPA’s to below 1%. The rush to clean the balance sheets by making high provisions for NPA’s had its impact on bottom lines. lines. The 82 82 banks covered covered in the the study, in in percentage percentage terms, terms, had a lower lower net profit profit growth growth of 32.9 % (Rs. 23,035 crore) in 2003-2004 than the 53% (Rs. 17,331 crore) in 2000-2003. Private Banks were the hardest hit. In 2003-2004, the net profit of private banks grew by 32% to Rs. 4,254 crore versus a rise of 83.9 % (Rs. 3,220 crore) in 2002-2003. The bottomlines of state owned banks grew 34.6 %( Rs. 16,546 crore) in 2004 versus 48% (Rs. 12,295 crore) in the previous previous year. Foreign banks clocked a 23% rise (Rs. 2,235 crore) in net profit s compared with 38 % (Rs.1, 816 crore) in 2002-2003. The lower growth in profit can also be attributed to the marginal rise in interest income. Interest income rose marginally by 2.5% to Rs.1, 43,437 crore in 2003-2004, compared with 12.5% (Rs 1, 39,931 crore) in 2002-2003. it is obvious that the fall in the cost of lending hit the growth in interest income. However, the net interest income of the banking industry rose sharply by 20%. In 2002-2003, the rise in net interest income was 21.3%. Banks indeed made huge treasury profits. However, the bread-and- butter lending business was not entirely neglected. The total advances of 82 banks rose 17.1% to Rs 8, 60,741 crore, up from a rise of 15.3% (Rs 7, 35,041 crore) in 2002-2003.



SUGGESTIONS

1. Fixing up the budget for profits and recovery rather than for advances. Budget oriented approach at times leads to release of credit facilities without ensuring compliance of covenants of sanction. A suitable mechanism could be drawn at each bank level to provide monetary benefits/ reorganization of the operating staff particularly for recovery in NPA’s write-off cases.


2. Projects with old technology should not be considered for finance.

3. Large exposure for big corporates/single project should be avoided.

4. There is a need for shift in PSB’s approach from collateral security to viability of the project and intrinsic strength of the promoters.

5. Upgradation of credit skills of the operating staff working in advance.

6. Timely sanction/ release to avoid time and cost overruns.

7. It is suggested for possible restructuring of banks through mergers and acquisitions to keep themselves competitive in the high credit risk market in India. 8. Possibly one time solution like Asset Reconstruction Fund (ARF) may be relevant India. 9. Unless the magnitude f NPA’s is brought down and ROA levels improved banks may not be able to infuse the confidence in the market in general and capital market in particular order to meet their capital adequacy needs.

CONCLUSION

An attempt is made in this study to present a comprehensive picture of non-performing advances of commercial banks in India, touching upon various quantitative and qualitative trends in the post reform period, besides carrying out with some policy and strategic implications. Undoubtedly India is one of the few countries where NPA levels are very high as there is an increase in the percentage of gross advances eroding their ROA by major basic points, after netting the provision. The net NPA’s constitute a major percentage of the tangible net worth of the public p ublic sector banks, which represent a huge chunk of the banking system business. Not withstanding a lower proportion of


NPA’s. NPA’s. Private banks NPA’s has shown a sudden spurt in the recent years making them vulnerable. The proportion proportion of credit credit risk among the the priority priority sector advances advances is double double that of non-priority non-priority advances advances implying the irrationality of (administered) price controls, which still exists in some form. External factors outweigh the internal factor4s contributing to this high accumulation of NPA’s. If the banks have to survive in the competitive and increasingly globalized market conditions they should be helped both by the RBI and the government in the form of faster recovery climate, especially for the legal processes of enforcement of contracts. Till such time the banks may be helped by recognizing their provisions against standard assets, additional provisions over and above the prudential norms, etc., as Tier II capital. The quadrant analysis of credit risk clearly identifies that all the big banks in India suffer from high NPA levels. levels. It also also offers offers scope scope for mergers mergers and and acquisitions acquisitions among the the banks to to be better better prepared prepared for high risk credit marketing in India. Public sector banks suffer from a heavy NPA baggage. Hence, at one point of time, asset reconstruction fund pattern in a feasible shape may be helpful to the banks. Corporate defaults defaults from their side will affect banks and they will not be in a position position to lower the interest rates due to high default risk premier. Unless all efforts are made from within and without reducing the magnitude of NPA’s, banks will not be in apposition to infuse requisite confidence in the capital market. Periodical visit to which is essential in future especially now when the government has almost said no to future capitalization of public sector banks.



Bibliography:

1.Annual reports of IDBI bank 2.Documents concerned to finance department. 3.Books on banking sector 4.Books on NPA 5.The journals, magazines, periodicals 6.Website


A Project Report on Non Performing Asset of Commercial Bank in India at Idbi

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