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  • 2. INTRODUCTIONAfter liberalization the Indian banking sector developed very appreciate. TheRBI also nationalized good amount of commercial banks for proving socio economicservices to the people of the nation. The Public Sector Banks have shown verygood performance as far as the financial operations are concerned. If we look tothe glance of the financial operations, we may find that deposits of public tothe Public Sector Banks have increased from 859,461.95crore to 1,079,393.81crorein 2003, the investments of the Public Sector Banks have increased from349,107.81crore to 545,509.00crore, and however the advances have also beenincreased to 549,351.16crore from 414,989.36crore in 2003. The total income ofthe public sector banks have also shown good performance since the last fewyears and currently it is 128,464.40crore. The Public Sector Banks have alsoshown comparatively good result. The gross profits of the Public Sector Bankscurrently 29,715.26crore which has been doubled to the last to last year, andthe net profit of the Public Sector Banks is 12,295,47crore. However, the onlyproblem of the Public Sector Banks these days are the increasing level of thenon performing assets. The non performing assets of the Public Sector Banks havebeen increasing regularly year by year. If we glance on the numbers of nonperforming assets we may come to know that in the year 1997 the NPAs were47,300crore and reached to 80,246crore in 2002. The only problem that hampersthe possible financial performance of the Public Sector Banks is the increasingresults of the non performing assets. The non performing assets impactsdrastically to the working of the banks. The efficiency of a bank is not alwaysreflected only by the size of its balance sheet but by the level of return onits assets. NPAs do not generate interest income for the banks, but at the sametime banks are required to make provisions for such NPAs from their currentprofits.2
  • 3. NPAs have a deleterious effect on the return on assets in several ways  • • • •They erode current profits through provisioning requirements They result inreduced interest income They require higher provisioning requirements affectingprofits and accretion to capital funds and capacity to increase good qualityrisk assets in future, and They limit recycling of funds, set in asset-liabilitymismatches, etc.The RBI has also tried to develop many schemes and tools to reduce the nonperforming assets by introducing internal checks and control scheme,relationship managers as stated by RBI who have complete knowledge of theborrowers, credit rating system, and early warning system and so on. The RBI hasalso tried to improve the securitization Act and SRFAESI Act and other actsrelated to the pattern of the borrowings. Though RBI has taken number ofmeasures to reduce the level of the non performing assets the results is not upto the expectations. To improve NPAs each bank should be motivated to introducetheir own precautionary steps. Before lending the banks must evaluate thefeasible financial and operational prospective results of the borrowingcompanies. They must evaluate the business of borrowing companies by keeping inconsiderations the overall impacts of all the factors that influence thebusiness.3
  • 4. RESEARCH OPERATION1. Significance of the studyThe main aim of any person is the utilization money in the best manner since theIndia is country were more than half of the population has problem of runningthe family in the most efficient manner. However Indian people faced largenumber of problem till the development of the full-fledged banking sector. TheIndian banking sector came into the developing nature mostly after the 1991government policy. The banking sector has really helped the Indian people toutilise the single money in the best manner as they want. People now havestarted investing their money in the banks and banks also provide good returnson the deposited amount. The people now have at the most understood that banksprovide them good security to their deposits and so excess amounts are investedin the banks. Thus, banks have helped the people to achieve their socio economicobjectives. The banks not only accept the deposits of the people but alsoprovide them credit facility for their development. Indian banking sector hasthe nation in developing the business and service sectors. But recently thebanks are facing the problem of credit risk. It is found that many generalpeople and business people borrow from the banks but due to some genuine orother reasons are not able to repay back the amount drawn to the banks. Theamount which is not given back to the banks is known as the non performingassets. Many banks are facing the problem of non performing assets which hampersthe business of the banks. Due to NPAs the income of the banks is reduced andthe banks have to make the large number of the provisions that would curtail theprofit of the banks and due to that the financial performance of the banks wouldnot show good results The main aim behind making this report is to know howPublic Sector Banks are operating their business and how NPAs play its role tothe operations of the Public Sector Banks. The report NPAs are classifiedaccording to the sector, industry, and state wise. The present study alsofocuses on the existing system in India to solve the problem of NPAs andcomparative analysis to understand which bank is playing what role withconcerned to NPAs.Thus, the study would help the decision makers to understandthe financial performance and growth of Public Sector Banks as compared to theNPAs.4
  • 5. 2. Objective of the study Primary objective:The primary objective of the making report is: To know why NPAs are the greatchallenge to the Public Sector BanksSecondary objectives:The secondary objectives of preparing this report are: To understand what is NonPerforming Assets and what are the underlying reasons for the emergence of theNPAs. To understand the impacts of NPAs on the operations of the Public SectorBanks. To know what steps are being taken by the Indian banking sector to reducethe NPAs? To evaluate the comparative ratios of the Public Sector Banks withconcerned to the NPAs.5
  • 6. 2. Research methodologyThe research methodology means the way in which we would complete our prospectedtask. Before undertaking any task it becomes very essential for any one todetermine the problem of study. I have adopted the following procedure incompleting my report study. 1. Formulating the problem 2. Research design 3.Determining the data sources 4. Analysing the data 5. Interpretation 6.Preparing research report (1) Formulating the problemI am interested in the banking sector and I want to make my future in thebanking sector so decided to make my research study on the banking sector. Ianalysed first the factors that are important for the banking sector and I cameto know that providing credit facility to the borrower is one of the importantfactors as far as the banking sector is concerned. On the basis of the analysedfactor, I felt that the important issue right now as far as the creditfacilities are provided by bank is non performing assets. I started knowingabout the basics of the NPAs and decided to study on the NPAs. So, I chose thetopic  Non Performing Assts the great challenge before the Public SectorBanks . (2) Research DesignThe research design tells about the mode with which the entire project isprepared. My research design for this study is basically analytical. Because Ihave utilised the large number of data of the Public Sector Banks.6
  • 7. (3)Determining the data sourceThe data source can be primary or secondary. The primary data are those datawhich are used for the first time in the study. However such data take placemuch time and are also expensive. Whereas the secondary data are those datawhich are already available in the market. These data are easy to search and arenot expensive too.for my study I have utilised totally the secondary data. (4)Analysing the dataThe primary data would not be useful until and unless they are well edited andtabulated. When the person receives the primary data many unuseful data wouldalso be there. So, I analysed the data and edited them and turned them in theuseful tabulations. So, that can become useful in my report study. (5)Interpretation of the dataWith use of analysed data I managed to prepare my project report. But theanalyzing of data would not help the study to reach towards its objectives. Theinterpretation of the data is required so that the others can understand thecrux of the study in more simple way without any problem so I have added thechepter of analysis that would explain others to understand my study in simplerway. (6) Project writingThis is the last step in preparing the project report. The objective of thereport writing was to report the findings of the study to the concernedauthorities.7
  • 8. 4. Limitations of the studyThe limitations that I felt in my study are: It was critical for me to gatherthe financial data of the every bank of the Public Sector Banks so the betterevaluations of the performance of the banks are not possible. Since my study isbased on the secondary data, the practical operations as related to the NPAs areadopted by the banks are not learned. Since the Indian banking sector is so wideso it was not possible for me to cover all the banks of the Indian bankingsector.8
  • 9. INDIAN BANKING SECTORBanking in India has its origin as early as the Vedic period. It is believedthat the transition from money lending to banking must have occurred even beforeManu, the great Hindu Jurist, who has devoted a section of his work to depositsand advances and laid down rules relating to rates of interest. During the Mogulperiod, the indigenous bankers played a very important role in lending money andfinancing foreign trade and commerce. During the days of the East India Company,it was the turn of the agency houses to carry on the banking business. TheGeneral Bank of India was the first Joint Stock Bank to be established in theyear 1786. The others which followed were the Bank of Hindustan and the BengalBank. The Bank of Hindustan is reported to have continued till 1906 while theother two failed in the meantime. In the first half of the 19th century the EastIndia Company established three banks; the Bank of Bengal in 1809, the Bank ofBombay in 1840 and the Bank of Madras in 1843. These three banks also known asPresidency Banks were independent units and functioned well. These three bankswere amalgamated in 1920 and a new bank, the Imperial Bank of India wasestablished on 27th January 1921. With the passing of the State Bank of IndiaAct in 1955 the undertaking of the Imperial Bank of India was taken over by thenewly constituted State Bank of India. The Reserve Bank which is the CentralBank was created in 1935 by passing Reserve Bank of India Act 1934. In the wakeof the Swadeshi Movement, a number of banks with Indian management wereestablished in the country namely, Punjab National Bank Ltd, Bank of India Ltd,Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank ofIndia Ltd. On July 19, 1969, 14 major banks of the country were nationalised andin 15th April 1980 six more commercial private sector banks were also taken overby the government.9
  • 10. Indian Banking: A Paradigm shift-A regulatory point of viewThe decade gone by witnessed a wide range of financial sector reforms, with manyof them still in the process of implementation. Some of the recently initiatedmeasures by the RBI for risk management systems, anti money launderingsafeguards and corporate governance in banks, and regulatory framework for nonbank financial companies, urban cooperative banks, government debt market andforex clearing and payment systems are aimed at streamlining the functioning ofthese instrumentalities besides cleansing the aberrations in these areas.Further, one or two all India development financial institutions have alreadycommenced the process of migration towards universal banking set up. The bankingsector has to respond to these changes, consolidate and realign their businessstrategies and reach out for technology support to survive emerging competition.Perhaps taking note of these changes in domestic as well as international arenaAll of we will agree that regulatory framework for banks was one area which hasseen a sea-change after the financial sector reforms and economic liberalisationand globalisation measures were introduced in 1992-93. These reforms followedbroadly the approaches suggested by the two Expert Committees both set up underthe chairmanship of Shri M. Narasimham in 1991 and 1998, the recommendations ofwhich are by now well known. The underlying theme of both the Committees was toenhance the competitive efficiency and operational flexibility of our bankswhich would enable them to meet the global competition as well as respond in abetter way to the regulatory and supervisory demand arising out of suchliberalisation of the financial sector. Most of the recommendations made by thetwo Expert Committees which continued to be subject matter of close monitoringby the Government of India as well as RBI have been implemented. Government ofIndia and RBI have taken several steps to :- (a) Strengthen the banking sector,(b) Provide more operational flexibility to banks, (c) Enhance the competitiveefficiency of banks, and (d) Strengthen the legal framework governing operationsof banks.10
  • 11. Regulatory measures taken to strengthen the Indian Banking sectors The importantmeasures taken to strengthen the banking sector are briefly, the following:• • • • • •Introduction of capital adequacy standards on the lines of the Basel norms,prudential norms on asset classification, income recognition and provisioning,Introduction of valuation norms and capital for market risk for investmentsEnhancing transparency and disclosure requirements for published accounts ,Aligning exposure norms   single borrower and group-borrower ceiling   withinter-national best practices Introduction of off-site monitoring system andstrengthening of the supervisory framework for banks.(A) Some of the important measures introduced to provide more operationalflexibility to banks are:•• •• • •Besides deregulation of interest rate, the boards of banks have been given theauthority to fix their prime lending rates. Banks also have the freedom to offervariable rates of interest on deposits, keeping in view their overall cost offunds. Statutory reserve requirements have significantly been brought down. Thequantitative firm-specific and industry-specific credit controls were abolishedand banks were given the freedom to deploy credit, based on their commercialjudgment, as per the policy approved by their Boards. The banks were given thefreedom to recruit specialist staff as per their requirements, The degree ofautonomy to the Board of Directors of banks was substantially enhanced. Bankswere given autonomy in the areas of business strategy such as, opening ofbranches / administrative offices, introduction of new products and certainother operational areas.(b) Some of the important measures taken to increase the competitive efficiencyof banks are the following:•Opening up the banking sector for the private sector participation.11
  • 12. •Scaling down the shareholding of the Government of India in nationalised banksand of the Reserve Bank of India in State Bank of India.(c) Measures taken by the Government of India to provide a more conducive legalenvironment for recovery of dues of banks and financial institutions are:• • •Setting up of Debt Recovery Tribunals providing a mechanism for expeditious loanrecoveries. Constitution of a High Power Committee under former Justice ShriEradi to suggest appropriate foreclosure laws. An appropriate legal frameworkfor securitisation of assets is engaging the attention of the Government,Due to this paradigm shift in the regulatory framework for banks had achievedthe desired results. The banking sector has shown considerable degree ofresilience. (a) The level of capital adequacy of the Indian banks has improved:the CRAR of public sector banks increased from an average of 9.46% as on March31, 1995 to 11.18% as on March 31, 2001. (b) The public sector banks have alsomade significant progress in enhancing their asset quality, enhancing theirprovisioning levels and improving their profits.• •• •The gross and net NPAs of public sector banks declined sharply from 23.2% and14.5% in 1992-93 to 12.40% and 6.7% respectively, in 2000-01. Similarly, inregard to profitability, while 8 banks in the public sector recorded operatingand net losses in 1992-93, all the 27 banks in the public sector showedoperating profits and only two banks posted net losses for the year ended March31, 2001. The operating profit of the public sector banks increased from Rs.5628crore as on March 31, 1995 to Rs.13,793 crore as on March 31, 2001. The netprofit of public sector banks increased from Rs.1116 crore to Rs.4317 croreduring the same period, despite tightening of prudential norms on provisioningagainst loan losses and investment valuation.The accounting treatment for impaired assets is now closer to the internationalbest practices and the final accounts of banks are transparent and more amenableto meaningful interpretation of their performance.12
  • 13. WAY FORWARD RBI president recently recommended Indian banks to go for largerprovisioning when the profits are good without frittering them away by way ofdividends, however tempting it may be. As a method of compulsion, RBI hasrecently advised banks to create an Investment Fluctuation Reserve upto 5 percent of the investment portfolio to protect the banks from varying interest rateregime. He further added that one of the means for improving financial soundnessof a bank is by enhancing the provisioning standards of the bank. The cumulativeprovisions against loan losses of public sector banks amounted to a mere 41.67%of their gross NPAs for the year ended March 31, 2001. The amount of provisionsheld by public sector banks is not only low by international standards but therehas been wide variation in maintaining the provision among banks. Some of thebanks in the public sector had as low provisioning against loan losses as 30% oftheir gross NPAs and only 5 banks had provisions in excess of 50% of their grossNPAs. This is inadequate considering that some of the countries maintainprovisioning against impaired assets at as high as 140%. Indian Banks shouldimprove the provisioning levels to at least 50% of their gross NPAs. Thereshould therefore be an attitudinal change in banks  policy as regardsappropriation of profits and full provisioning towards already impaired assetsshould become a priority corporate goal. He also suggested that banks shouldalso develop a concept of building desirable capital over and above the minimumCRAR which is insisted upon in developed regulatory regimes like UK. This can beat, say around 12 percent as practised even today by some of the Indian banks,so as to provide well needed cushion for growth in risk weighted assets as wellas provide for unexpected erosion in asset values. As banks would have observed,the changes in the regulatory framework are now brought in by RBI only throughan extensive consultative process with banks as well as public whereverwarranted. While this serves the purpose of impact assessment on the proposedmeasures it also puts the banks on notice to initiate appropriate internalreadjustment to meet the emerging regulatory prescriptions. Though adequatetransitional route has been provided for switchover to new regulatory measuressuch as scaling down the exposure to capital market, tightening the prudentialrequirements like switch over to 90 day NPA norm, reduction in exposure norms,etc., I observe from the various quarters13
  • 14. from which RBI gets its inputs that the banks are yet to take serious stepstowards implementation of these measures. The Boards of banks have been accordedconsiderable autonomy in regard to their corporate strategy as also severalother operational matters. This does not; however, seem to have translated toany substantial improvement in customer service. It needs to be recognised thatmeeting the requirements of the customer   whether big or small  efficiently and in a cost effective manner, alone will enable the banks towithstand the global competition as also the competition from non-bankinstitutions. The profitability of the public sector banks is coming understrain. Despite the resilience shown by our banks in the recent times, theincome from recapitalisation bonds accounted for a significant portion of thenet profits for some of the nationalised banks. The Return on Assets (RoA) ofpublic sector banks has, on an average, declined from 0.54 for the year endedMarch 31, 1999 to 0.43 for the year ended March 31, 2001. Therefore, theBoards  attention needs to be focused on improving the profitability of thebank. The interest income of public sector banks as a percentage of total assetshas shown a declining trend since 1996-97: it declined from 9.69 in 1996-97 to8.84 in 2000-01. Similarly, the spread (net interest income) as a percentage oftotal assets also declined from 3.16 in 1996-97 to 2.84 in 2000-01. Adisheartening feature is that a large number of public sector banks haverecorded far below the median RoA of 0.4% for 2000-01 in their peer group.Incidentally the RoA recorded by new private banks and foreign banks ranged from0.8% to 1% for the same period. An often quoted reason for the decline inprofitability of public sector banks is the stock of NPAs which has become adrag on the bank s profitability. As you are aware, the stock of NPAs does notadd to the income of the bank while at the same time, additional cost isincurred for keeping them on the books. To help the public sector banks inclearing the old stock of chronic NPAs, RBI had announced  one-time nondiscretionary and non discriminatory compromise settlement schemes  in 2000and 2001. Though many banks tried to settle the old NPAs through thistransparent route, the response was not to the extent anticipated as the bankshad been bogged down by the usual fear psychosis of being averse to settlingdues where security was available. The moot point is if the underlying securitywas not realised over decades in many cases due to extensive delay in litigationprocess, should not the banks have taken advantage of the one time opportunityprovided under RBI scheme to cleanse their books of chronic14
  • 15. NPAs? This would have helped in realizing the carrying costs on such non-incomeearning NPAs and released the funds for recycling. If better steps are takenplaced in this connection then the performance of the Public Sector Banks canshow very good and healthy results in the shorter period. To make the betterfuture of the Public Sector Banks, the Boards need to be alive to the decliningprofitability of the banks. One of the reasons for the low level ofprofitability of public sector banks is the high operating cost. The cost incomeratio (which is also known as efficiency ratio of public sector banks) increasedfrom 65.3 percent for the year ended March 31, 2000 to 68.7 per cent for theyear ending March 31, 2001. The staff expenses as a proportion to total incomeformed as high as 20.7% for public sector banks as against 3.3% for new banksand 8.2% for foreign banks for the year ended March 31, 2001. There is thus animperative need for the banks to go for cost cutting exercise and rationalisethe expenses to achieve better efficiency levels in operation to withstanddeclining interest rate regime. Boards of banks have much more freedom now thanthey had a decade ago, and obviously they have to play the role of changeagents. They should have the expertise to identify, measure and monitor therisks facing the bank and be capable to direct and supervise the bank soperations and in particular, its exposures to various sectors of the economy,and monitoring / review thereof, pricing strategies, mitigation of risks, etc.The Board of the banks should also ensure compliance with the regulatoryframework, and ensure adoption of the best practices in regard to riskmanagement and corporate governance standards. The emphasis in the secondgeneration of reforms ought to be in the areas of risk management and enhancingof the corporate governance standards in banks.15
  • 16. THE INDIAN BANKING INDUSTRYThe origin of the Indian banking industry may be traced to the establishment ofthe Bank of Bengal in Calcutta (now Kolkata) in 1786. Since then, the industryhas witnessed substantial growth and radical changes. As of March 2002, theIndian banking industry consisted of 97 Commercial Banks, 196 Regional RuralBanks, 52 Scheduled Urban Co-operative Banks, and 16 Scheduled State Co-operative Banks. The growth of the banking industry in India may be studied interms of two broad phases: Pre Independence (1786-1947), and Post Independence(1947 till date). The post independence phase may be further divided into threesub-phases: • • • Pre-Nationalisation Period (1947-1969) Post-Nationalisation Period (1969-1991) Post-Liberalisation Period (1991- till date)The two watershed events in the postindependence phase are the nationalisationof banks (1969) and the initiation of the economic reforms (1991). This sectionfocuses on the evolution of the banking industry in India post-liberalisation.1. Banking Sector Reforms - Post-LiberalisationIn 1991, the Government of India (Gol) set up a committee under the chairmanshipof Mr. Narasimaham to make an assessment of the banking sector. The report ofthis committee contained recommendations that formed the basis of the reformsinitiated in 1991. The banking sector reforms had the following objectives: 1.Improving the macroeconomic policy framework within which banks operate; 2.Introducing prudential norms; 3. Improving the financial health and competitiveposition of banks; 4. Building the financial infrastructure relating tosupervision, audit technology and legal framework; and 5. Improving the level ofmanagerial competence and quality of human resources. 1.1 Impact of Reforms onIndian Banking Industry16
  • 17. With the initiation of the reforms in the financial sector during the 1990s, theoperating environment of banks and term-lending institutions has radicallytransformed. One of the fall-outs of the liberalisation was the emergence ofnine new private sector banks in the mid1990s that spurred the incumbentforeign, private and public sector banks to compete more fiercely than had beenthe case historically. Another development of the economic liberalisationprocess was the opening up of a vibrant capital market in India, with bothequity and debt segments providing new avenues for companies to raise funds.Among others, these two factors have had the greatest influence on banksoperating in India to broaden the range of products and services on offer. Thereforms have touched all aspects of the banking business. With increasingintegration of the Indian financial markets with their global counterparts andgreater emphasis on risk management practices by the regulator, there have beenstructural changes within the banking sector. The impact of structural reformson banks balance sheets (both on the asset and liability sides) and theenvironment they operate in is discussed in the following sections. 1.2 Reformson the Liabilities Side • Reforms of Deposit Interest RateBeginning 1992, a progressive approach was adopted towards deregulating theinterest rate structure on deposits. Since then, the rates have been freedgradually. Currently, the interest rates on deposits stand completelyderegulated (with the exception of the savings bank deposit rate). Thederegulation of interest rates has helped Indian banks to gain more control onthe cost of their deposits, the main source of funding for Indian banks.Besides, it has given more, flexibility to banks in managing theirAssetLiability positions.17
  • 18. •Increase in Capital Adequacy RequirementDuring the 1990s, the Reserve Bank of India (RBI) adopted a strategy aimed atall banks attaining a Capital Adequacy Ratio (CAR) of 8% in a phased manner. Onthe recommendations of the Committee on Banking Sector Reforms, the minimum CARwas further raised to 9%, effective March 31, 2000.While the stipulation of ahigher Capita! Adequacy Ratio has increased the capital requirement of banks;it has provided more stability to the Indian banking system. 1.3 Reforms on theAsset Side Reforms on the Lending Interest Rate During 1975-76 to 1980-81, theRBI prescribed both the minimum lending rate and the ceiling rate. During 1981-82 to 1987-88. The RBI prescribed only the ceiling rate. During 198889 to 1994-95, the RBI switched from prescribing a ceiling rate to fixing a minimum lendingrate. From 1991 onwards, interest rates have been increasingly freed. Atpresent, banks can offer loans at rates below the Prime Lending Rate (PLR) toexporters or other creditworthy borrowers (including public enterprises), andhave only to announce the FLR and the maximum spread charged over it. Thederegulation of lending rates has given banks the flexibility to price loanproducts on the basis of their own business strategies and the risk profile ofthe borrower. It has also lent a competitive advantage to banks with lower costof funds. Lower Cash Reserve and Statutory Liquidity Requirements During theearly 1980s, statutory pre-emption in the form of Cash Reserve Ratio (CRR) andStatutory Liquidity Ratio (SLR) accounted for 42% of the deposits. In the 1990s,the figure rose to 53.5%, which during the post-liberalisation period has beengradually reduced. At present, banks are required to maintain a CRR of 4% of theNet Demand and Time Liabilities (NDTL) (excluding liabilities subject to zeroCRR prescriptions). The RBI has indicated that the CRR would eventually bebrought down to the statutory minimum level of 3% over a period of time. TheSLR, which was at a peak of 38.5% during September 1990 to December 1992, nowstands lower at the statutory minimum of 25%.A decrease in the CRR and SLRrequirements implies an increase in the share of deposits available to banks forloans and advances. It also means that banks now have more discretion in theallocation of • •18
  • 19. funds, which if deployed efficiently, can have a positive impact on theirprofitability. By increasing the amount of invisible funds available to banks,the reduction in the CRR and SLR requirements has also enhanced the need forefficient risk management systems in banks. Asset Classification andProvisioning Norms Prudential norms relating to asset classification have beenchanged postliberalisation. The earlier practice of classifying assets ofdifferent quality into eight `health codes" has now been replaced by the systemof classification into four categories (in accordance with the internationalnorms): standard, sub-standard, doubtful, and loss assets. On 1st April 2000,provisioning requirements of a minimum of 0.25% were introduced for standardassets. For the sub-standard, doubtful and loss asset categories, theprovisioning requirements remained at 10%, 20-50% (depending on the duration forwhich the asset has remained doubtful), and 100%, respectively, the recognitionnorms for NPAs have also been tightened gradually. Since March 1995, loans withinterest and/or installment of principal overdue for more than 180 days areclassified as nonperforming. This period will be shortened to 90 days from theyear ending 31st March 2004. 1.4 Structural Reforms Increased Competition Withthe initiation of banking-sector reforms, a more competitive environment hasbeen ushered in. Now banks are not only competing within themselves, but alsowith non-banks, such as financial services companies and mutual funds. Whileexisting banks have been allowed greater flexibility in expanding theiroperations, new private sector banks have also been allowed entry. Over the lastdecade nine new private sector banks have established operations in the country.Competition amongst Public Sector Banks (PSBs) has also intensified. PSBs arenow allowed to access the capital market to raise funds. This has dilutedGovernments shareholding, although it remains the major shareholder in PSBs,holding a minimum 51% of their total equity. Although competition in the bankingsector has reduced the share of assets and deposits of the PSBs, their dominantpositions, especially of the large ones, continues. Although the PSBs willremain major players in the banking industry, they are likely to face toughcompetition, from both private sector banks and foreign banks. Moreover, thebanking industry is likely to face stiff competition from other players likenon-bank • •19
  • 20. finance companies, insurance companies, pension funds and mutual funds. Theincreasing efficiency of both the equity and debt markets has also acceleratedthe process of financial disintermediation, putting additional pressure on banksto retain their customers. Increasing competition among banks and financialintermediaries is likely to reduce the Net Interest Spread of banks. Banks entryinto New Business Lines Banks are increasingly venturing into new areas, suchas, Insurance and Mutual Funds, and offering a wider bouquet of products andservices to satisfy the diverse needs of their customers. With the enactment ofthe Insurance Regulatory and Development Authority (IRBA) Act, 1999, banks andNBFCs have been allowed to enter the insurance business. The RBI has also issuedguidelines for-banks entry into insurance, according to which, banks need toobtain prior approval of the RBI to enter the insurance business. So far, theRBI has accorded its approval to three of the 39 commercial banks that hadsought entry into insurance. Insurance presents a new business opportunity forbanks. The opening up of the insurance business to banks is likely to help thememerge as financial supermarkets like their counterparts in developed countries.Increased thrust on Banking Supervision and Risk Management To strengthenbanking supervision, an independent Board for Financial Supervision (BFS) underthe RBI was constituted in November 1994. The Board is empowered to exerciseintegrated supervision over all credit institutions in the financial system,including select Development Financial Institutions (DFIs) and Non BankingFinancial Companies (NBFCs), relating to credit management, prudential norms andtreasury operations. A comprehensive rating system, based on the CAMELSmethodology, has also been instituted for domestic banks; for foreign banks, therating system is based on CACS. This rating system has been supplemented by atechnologyenabled quarterly off- site surveillance system. To strengthen theRisk Management Process in banks, in line with proposed Basel 11 accord, the RBIhas issued guidelines for managing the various types of risks that banks areexposed to. To make risk management an integral part of the Indian bankingsystem, the RBI has also issued guidelines for Risk based Supervision (RBS) andRisk based Internal Audit (RBIA). • •20
  • 21. These reform initiatives are expected to encourage banks to allocate fundsacross various lines of business on the basis of their Risk adjusted Return onCapital (RAROC). The measures would also help banks be in line with the globalbest practices of risk management and enhance their competitiveness. The Indianbanking industry has come a long way since the nationalisation of banks in 1969.The industry has witnessed great progress, especially over the past 12 years,and is today a dynamic sector. Reforms in the banking sector have enabled banksexplore new business opportunities rather than remaining confined to generatingrevenues from conventional streams. A wider portfolio, besides the growingemphasis on consumer satisfaction, has led to the Indian banking sectorreporting robust growth during past few years. It is clear that the deregulationof the economy and of the Banking sector over the last decade has ushered incompetition and enabled Indian banks to better take on the challenges ofglobalisation. 1.5 Operational and Efficiency Benchmarking Benchmarking ofReturn on Equity Return on Equity (ROE) is an indicator of the profitability ofa bank from the shareholders perspective. It is a measure of Accounting Profitsper unit of Book Equity Capital. The ROE of Indian banks for the year ended 31stMarch 2003, was in the range of 14 - 40%; the median ROE. Being 23.72% for thesame period. On the other hand, the global benchmark banks had a median ROE of12.72% for the year ended 31st December 2002. In recent years, Indian banks havereported unusually high trading incomes, driven mainly by the scope to bookingprofits that arise from a sharply declining interest rate environment. However,such high trading income may not be sustainable in future. The adjusted medianROE for Indian banks (adjusted for trading income) stands at 5.42% for Indianbanks for FY2003 as compared with 11.77% for the global benchmark banks.Afteradjusting for trading income, the median ROE of Indian hanks stands lower thanthe same for the global benchmark banks, thus implying that the contribution oftrading income to the RoE of Indian banks is significant. •21
  • 22. Further, the ROE benchmarking method favors banks that operate with low levelsof equity or high leverage. To assess the impact of the leverage factor on theROE of banks, "Equity Multiplier  is presented in the next section.Benchmarking of Equity Multiplier Equity Multiplier (EM) is defined as "TotalAssets divided by Net Worth". This is the reciprocal of the Capital-to-Assetratio, which indicates the leverage of a bank (amount of Assets of a bankpyramided on its equity capital). Banks with a higher leverage will be able topost a higher ROE with a similar level of Return on Asset (ROA), because of themultiplier effect. However, the banking industry is safer with a lower leverageor a higher proportion of equity capital in the total liability. Capital isimportant for banks for two main reasons: Firstly, capital is viewed as theultimate line of protection against any potential losscredit, market, oroperating risks. While loan and investment provisions are associated withexpected losses, capital is a cushion against unexpected losses. Secondly,capital allows banks to pursue their growth objectives; a bank has to maintain aminimum capital adequacy ratio in accordance with regulatory requirements. Abank with insufficient capital may not be able to take advantage of growthopportunities offered by the external operating environment the same way asanother bank with a higher capital base could. Benchmarking of Return on AssetsROA is defined as Net Income divided by Average Total Assets. The ratio measuresa banks Profits per currency unit of Assets. The median ROA for Indian bankswas 1.15% for FY2003. For the global benchmark banks, the ROA ranged from 0.05%to 1.44% for the year ended December 2002, with the median at 0.79%. For theyear ended December 2002, Bank of America reported the highest ROA (1.44%) amongthe global benchmark banks, followed by Citi group Inc. (1.42%). The medianvalue for Indian banks at 1.15% was higher than that of ABN AMRO Bank, DeutscheBank, Rabo Bank and Standard Chartered Bank. Two banks, namely Bank of Americaand Citigroup Inc., posted higher ROAs as compared with the European and otherbanks for both FY2003 and FY2002 primarily on the strength of higher NetInterest Margins. The reasons for the Net Interest Margins being higher arediscussed in the sections that follow. • •22
  • 23. As with the ROE analysis, here too adjustments for non-recurring income/expensesmust be made while comparing figures on banks ROA. Adjusting for tradingincome, for both Indian banks and the global benchmark banks, the median worksout to be lower for Indian banks vis-a-vis the global benchmark banks for FY2003. I have further analysed the effect of adjustment for trading income on theROAs of both Indian Banks and the Global Benchmark Banks. Here, it must be notedthat the global benchmark banks have a more diversified income portfolio ascompared with Indian banks, and a decline in interest rate could have increasedprofitability of global benchmark banks indirectly in more ways than one.However, from the disclosures available in the annual reports of the globalbanks, it is not possible to quantify the impact of declining interest rates ontheir profitability (`thus, the same has not been adjusted for in thisanalysis). Nevertheless, to further analyse the profitability (per unit ofassets) of Indian banks vis-a-vis the global benchmark banks, ICRA has conducteda ROA decomposition analysis. 1.6 Decomposition of Return on Assets Net InterestMargin Net Interest Margin (NIM) measures the excess income of a banks earningsassets (primarily loans, fixed-income investments, and interbank exposures) overits funding costs. To the past, for banks NIM was the main source of earnings,which were therefore directly correlated with the margin levels. But with NIMdeclining significantly in many countries, banks are now trying to compensatethe "lost" margins with non-fund based fee incomes and trading income. Despitethese changes, net interest income continues to account for a significant shareof the earnings of most banks. The median NIM for Indian banks was 3.16% forFY2003 and 3.92% for FY2002. The figures compare favorably with those of theglobal benchmark banks. Before drawing inferences on the NIM benchmarkingresults, three aspects must be considered, namely: (a) The external operatingenvironment, (b) The quality and type of assets, and (c) Accounting policiesfollowed by banks. The three aspects are explored in detail in the subsequentparagraphs. (a) External Operating Environment •23
  • 24. Intermediation cost is a significant factor explaining the differences in NIMsacross countries. Interest margins tend to be higher in countries where theintermediation costs are high. Generally, the absence of a vibrant capitalmarket results in the intermediation costs being higher. In India, the debtmarket is relatively less developed (as compared with the markets in USA andEurope), and therefore, most corporate entities are dependent mainly on banksfor meeting their financing needs. As a result, Indian banks are able to commandhigher NIMs as compared with the global benchmarks banks. To make a like-to-likecomparison and understand the impact of intermediation cost, ICRA has comparedthe NIMs of the Indian operations of the global benchmark banks with those ofIndian banks. Of the six global benchmark banks, the local operations of fourbanks earned higher NIMs vis-a-vis the median of Indian banks in FY2002 andFY2003. Of these four banks, three earned NIMs above 4%. This analysisstrengthens ICRAs hypothesis that the external operating environment is animportant factor while benchmarking NIMs. (b) Type & Quality of Assets Thehigher NIMs of US-based banks are attributable to their sharper focus onconsumer loans and credit cards as compared with European banks. Also, the highNIMs of US banks are the cause for their comparatively high ROAs. To overcomethe potential for higher provisions arising from its strategy of lending toriskier assets, a bank may charge a higher rate of interest to its borrowers(with a consequently higher NIM) than another bank. So while comparing the NIMsof two banks, the effect of asset quality must be normalised. One way of doingthis is to use Total Risk Weighted Adjusts (RWA) instead of Total Assets as thedenominator. However, many Indian banks do not disclose their RWA values intheir annual reports, and therefore, ICRA has not been able to use this methodin this study. The alternative method is to adjust the NIM for provisions &contingencies. If the asset quality of a bank is relatively weak, it is likelyto generate higher Non-Performing Assets (NPAs). As a result, its provisions &contingencies are also likely to be higher. Therefore, if the effect of assetquality is normalised by removing provisions & contingencies from the NIM, abetter understanding of the efficiency of the fund based business of banks maybe obtained. ICRA defined adjusted NIM as Net Interest Spread (Net InterestIncome less Provisions & Contingencies)/Average Total Assets]. The Net InterestSpreads for the global benchmark banks ranged from 0.14 to 2.10% for thefinancial year ended December 2002, with the median at 1.54%. The correspondingmedian figure for Indian banks was 1.68%. The difference between the NIMs of theglobal benchmark banks and Indian bank; reduces substantially after24
  • 25. adjusting for provisions. This strengthens ICRAs hypothesis that the type andquality of assets substantially affect NIM. (3)Accounting Policies The NetInterest Spreads adjusted for Provisions can vary substantially, depending onthe income recognition and provisioning norms. According to InternationalAccounting Standard, (IAS) provisioning for NPAs is based on managementdiscretion, Whereas in India, the RBI defines the provisioning requirement forimpaired assets as a function of time and security. An illustration ofdifference in accounting for NPA is that for Indian banks, an asset is reckonedas NPA when principal or interest are past due for 180 days as compared with 90days for the global benchmark banks (the norms will converge with effect fromfinancial year 2004). Keeping in view the levels of NIM for Indian and globalbenchmark banks, and the three factors analysed above, ICRA believes that theNIM for Indian banks is comparable with that of the global benchmark banks. •Non-Interest Income RatioIncreased competition in the Indian Banking industry has driven the interestyields and consequently, the NIMs, southwards. Hence, banks are increasinglyconcentrating on non-interest income to shore up profits. In FY2003, the rangeof noninterest income for Indian banks (as percentage of average Total Assets)was between 1.01 and 3.00%. The median for Indian banks showed a moderateincrease from 1.63% in 2002 to 1.77% in 2003. The non-interest income (aspercentage of Average Total assets) of the global benchmark banks varied from0.72 to 3.13% (with a median value of 1.62%), or the year ended December 31,2002. The decline in interest rates in India over the last few years has helpedIndian banks book substantial profits from the sale of investments, thusboosting their Non-Interest Income. As the high profits accruing from the saleof investments are not lively to be sustainable, ICRA has benchmarked the purefee based income (i.e. looking at Non-interest income without profits from saleof investments) as a percentage of average total income. 16 of the 21 Indianbanks in the study had a fee based income ratio of between 0.4 and 0.8%.Acomparison after similar adjustment for the global benchmark banks reveals thatthe fee-based income ratio of Indian banks is lower. • Operating Expense Ratio25
  • 26. The Operating Expense Ratio (operating expenses as a ratio of the average totalassets) reveals how expensive it is for a bank to maintain its fixed assets andhuman capital that are used to generate that income streams, The medianOperating Expense ratio for Indian banks was 2.26% in 2003, which is comparablewith that for the global benchmark banks (2.09%). 1.7 Asset Quality BenchmarkingGross NPAs The median Gross NIA ratio (Gross NPA as a proportion of totaladvances) for Indian banks was 9.40% for FY2003 and 10.66% for FY2002. Thevalues of the Gross NPA ratio for FY 2003 range between 2.26 and 14.68%.Manyglobal banks do not disclose their Gross NPA percentages in their annualreports. Net NPAs The median Net NPA ratio ("Net NPA as a proportion of Netadvances) of Indian banks was 4.33% for FY2003 and 5.39% for FY2002. The valuesof Net NPA ratio for FY 2003 for the global benchmark banks ranged between 0.37and 7.08%. Most of the global benchmark banks do not disclose their Net NPAratios in their annual reports. From the study it can be inferred that themedian Net NPA percentage for Indian banks is marginally higher than that forthe global benchmark banks. Efficiency Benchmarking ICRA studied the followingparameters to assess the efficiency of Indian banks vis-à -vis their foreigncounterparts: • Profitability per employee • Profitability per branch •Business per employee • Business per branch • Expenses per employee •Expenses per branch The business model of the global benchmark banks involvesoutsourcing of noncore activities. In the case of Indian banks, particularlythose in the public sector, both non-core and core business functions arecarried out in-house. The global benchmark banks display higher efficiencyparameters, mainly because of the outsourcing model. • • •26
  • 27. Thus, the efficiency parameters are not strictly comparable, as they areaffected by the business plans of specific banks and also by economy-specificconsiderations. ICRA has presented the analysis of the performance of Indian andinternational banks in the following sections. We would like to highlight thatseveral factors influence the results here, and caution needs to be exercised inarriving at inferences. E.g. comparing expenses per branch (or employee) forbanks across different economies involves conversion of amounts to a commoncurrency. The results depend on the conversion rates of foreign exchange used(e.g. USD per rupee or Euro per rupee). In this report, ICRA has used nominalrates of foreign currencies rather than rates based on PPP (Purchasing PowerParity). On another dimension, Indian banks and international banks operateunder different business models and levels of technology. Increasingly,sophisticated banks (particularly in advanced countries) use several channels totransact business with customers, such as, the Internet, telephone, debit cards,and ATMs. Therefore, results from benchmarking using parameters such as businessper branch or expenses per branch (which are appropriate parameters to compareacross banks that operate predominantly through branches) need to beappropriately interpreted in an exercise when we compare heterogeneous banksacross different economies. Profitability per Employee The profit per employeefigure for 17 out of the 21 Indian banks was in the range of Rs. 0.02 crore forthe financial year ended March 2003. Most Indian banks posted higher profits peremployee in FY2003 as compared with FY2002. This overall trend of increasingemployee profitability may be attributed to the reduction in the number ofemployees following the launch of Voluntary Retirement Schemes (VRS) by somebanks as well as higher profits by the banks. On an average, new private sectorbanks enjoy a higher increase in profitability per employee, as compared withtheir public sector counterparts. This may be attributed largely to the bettertechnology that the new private sector banks employ, besides the advantage ofcarrying no historical baggage. As for the global benchmark banks, theprofitability per employee for HSBC was robust at USD 0.12 million (Rs. 0.552crore) for FY 2002. For ABN AMRO Bank, the figure was EUR 0.02 million (Rs.lcrore). On an intertemporal basis, the profitability per employee for the globalbenchmark bank also showed growth. Profitability per Branch For most Indianbanks, the profit, per branch was in the range of Rs. 0-0.2 crore. However, thenew private sector banks displayed the highest profits per branch, at Rs. • •27
  • 28. 1.73 and 1.22 crore for the years 2003 and 2002, respectively. On an inter-temporal basis, profit per branch has been increasing gradually in the Indianbanking sector. The growth in profit per branch for Indian banks is attributableto the overall increase in profitability in the banking industry. In the case ofthe foreign peer group, profitability per branch shows a small increase over theperiod covered by this study. As for the global benchmark banks, profitabilityper branch for Bank of America is at a robust USD 1.62 million (Rs. 7.44 crore),while the figure for ABN AMRO Bank is EUR 0.87 million (Rs. 4.36 crore) for theFY 2002. Hence, profitability per branch for the global benchmark banks ishigher than that of Indian banks.28
  • 29. Business per Employee Since different employees in a bank contribute indifferent ways to the revenues and profits of a bank, it is difficult to come upwith one universal metric that captures the business per employee accurately.For this analysis, ICRA has used the amount of deposits mobilised per employeeas a measure of the business per employee. The Indian banking industry on anaverage mobilised Rs. 1-2 crore of deposits per employee for the year endedMarch 2003. In this respect, private sector banks lead the group of Indianbanks. The top bank in this category showed a deposit per employee of Rs. 7.14crore for the year ended March 2003. As for the global benchmark banks, businessper employee for HSBC was robust at USD9.71 million (Rs. 44.66 crore), whilethat for ABN AMRO Bank was EUR 4 million (Rs. 20 crore) for the year endingDecember 2002. Thus, deposit mobilisation per employee for the global benchmarkbanks is higher than that of Indian banks. Business per Branch On an average,the banks showed a deposit of around Rs. 10-30 crore per branch for the yearended March 2003. In recent times, the deposit mobilisation for Indian Banks ona branch basis has witnessed a steady increase. The new private sector banks inIndia have led the way in this regard, because of the better use of technology.The highest deposit per branch stood at Rs. 103.24 crore in 2003 for a newprivate sector bank, as compared with Rs, 68.71 crore in 2002. The globalbenchmark banks mobilised more business per branch as compared with their Indiancounterparts. Bank of America mobilised USD 88.9 million (Rs. 408.94 crores) forthe financial year ended 2002, while ABN AMRO Bank mobilised EUR 140 million(Rs. 700 crores). The higher per-bank deposit mobilisation for the globalbenchmark banks may be attributed to their superior technology orientation andthe higher gross domestic products (GDP) of their respective countries. 3.5.5Expenses per Employee For this analysis, ICRA has used the employee expenses peremployee as a measure of the expenses per employee. Indian banks, on an average,expensed Rs. 0.025 crore per employee in FY2002. For the new private sectorbanks, this figure was higher. The highest expense per employee incurred by anIndian bank for the year 2002 was Rs. 0.041 crore per employee. ••29
  • 30. In the case of the global benchmark banks, the expenses per employee for CitiGroup Inc. was at USD 0.08 million (Rs. 0.36 crore), while for ABN AMRO Bank itwas EUR 0.07 million Rs. 0.36 crore). Expenses per Branch For this analysis,ICRA has used operating expenses per branch as a measure of the expenses perbranch. The expense per branch for most Indian banks was Rs. 0.56 crore forFY2002. Over the years, Indian banks have reported a gradual increase in suchexpenses, with competition-prompted upgrade being the primary reason for thesame. In the case of the global benchmark banks, expense per branch for Bank ofAmerica was USD 4.93 million (amount in Rs. 22.68 crore), while for ABN AMROBank it was EUR 4.6 million (Rs. 22.99 crore). 1.8 Structural Benchmarking Sinceits inception in 1980s) BIS has issued several guidance notes for banks and banksupervisors. These notes have sought to improve the integrity of the globalbanking system and propagate best practices in banking across the world. Forissues related to accounting, BIS has relied on the International AccountingStandards (IAS) issued by the International Accounting Standards Committee(IASC). Banks are supposed to follow these accounting standards as part of bestpractices. For the structural benchmarking study of the Indian banking sector,ICRA has used primarily the guidance notes issued by BIS and the relevant IAS asthe benchmarks of best practices. ICRA has also referred to standards asmentioned under, US and UK. GAAP (Generally Accepted Accounting Practices) wherethey provide a good understanding of international best practices. • CapitalAdequacy Norms for Banks BIS introduced capital adequacy norms for banks for thefirst time in 1988. To improve on the existing norms, BIS issued a ConsultativeDocument in January 2001, proposing changes to the existing framework. Theobjective of this document is to develop a consensus on the Basel II Accord (asit is popularly known), which is expected to be implemented in 2007. Based onfeedback received from various quarters, BIS issued a new Consultative Documentin April 2003. In this document, BIS has proposed the following key changes overthe existing norms: • Introduction (of finer grades of risk weighting incorporate credit: •30
  • 31. According to the original 1988 Accord, all credit risks have a 100% per centweighting. Under the new method, grades of weightings in the 20-150% range willbe assigned. Introduction of charges for operational risks: Under the proposedBasel II Accord, banks have to allocate capital for operational risks. BIS hassuggested three methods for estimating operational risk capitals: 1. BasicApproach, 2. Standardised Approach, and 3. Advanced Measurement Approach.Capital requirement for mortgages reduced: The risk weights on residentialmortgages will be reduced to 35% from 50%. During the 1990s, the RBI adopted thestrategy of attaining a Capital Adequacy Ratio (CAR) of 8% in a phased manner.Subsequently, in line with the recommendations of the Committee on BankingSector Reforms, the minimum CAR was further raised to 9%, effective 31st March2000. As a step towards implementing the Basel II guidelines, the RBI in itscircular of 14th May, 2003 has proposed new methods for estimating regulatoryrisk capital. To estimate the impact of the proposed changes on the capitaladequacy position of Indian banks, the RBI has asked select banks to estimatetheir riskweighted assets on the basis of the new method. As per this, the RBIhas asked for the estimation of capital requirement on the basis of the externalcredit rating of borrowers. For nonrated borrowers, the RBI has asked the selectbanks to use the existing 100% risk weights. The RBI has also asked the banks tocalculate operational risk capital separately following the Basel approach.Based on the result of the exercise, the RBI will issue new guidelines onestimating economic capital. Additionally, the RBI has asked banks to introduceinternal risk scoring models. It is expected that once the Basel II Accord issigned, the RBI will allow banks to move to the IRB approach. The CapitalAdequacy norms in India are in line with the best practices as suggested by BIS.Once the Basel II Accord is implemented, the method of estimation of riskcapital will undergo a significant change. RBI has already taken appropriatesteps to prepare the Indian banking industry for such changes. • •31
  • 32. Recognition of Financial Assets & Liabilities IAS 39 requires that all financialassets and all financial liabilities be recognised on the balance sheet. Thisincludes all derivatives. Historically, in many parts of the world, derivativeshave not been recognised as liabilities or assets on balance sheets. Theargument for this practice has been that at the time the derivative contract wasentered into, no cash or other asset was paid. The zero cost justified non-recognition, notwithstanding the fact that as time pauses and the value of theunderlying variable (rate, price, or index) changes, the derivative has apositive (asset) or negative (liability) value. In India, derivatives are stilloff-balance sheet items and considered part of contingent liabilities. So inIndian treatment of derivatives is different from International AccountingStandards. Valuation of Financial Assets IAS 39 has classified financial assetsunder four categories. The following table summarises the classification andmeasurement scheme for financial assets under IAS 39, Under US GAAP, marketableequity securities and debt securities are classified as under: • trading, •Available for sale, or • held to maturity. Recognition of Non-PerformingAssets (NPAs)/Impaired Assets Under IAS 39, impairment recognition is left tomanagement discretion (its perception of the likelihood of recovery). Impairmentcalculation compares the carrying amount of the financial asset with the presentvalue of the currently estimated amounts and timings of payments. If the presentvalue is lower than. The carrying amount, the loan is classified as NPL. UnderUS GAAP, loans assume non-accrual statuses if any of the following conditionsare fulfilled: Full repayment of principal or interest is in doubt (inmanagements judgment), or if scheduled principal or interest payment is pastdue 90 days or more, and if the collateral is insufficient to cover theprincipal and interest. In India, NPAs are classified under three categories-Sub-standard, Doubtful and Loss on the basis of the number of months the amountis overdue for. India proposed to • ••32
  • 33. move from 180 days to a 90-day past due classification rule for NPA recognitioneffective March 2004. The financial instruments original effective interestrate is the rate to be used for discounting. Any impairment loss is charged toprofit and loss account for the period. Impairment or "uncollectability" must beevaluated individually for material financial assets. A portfolio approach maybe used for items that are individually small [IAS 39.109]. Therefore, underIAS, provisioning is based on management discretion. Provision in excess ofexpected loan losses may be booked directly to shareholders equity. As withIAS, under the UK, And US GAAP also, provisioning is based on managementdiscretion. Under US GAAP, when the Net Present Value of a loan is less than thecarrying value, the difference is booked as provision. In India; provisioningnorms are more explicit than they are under the IAS. RBI has specified norms forvarious classes of NPL as follows: Standard Assets: 10% Doubtful Assets: 100% ofunsecured portion, 20-50% on secured portion Loss Assets: 100% Interest Accrualon M on-performing Loans / impaired Assets Under both IAS and US GAAP, there isno specific prescription for interest accrual on NPAs. Under UK. GAAP, interestis suspended upon classification as NPL. However, suspension may be deferred upto 12 months if sufficient collateral exists.According to Sound Practices for Loan Accounting and Disclosure (1999) number11, the BIS Committee on Banking Supervision recommends that when a loan isidentified as impaired, a bank should cease accruing interest in accordance withthe terms of the contract. Interest on impaired loans should not contribute tonet income if doubts exist over the collectability of loan interest orprincipal. In India, accrual of interest is suspended upon classification of aloan as non performing. • General Provisioning on Performing Loans33
  • 34. Under IAS, UK and US GAAP, there is no specific prescription for generalprovisioning towards performing loans. However, Indian banks have a provisioningrequire; f tent of 0.2 5% on all standard assets. Conclusion The RBI norms forclassification of assets, and provisioning against, bad/doubtful debts are moredetailed and precise vis-a-vis international rules. While the internationalnorms often leave bad debt provision levels to "management discretion", Indianstandards are precise and clearly state exactly when and by how much reportedearnings must be charged off for bad debts. In India, detailed accountingstandards for derivatives are yet to be introduced. As of now, derivativescontinue to be considered as off-balance sheet liabilities. 1.9 Likely FutureTrends and their Implications for Indian Banks Financial Disintermediation andBank Profitability The degree of banking disintermediation and financialsophistication are important factors in the development of a countrys economy.Disintermediation affects the allocation process for both savings and credits inthe economy. With the introduction of sophisticated deposit products by mutualfunds, pension funds and insurance companies, individual and corporatedepositors now have more options for savings. A similar trend is also visible incredit offerings. More and more corporate entities are now approaching thecapital market to raise funds either in the form of debt or equity. At the endof the 1990s, the US banking industry was facing a high level ofdisintermediation, as most outstanding savings were in mutual funds, pensionfunds, and life insurance plans, but not in bank deposits or other liabilityproducts. However, in continental Europe, most banking systems (as in Germany,Spain, Italy, Austria, France, etc.) are still highly bank-intermediated,although the trend is clearly towards faster disintermediation for both savingsand credits. In India, financial disintermediation is likely to catch up withbanks sooner than later. With the opening up of the financial sector, Indianbanks are facing competition from the mutual fund and insurance sectors forsavings. On the credit side, good quality borrowers have started raising debtdirectly from the market at competitive rates. Changing Capital Adequacy NormsCapital adequacy norms for banks are likely to undergo a change after the BaselII Accord is implemented. In the current system, Indian banks need to allocate9% capital, • • •34
  • 35. irrespective of the credit quality of a borrower. In the new system, a bankoffering credit to a better quality corporate entity is likely to require lessregulatory capital. The allocation of regulatory capital on the basis of creditquality would encourage banks to estimate their Risk adjusted Return on Capital(RAROC) rather than compute simple margins. Similarly, banks now need todistinguish between the credit qualities of sovereign borrowings and inter-bankborrowing, as they would need to allocate capital to sovereign credit and inter-bank credit on the basis of external ratings, or using the IRB approach. Toemerge successful in the Basel II regulatory environment, banks would need tointroduce the practice of risk-based pricing of loans, which in turn wouldrequire a bank to implement advance Risk Management Systems. To implement suchsystems, banks would need to implement the following key steps: • • • •• Develop Credit Risk Scoring Models Generate Probability of Default (PD)associated with each risk grade Estimate Loss Given Default (LGD) for eachcollateral type. Calculate expected and unexpected loss in a portfolio based oncorrelation amongst loans. Compute the capital that would be required to be heldagainst economic loss potential of the portfolio.Similarly, banks would have to introduce robust systems for measuring andcontrolling Market Risk and Operations Risk. .3 Management of Non-PerformingAssets The size of the NPA portfolio in the Indian banking industry is close toRs. 1,00,000 crore, which is around 6% of Indias GDP. NPAs affect banksprofitability on two counts: The introduction of scientific credit riskmanagement systems would lower slippage of assets from the performing to thenonperforming category. Further, banks with better NPA recovery processes wouldbe able to reduce their provisioning requirements, thereby increasing theirprofitability. To enable a fair borrower-lender relationship in credit, theGovernment of India has recently enacted the Securitisation and Reconstructionof Financial Assets and Enforcement of Security interest Act 2002 (SRES Act).Due to several cases still to be resolved in courts of law, it is. Not clear asyet, how far this Act is set to alter the NPA recovery scenario in India.35
  • 36. Following the announcement of the RBIs Asset Classification norms, the processof Asset Quality Management involves segregating the total portfolio into threesegments and having detailed strategies for each. The three segments are: • • • Standard/Performing Assets Special Mention Accounts/Sub-Standard AssetsChronic Non-Performing AssetsBanks need to vigilantly monitor Standard Assets to arrest any account slippageinto the non-performing grade. Besides, banks need to churn their creditportfolio so as to maximise returns while keeping the risks pegged at acceptablelevels. Special Mention Accounts are assets with potential weaknesses whichdeserve close attention and timely remedial action. The typical warning signsexhibited by a borrower ranges from frequent excesses in the account to non-submission of periodical statements. Account restructuring and rehabilitationtools are best implemented during this stage. However, the challenges facedwhile restructuring include, (a) selecting the genre of assets to berestructured, (b) quantifying the benefits to be extended, (c) determiningrepayment schedules, and (d) coordinating and balancing the needs of severallenders. Chronic Non-Performing Assets can now be better managed following theenactment of the SIZES Act. The Act provides the requisite regulatory frameworkfor the foreclosure of assets by lenders, incorporation of Asset ReconstructionCompanies (ARCS), and formation of a Central Registry. In the wake of this newlegislation, amicable solutions may be realised for Chronic NPAs. The strategiesinclude Enforcement of Security Interest, Securitisalion, One-Time Settlement(OTS), and Writeoff. However, a scientific approach to deciding which of thesealternative routes must be taken hinges on: (a) assessment in terms of qualityof the underlying assets and their realisable value, (b) alternative use of theassets, and (c) willingness of the borrower to settle outstanding dues.conclusion The profitability of Indian banks in recent years compares well withthat of the global benchmark banks primarily because of the higher share ofprofit on the sale of investments, higher leverage and higher net interestmargins of Indian banks. However, many of these drivers of higher profits ofIndian banks may not be sustainable. To ensure •36
  • 37. long-term profitability, Indian banks need to focus on the following parametersand build systemic capability in management of the same: • • • • • •• Ensure that loans are diversified across several customer segments Introducerobust risk scoring techniques to ensure better quality of loans, as well as toenable better risk-adjusted returns at the portfolio level Improve the qualityof credit monitoring systems so that slippage in asset quality is minimisedRaise the share of non-fund income by increasing product offerings wherevernecessary by better use of technology Reduce operating expenses by upgradingbanking technology, and Improve the management of market risksReduce the impact of operational risks by putting in place appropriateframeworks to measure risks, mitigate them or insuring them. The RBI as theregulator of the Indian banking industry has shown the way in strengthening thesystem, and the individual banks have responded in good measure in orientingthem selves towards global best practices.37
  • 38. DISTRIBUTION OF THE INDIAN BANKS AS TO STATES AND POPULATIONHow Indian banks are distributed as to states and population is explained fromthe following table:Table  Distribution of Banking Centers According to State and Population Group(As at The End of March)POPULATION GROUPRURALSEMI-URBANURBANMETROPOLITANALL CENTRESREGION/STATE/20012002 20012002200120022001200220012002UNION TERRITORY12345678910NORTHERN REGION Haryana Himachal Pradesh Jammu & Kashmir Punjab RajasthanChandigarh Delhi NORTH EASTERN REGION Arunachal Pradesh Assam ManipurMeghalaya Mizoram Nagaland Tripura EASTERN REGION Bihar Jharkhand Orissa Sikkim
  • 39. 4578 644 605 477 1022 1765 9 55 1166 53 749 40 122 60 34 108 6979 2346 906 1533324576 644 605 477 1023 1762 9 56 1152 53 736 39 122 60 34 108 6972 2346 904 153232458 94 14 22 102 212 2 12 123 6 73 11 7 5 8 13 773 313 88 93 1458 94 14 22 102 212 2 12 123 6 73 11 7 5 8 13 773 313 88 93 136 11   2 9 13 1   8   4 1 1 1   1 67 12 4 6  36 11   2 9 13 1   8   4 1 1 1   1 68 12 4 6  3       1 1   1                 1        3       1 1   1                 1        5075 749 619 501 1134 1991 12 69 1297 59 826 52 130 66 42 122 7820 2671 998 1632335073 749 619 501 1135 1988 12 69 1283 59 813 51 130 66 42 122 7814 2671 996 16313338
  • 40. West Bengal Andaman & Nicobar Islands CENTRAL REGION Chhattisgarh Madhya PradeshUttar Pradesh Uttaranchal WESTERN REGION Goa Gujarat Maharashtra Dadra & NagarHaveli Daman & Diu SOUTHERN REGION Andhra Pradesh Karnataka Kerala Tamil NaduLakshadweep Pondicherry ALL-INDIA2147 15 7368 639 1698 4539 492 3777 140 1445 2186 5 1 6400 2283 2064 303 1719 9222143 15 7331 629 1680 4530 492 3767 140 1438 2183 5 1276 2 805 61 225 480 39 674 12 260 399 1 2276 2 805 61 225 480 39 674 12 260 399 1 2 2213 466 278 1037 427   5 504645   60 6 15 36 3 42   14 28     83 35 15 7 25   1 296 29645   60 6 15 36 3 42   14 28     83 35 15 7 25   11   4   2 2   7   3 4     3 1 1   1     181   4   2 2   7   3 4     3 1 1   1     182469 17 8237 706 1940 5057 534 4500 152 1722 2617 6 3 8704 2785 2358 1349 2175 928 356332465 17 8200 696 1922 5048 534 4490 152 1715 2614 6 3 8658 2781 2351 1348 2144 925 355176359 2218 2279 2057 1691 9 19 466 278 430   5304 103930268 30157 505139
  • 41. MAJOR DEVELOPMENTS IN BANKING AND FINANCE• Banking DevelopmentsThe RBI allowed resident Indians to maintain foreign currency accounts. Theaccounts to be known as resident foreign currency (domestic) accounts, can beused to park forex received while visiting any place abroad by way of paymentfor services, or money received from any person not resident in India, or who ison a visit to India, in settlement of any lawful obligations. These accountswill be maintained in the form of current accounts with a cheque facility and nointerest is paid on these accounts. With a view to liberalise gold trading, theReserve Bank has decided to permit authorised banks to enter into forwardcontracts with their constituents like exporters of gold products, jewellerymanufacturers and trading houses, in respect of the sale, purchase and loantransactions in gold with them. The tenor of such contracts should not exceed 6months. The Reserve Bank of India has told foreign banks not to shut downbranches without informing the central bank well in advance. Foreign banks havebeen further advised by the Reserve Bank of India to furnish a detailed plan ofclosure to ensure that their customers  interests and conveniences areaddressed properly. The RBI has prohibited urban co-operative banks from actingas agents or subagents of money transfer service schemes. The RBI has allowedbanks to invest undeployed foreign currency non-resident (FCNR-B) funds in theoverseas markets in the long-term fixed income securities with ratings a notchlower than highest safety. Earlier, banks were allowed to invest only in long-term securities with highest safety ratings by international agencies. The RBIhas defined the term  willful defaulter  paving the way for banks to acquireassets of defaulting companies through the Securitisation Ordinance and reducetheir NPAs faster. According to the RBI a wilful defaulter is one who has notused bank funds for the purpose for which it was taken and who has not repaidloans despite having adequate liquidity. International credit rating agencyStandard & Poor has estimated that the level of gross problematic assets inIndia can move into the 35-70 per cent range in the event of a recession. It hasalso estimated that the level of non-performing assets (NPAs) in the system tobe at 25 per cent, of which only 30 per cent can be recovered.40
  • 42. The Reserve Bank of India has decided to extend operation of the guidelines forthe one time settlement scheme for loans upto Rs.50,000 to small and marginalfarmers by public sector banks for another 3 months, i.e, upto March 31, 2003.The Reserve Bank of India, as part of its policy of deregulating interest rateson rupee export credit, has freed interest rates on the second slab - 181 to 270days for preshipment credit and 91 to 180 days for post-shipment credit witheffect from May 1, 2003. The Cabinet cleared a financial package for IDBI andagreed to take over the contingent liabilities to the tune of Rs.2500 crore overfive years. The IDBI Act will be repealed during the winter session of theParliament, paving the way for IDBI s conversion into a banking company.TheIDBI would be given access to retail deposits, to enable it to bring down thecost of funds, but will be spared from priority sector lending and SLRrequirements for existing liabilities. The RBI has issued guidelines for settingup of offshore banking units (OBUs) within special economic zones (SEZs) invarious parts of the country. Minimum investment of $10 million is required forsetting up an OBU. All commercial banks are allowed to set up one OBU each. OBUshave to undertake wholesale banking operations and should deal only in foreigncurrency. Deposits of the OBUs will not be covered by deposit insurance. Theloans and advances of OBUs would not be reckoned as net bank credit forcomputing priority sector lending obligations. The OBUs will be regulated andsupervised by the exchange control department of the RBI. With a view to developthe derivatives market in India and making available hedged currency exposuresto residents an RBI Committee headed by Smt. Grace Koshie, recommended phasedintroduction of foreign currency-rupee (FC/NR) options. _ The Reserve Bank ofIndia has notified the draft scheme for merging Nedungadi Bank with PunjabNational Bank. This is the first formal step towards bringing about a mergerbetween the two Banks. The Reserve Bank of India has agreed to allow capitalhedging for foreign banks in India. The guidelines pertaining to capital hedgingwill be issued by RBI soon. The Reserve Bank of India has decided to allowforeign institutional investors (FIIs) to enter into a forward contract with therupee as one of the currencies, with an41
  • 43. authorised dealer (AD) in India to hedge their entire exposure in equities at aparticular point of time without any reference to the cut-off date. Further, theRBI has also increased Authorised Dealer s overseas market investment limit to50 per cent of their unimpaired tier-I capital or $ 25 million, whichever ishigher. The Reserve Bank of India doubled the foreign exchange available underthe basic travel quota (BTQ) to resident individuals from US $5000 to US $10000,or its equivalent.The Government has decided to dispose of UTI Bank as part ofrestructuring Unit Trust of India.Though the details in this regard is yet to beworked out, it has been decided that the bank will be disposed of during thecourse of the restructuring. The RBI has allowed tour operators to sell ticketsissued by overseas travel operators such as Eurorail and other rail/road andwater transport operators in India, in rupees, without deducting the paymentfromthe travellers  basic travel quota. The Reserve Bank of India (RBI) has bannedbanks from offering swaps involving leveraged structures, which can cause hugelosses if the market moves the other way. The RBI constituted committee onpayment system has recommended that the central bank, as the regulator ofpayment and settlement systems, should be empowered to regulate non-bankingsystems. • Market Developments and New ProductsThe Hong Kong and Shanghai Banking Corporation will be bringing $150 millionadditional capital to India in the current fiscal. The Reserve Bank of India hasordered a moratorium on the Nedungadi Bank. The moratorium effective from theclose of business will be in force upto February 1, 2003. During this period,the central bank is likely to finalise the plans for merging Nedungadi Bank withPunjab National Bank. ABN Amro Bank launched its Business Process outsourcing(BPO) operations, ABN Amro Central Enterprise Services (ACES) in Mumbai. It hasbeen set up with an initial investment of 4 million euros (Rs.19 crore) and hasbeen capacitised at 650 seats in a single shift.42
  • 44. The Canara Bank has returned 48 per cent (Rs. 277.87 crore) of its capital tothe Government before its Initial Public Offer. China has granted licence toBank of India to open a representative office in the south Chinese city ofShenzhen. Shri A.K. Purwar is appointed as the Chairman of State Bank of India.The State Bank of India has launched  SBI Cash Plus , its Maestro debit cardfor which it has tied up with Master Card International. SBI Cash Plus willallow customers to access their deposit accounts from ATMs and merchantestablishments. The Siam Commercial Bank, having Thailand government as themajor share holder, is planning to close down its banking operations in Indiafrom November 30, 2002, as part of its global restructuring strategy. The PunjabNational Bank (PNB) has got license from the Reserve Bank of India for doinginternet banking. The bank is likely to do the formal launch of its internetbanking solution within a few weeks time. The ICICI Bank is planning to set upkiosks to offer financial services in the rural areas. This outfit would alsoextend agricultural loans.43
  • 45. CLASSIFICATION OF SCHEDULED BANKING STRUCTURE IN INDIAThe scheduled banks are divided into scheduled commercial banks and scheduled cooperative banks. Further scheduled commercial banks divided into the PublicSector Banks, private sector banks, foreign banks, and regional rural banks.Whereas scheduled co-operative banks are classified into scheduled urban cooperative and scheduled state co- operative.RBI has further classified publicsector banks into nationalized banks, state bank of India and its subsidiaries.And private banks have been classified into old and new private sector banks. Asfar as the number is concerned, total public sector banks are 27, private sectorbanks are 30, foreign banks are 36, and regional rural banks are 196. Thus inscheduled commercial bans, the regional rural banks are on the top number. Inthe scheduled co-operative banks, there are 57 scheduled cooperatives and 16scheduled co-operative banks. Today the overall commercial banking system inIndia may be distinguished into:44
  • 46. 1. Public Sector Banks 2. private Sector Banks 3. Co-operative Sector Banks 4.Development Banks PUBLIC SECTOR BANKS a. State Bank of India and its associatebanks called the State Bank group b. 20 nationalised banks c. Regional RuralBanks mainly sponsored by Public Sector BanksPRIVATE SECTOR BANKS a. b. c. d. e. Old generation private banks New generationprivate banks Foreign banks in India Scheduled Co-operative Banks Non-scheduledBanksCO-OPERATIVE SECTOR The co-operative banking sector has been developed in thecountry to the suppliment the village money lender. The co-operatiev bankingsector in India is divided into 4 components 1. 2. 3. 4. 5. 6. 7. 8. State Co-operative Banks Central Co-operative Banks Primary Agriculture Credit SocietiesLand Development Banks Urban Co-operative Banks Primary Agricultural DevelopmentBanks Primary Land Development Banks State Land Development Banks45
  • 47. DEVELOPMENT BANKS 1. 2. 3. 4. 5. 6. 7. 8. 9. Industrial Finance Corporation ofIndia (IFCI) Industrial Development Bank of India (IDBI) Industrial Credit andInvestment Corporation of India (ICICI) Industrial Investment Bank of India(IIBI) Small Industries Development Bank of India (SIDBI) SCICI Ltd. NationalBank for Agriculture and Rural Development (NABARD) Export Import Bank of IndiaNational Housing Bank46
  • 48. PUBLIC SECTOR BANKSBefore the independence, the banking system in India was primarily associatedwith urban sector. After independence, the banks had to spread out into ruraland unbanked areas and make credit available to the people of those areas. In1969 the government nationalized 14 major commercial banks. Still the widedisparities continued. To reduce the disparities the government nationalized 6more commercial banks in 1980 government came to own 28 banks including SBI andits 7 subsidiaries. Today, we are having a fairly well developed banking systemwith different classes of banks-public sector banks, foreign banks, and privatesector banks-both old and new generation. In July 1993, New Bank of India wasmerged with Punjab National Bank. Now, there are 27 banks in the public sectorviz. State Bank of India and its 7 associates, 19 commercial banks exclusive ofRegional Rural. In terms of sheer geographical spread, the public sector systemis the largest. The statistics are as follows: a network of 64000,branches-onebranch for every 14000 Indian with over 64 crores customers. This labourintensive network has built-in cost, which makes the public sector banksinherently uncompetitive. Reduction of branches to achieve cost saving has notreceived a munch thrust as it should. Public sector banks are characterized bymammoth branch network, huge work force, relatively lesser mechanization, andhuge volume but of less value business transactions, social objectives and theirown legacy system and procedures.  Improving profitability in general requiresefforts in several directions, i.e. cutting in cost, improving productivity,better recovery of loan and to reduce high level of NPAs . The public sectorbanks have to build up the cost-benefit culture in their operations. When thereis a thin margin in banking operation, the public sector banks in India have toincrease the turnover. Previously, Indian banks were relying on high creditdeposit ratio. Now, the Indian banks have to depend on the volume of highbusiness turnover. The returns on assets have to be improved. Further, the PSBsin Indian have to compare them with the highly profitable bank with regards tooperating expenses. They have to ensure that each every account is profitableand product should be such, while generates more profit.47
  • 49. CHALLENGES FOR THE PUBLIC SECTORIndian banks functionally diverse and geographically widespread have played acrucial role in the socio-economic progress of the country after independence.Growth of large number of medium and big industries and entrepreneurs in diversefields were the direct results of the expansion of activities of banks. Therapid growth, forever lead to strains in the operational efficiency of the banksand the accumulation of non-performing assets (NPAs) in their loans portfolio.The uncomfortably high level of NPAs of banks however is a cause for worry andit should be brought down to international acceptable levels for creating avibrant and competitive financial system. NPAs are serious strains on theprofitability of the banks as they cannot book income on such accounts and theirfunding cost provision requirement is a charge on their profit. Although S & Pcited as a reasons for mounting of NPAs priority sector lending, outdated legalsystem which not only encourages the incidence of NPAs but also prolongs theirexistence by placing a premium on default and delay in finalization ofrehabilitation packages by the Board for Industrial and Financial Reconstructionare some of the major causes for the rising of NPAs. The following deficiencieswere noticed in the managing Credit Risk: The absence of written policies. Theabsence of portfolio concentration limits. Excessive centralization ordecentralization of lending authorities. Cursory financial analysis of borrower.Infrequent customer contact. Inadequate checks and balances in credit processThe absence of loan supervision A failure to improve collateral position as acredit deteriorate Excessive overdraft lending. Incomplete credit files Theabsence of the assets classification and loan-loss provisioning standards48
  • 50. A failure to control and audit the credit process effectively.In July 1993, New Bank of India was merged with Punjab National Bank. Now, thereare 27 banks in the public sector viz. State Bank of India and its 7 associates,19 commercial banks exclusive of Regional Rural. Following are the 21 publicsector banks. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Allahabad BankAndhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank CentralBank of India Corporation Bank Dena Bank Indian Bank Indian Overseas bank PunjabNational Bank Punjab and Sind Bank State Bank of India State Bank of India & itsassociates. 1) State Bank of Hyderabad 2) State Bank of India 3) State Bank ofIndore 4) State Bank of Mysore 5) State Bank of Saurashtra 6) State Bank ofTravancore18. Syndicate Bank 19. UCO Bank 20. Union Bank of India (UBI) 21.Vijaya Bank49
  • 51. 50
  • 52. Deposits Total deposits mobilized by the Public Sector Banks as at the end March2003 stood at Rs. 10,79,394crore showing a growth of 11.4% which is lower thangrowth rate of 12.7% recorded at end March 2002. The State Bank of Patialashowed the highest growth in the deposit mobilization with 28.1%, where OrietalBank of Commerce showed the lowest growth rate of 4.6% at the end March 2003.During the year 2002-2003, 17 Public Sector Banks registered the higher growththan the group average. Investment During 2002-2003, investment rose by Rs.91,159crore (20%) to Rs. 5, 45,668 crore as compared to an increase of Rs.60,402 crore (15.3%) during the previous year. The rate of growth was higherthan the average for 14 Public Sector Banks. State Bank of Patiala showedhighest rate with 42.3%. At the other extreme, Oriental Bank of commerceregistered growth rate of 7.9% during the year. Other banks which haveregistered an impressive growth in investment during 2002-2003 are Canara Bank(31.1%), Corporation Bank (32.4%), and State Bank of Saurashtra (33.0%). CreditThe rate of growth in the total loan disbursement by the banking sector waslower during 2002-2003 due largely to lower economic activity. The total loansand advances position as at end March 2003 stood at Rs. 5,49,351crore registeredthe growth rate of 14.1% as compared to Rs. 4,80,118 crore at end March 2002with growth rate of 15.7%. 14 Public Sector Banks showed the higher growth ratethan the group average. Vijya Bank tops the position with 27.3% in creditdisbursal. Other banks which have showed impressive growth in advances areCanara Bank (22.1%), UCO Bank (24.4%), State Bank of Indore (21.0%),State Bankof Patiala (23.8%)and State Bank of Travancore (23.3%)during 2002-2003. the Bankwhich registered the lowest growth in credit disbursement was Bank of Barodawith 5.0%.51
  • 53. Table 2: Public Sector Banks: Total Assets, Gross NPA, And Net NPAName of the Bank NATIONALI S-ED BANKS Allahabad Bank Andhra Bank Bank of BarodaBank of India Bank of Maharashtra Canara Bank Central Bank of India CorporationBank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjaband Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of IndiaUnited Bank of India Vijaya Bank Total of 19 NAT. Bank S State Bank of IndiaAssociates of SBI State Bank of Bikaner & Jaipur State Bank of HeyderabadTotal Assets 2001 2002 2003 2001Gross NPA 2002 2003 2001Net NPA 2002 200322056.56 20389.41 63322.04 59566.57 19039.87 66520.64 47260.31 19703.20 17908.6026640.54 30294.4824764.46 20937.25 70910.07 69805.86 21470.45 72135.15 52613.67 23604.19 18842.0730262.94 35441.1228050.92 24678.36 76476.85 76626.77 24923.18 82054.93 57105.16 26271.98 20161.9635375.22 41154.721821.31 470.10 4185.72 3434.00 876.63 2150.29 3253.00 484.74 1928.26 2359.071631.402001.85 524.14 4489.30 3722.00 906.42 2112.44 3376.00 527.05 1996.02 2175.351818.541841.50 580.70 4167.90 3804.00 957.54 2474.78 3244.00 657.34 1616.58 1629.821896.481074.64 219.02 1850.54 2138.00 497.67 1345.99 1830.00 171.19 1280.31 949.93917.581160.1 237.23 1913.1 2304.0 479.71 1288.3 1699.0 253.43 1227.2 903.58 957.51886.9 206.2 1700. 2382. 459.1 1453. 1562. 198.3 997.2 754.9 912.227072.43 13402.38 63519.22 28243.22 27331.18 38977.74 21482.82 14256.61 626987.8315644.232236.93 13753.57 72914.66 31756.19 31381.37 44357.89 22776.38 16144.80 706109.0348228.233987.63 14490.91 86221.80 34435.43 34914.08 51060.49 24270.68 19079.37 791281.4375876.5585.76 1026.15 3460.10 1074.60 1284.02 2056.33 1411.15 594.92 34087.55 15874.97951.79 1091.84 4139.86 1299.13 1332.65 1215.50 602.69 36763.05 36763.05 15485.851146.25 1246.89 4980.06 1420.17 1366.49 2387.61 959.08 505.54 36882.7 13506.0397.11 634.13 1871.11 530.64 655.92 1201.22 602.30 356.06 18523.36 6856.26453.80 651.21 1810.0 689.59 723.59 1338.3 541.99 373.24 19005. 6810.2225.2 639.4 1526. 700.0 697.1 1253. 406.0 205.8 17169 6183.13887.5815504.24
  • 54. 18038.14715.00585.12580.29409.67342.11281.7918426.0322120.8026131.541075.29898.52734.84555.06417.47315.3952
  • 55. State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank ofSaurashtra State Bank of Travancore Total of 7 Associates Total of State BankGroup Total of Public Sector Bank S8222.52 9413.49 14324.81 8583.06 14482.67 87340.17 402984.3 1029972.9845.90 10353.67 17372.51 9369.85 16493.37 101060.4 449228.6 1155397.11376.37 11335.75 21288.90 10873.91 91030.16 118077.7 493954.2 1285235.325.19 581.01 688.99 568.54 757.93 4711.95 20586.92 54674.47320.10 624.61 628.02 443.25 727.61 4227.23 19713.08 56476.13295.25 562.01 531.29 354.34 635.26 3698.28 17204.35 54087.08202.57 336.96 336.20 262.38 495.97 2598.81 9455.07 27978.43153.46 361.51 254.78 203.57 425.05 2157.9 8968.2 27973.137.84 272.90 160.85 163.96 280.00 1612.7 7795.7 24963.Total Assets Total Assets of the Public Sector Banks increased toRs.1,28,5236crore as on March 2003 from Rs.11,55,398crore of the previous year,showing the growth rate of 11.2% as against the growth rate of 12.2% recordedduring the 2001-2002. 17 Public Sector Banks registered higher than the averagerate of growth recorded by the Public Sector Banks as a group. During theprevious year (2001-2202), 16 Public Sector Banks registered growth rate higherthan the average growth recorded by this group. Non performing Assets Both grossNPA and net NPA at the end March 2003 were lower than the previous year. Thegross NPA of Public Sector Banks decreased to Rs. 54,087crore at the end March2003 from Rs. 56,476crore at end March 2002. Similarly the Net NPA declined fromR.s 27,973 crore at the end March 2002 to Rs. 24,963crore at the end March far as the growth is concerned, the gross NPA registered (-)4.2%at the endMarch 2003 as compared to 3.3% of the previous year. In the case of net NPA, ithas shown a declining trend in all the tree years. The growth in net NPAregistered a (-) 0.02% in 2002 and (-) 10.7% at the end March 2003.53
  • 56. Table 3: Public Sectors Banks: ProfitsName of the Bank NATIONALIS ED BANKS Allahabad Bank Andhra Bank Bank of BarodaBank of India Bank of Maharashtra Canara Bank Central Bank of India CorporationBank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjaband Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of IndiaUnited Bank of India Vijaya Bank Total of 19 NAT. Bank S State Bank of IndiaAssociates of SBI State Bank of Bikaner &2001Gross profit 2002 2003Provisions &contingency 2001 2002 20032001Net profit 20022003266.01 248.72 1036.47 772.02 239.98 1131.23 470.48 532.06 76.83 61.59 306.60534.10 102.74 145.21 297.79 213.70 511.25 136.72 178.48 8062.05 3466.78407.98 425.38 1309.26 1408.45 415.05 1656.24 704.36 622.94 335.39 307.15 616.36917.10 163.70 1473.80 355.24 475.98 869.24 237.16 252.51 12953.2 6044.83515.8 754.83 1716.62 2030.00 520.58 1997.37 923.85 852.52 493.83 590.25 794.141163.06 280.84 2317.29 618.79 624.04 1303.92 556.02 432.36 18486.1 7775.40226.0 127.5 761.8 520.1 194.7 846.1 424.0 270.2 342.9 335.5 190.6 331.2 89.48481.5 62.86 180.7 355.7 117.5 107.7 5966. 2362.327.7 223.1 763.3 903.2 269.6 914.8 541.0 314.8 324.0 273.9 386.1 596.5 140.6911.4 104.6 311.4 555.1 118.1 121.6 8101. 3613.949.84 351.84 943.84 1179.00 298.56 978.48 618.33 436.53 379.14 401.42 378.04706.11 276.41 1475.09 274.66 416.55 751.23 250.83 235.80 10702.2 4670.4039.91 121.19 274.66 251.88 45.19 285.10 46.46 261.84 -266.12 -274.00 115.93202.89 13.26 263.64 234.94 33.00 155.47 19.14 70.73 2095.10 1604.2580.21 202.27 545.93 505.22 145.41 741.40 163.30 308.10 11.36 33.22 230.21 320.5523.04 562.39 250.55 164.52 314.13 119.04 130.90 4851.76 2431.62165.9 402.9 772.7 851.0 222.0 1018. 305.5 415.9 114.1 188.8 419.1 456.9 4.43842.2 344.1 207.4 552.6 305.1 196.5 7783. 3105.268.30390.62440.85162.9226.1237.5105.37164.50
  • 57. 203.254
  • 58. Jaipur State Bank of Heyderabad State Bank of Indore State Bank of Mysore StateBank of Patiala State Bank of Saurashtra State Bank of Travancore Total of 7Associates Total of State Bank Group Total of Public Sector Bank S448.39 172.46 137.94 399.12 116.38 230.24 1772.83 5739.61 13801.6600.05 342.24 234.79 564.63 221.26 321.26 2674.85 8719.68 21672.9757.95 421.00 352.75 739.54 286.63 455.00 3453.72 11229.1 29715.2298. 108.4 112.2 238.0 102.6 132.7 1155. 3577. 9484.373. 217.1 168.8 331.6 139.2 200.3 1656. 5270. 13371456.5 220.6 236.8 417.5 194.0 283.9 2047. 6717. 17419150.22 63.99 25.72 161.10 13.11 97.49 417.59 2221.84 4316.94226.49 125.10 65.90 232.94 82.09 120.93 1017.86 3449.48 8301.24301.4 200.3 115.9 322.0 92.55 171.0 1406. 4511. 12295Profit The total gross profit of the Public Sector Banks stood at Rs.29,715crore during 2002-03 as compared to Rs. 21,673crore 2001-02. The net profit ofthe banks also went up from Rs.8,301crore in 2001-02 to R.s12,295crore during2002-03. highest growth rate in the net profit was recorded by the Dena Bank(905.0%) followed by the Indian Bank (468.4%) apart from these two banks, otherbanks which have recorded remarkable growth in net profit were United Bank ofIndia (156.3%) and Allahabad Bank (106.9%). 14 banks recorded higher growth inthe net Public Sector Banks than the group average during 2002-03.55
  • 59. 56
  • 60. 57
  • 61. Operating Expenses The operating expenditure as percentage to total expensesmoved up from 24.3% in 2001-02 to 24.8% in 2002-03. Oriental Bank of Commercerecorded the least ratio with 17.2%. At the other extreme is Syndicate Bank withthe highest ratio of 35.8%. Total Expenditure The total expenditure of the banksincreased to Rs.1,16,169 crore during 2002-03 from Rs. 1,08,948crore during2001-02 showing a growth of 6.6% which is lower than the previous year sgrowth of 9.9%. this moderate reduction in the rate of growth in the totalexpenditure, which recorded a lower growth of 1.0% during 2002-03 as compared to12.1% of of previous year . on the other hand, the operating expenditure ofPublic Sector Banks moved up from Rs.26,422crore during 2001-02 toRs.28,897crore during 2002-03 recorded a growth of 9.4% as compared to theprevious year s declined growth of ()5.6%. 13 Public Sector Banks registeredhigher growth than the group s average growth in operating expenses during2002-03. Highest growth in the operating expenses was recorded by Andhra Bank(32.5%), closely followed by Vijaya Bank (32.1%). The United Bank of India wasthe only bank with lower operating expenses during 2002-03 as compared to theprevious year.58
  • 62. 59
  • 63. 60
  • 64. Income Total income of Public Sector Banks, though increased to Rs.1,28,464crore during the year 2002-03 from Rs. 1,17,252crore during 2001-02,recorded lower growth than the previous year. Growth of income during 2002-03was 9.6% which is lower than 13.3% of the previous year. Both of the majorcomponents of the income, i.e, interest income and other income, registeredlower growth than the previous year. Interest income during 2002-03 wasRs.1,00,711crore (10.5%) of the previous year. Similarly, the other income movedup to Rs.21,272crore (28.6%) during 2002-03 as compared to Rs. 16,541crore(33.7%) of the previous year. There is not much variation in the trend in theincome pattern of the 19 nationalised banks and SBI groups during the year 2002-03. though the interest income still remain the major contributor to the totalincome of the group, the share of other income in the total income is moving up.The share of other income in the total income of the Public Sector Banksincreased from 12% to 14% and further to 16.4% during the year 2000-01, 2001-02,and 2002-03, respectively. The impressive growth in the other income is largelydue to the impressive growth in the treasury income of the banks. Conclusion Theperformance of the Public Sector Banks indicates that their financial positionhas improved significantly during 2002-03. They made impressive performance ininvestment and moderate in advances. NPAs of the banks had declined during theyear. The rate of growth in the total income of the banks was lower than theprevious year. However, other income of the banks, led by treasury income, hadsteadily increased its share in total income. Total expenditure also recorded adecelerated growth rate during 2002-03 as compared to the previous year .Returnon assts of the banks recorded improvement. Profitability of the banks improvedconsiderably during the year.61
  • 65. NON-PERFORMING ASSETSThe world is going faster in terms of services and physical products. However ithas been researched that physical products are available because of the serviceindustries. In the nation economy also service industry plays vital role in theboosting up of the economy. The nations like U.S, U.K, and Japan have serviceindustries more than 55%. The banking sector is one of appreciated serviceindustries. The banking sector plays larger role in channelising money from oneend to other end. It helps almost every person in utilizing the money at theirbest. The banking sector accepts the deposits of the people and providesfruitful return to people on the invested money. But for providing the betterreturns plus principal amounts to the clients; it becomes important for thebanks to earn. the main source of income for banks are the interest that theyearn on the loans that have been disbursed to general person, businessman, orany industry for its development. Thus, we may find the input-output system inthe banking sector. Banks first, accepts the deposits from the people andsecondly they lend this money to people who are in the need of it. By the way ofchannelising money from one end to another end, Banks earn their profits.However, Indian banking sector has recently faced the serious problem of NonPerforming Assets. This problem has been emerged largely in Indian bankingsector since three decade. Due to this problem many Public Sector Banks havebeen adversely affected to their performance and operations. In simple words NonPerforming Assets problem is one where banks are not able to recollect theirlanded money from the clients or clients have been in such a condition that theyare not in the position to provide the borrowed money to the banks. The problemof NPAs is danger to the banks because it destroys the healthy financialconditions of the them. The trust of the people would not be anymore if thebanks have higher NPAs. So. The problem of NPAs must be tackled out in such away that would not destroy the operational, financial conditions and would notaffect the image of the banks. recently, RBI has taken number steps to reduceNPAs of the Indian banks. And it is also found that the many banks have shownpositive figures in reducing NPAs as compared to the past years.62
  • 66. MEANING OF NPASAn asset is classified as non-performing asset (NPAs) if the borrower does notpay dues in the form of principal and interest for a period of 180 days. Howeverwith effect from March 2004, default status would be given to a borrower if dueswere not paid for 90 days. If any advance or credit facilities granted by bankto a borrower become non-performing, then the bank will have to treat all theadvances/credit facilities granted to that borrower as non-performing withouthaving any regard to the fact that there may still exist certain advances /credit facilities having performing status.63
  • 67. WHAT IS A NPAs (NON PERFORMING ASSETS)Action for enforcement of security interest can be initiated only if the securedasset is classified as Non Performing Asset. Non Performing Asset means an assetor account of borrower, which has been classified by a bank or financialinstitution as substandard, doubtful or loss asset, in accordance with thedirections or guidelines relating to asset classification issued by RBI. Anamount due under any credit facility is treated as "past due" when it has notbeen paid within 30 days from the due date. Due to the improvement in thepayment and settlement systems, recovery climate, upgradation of technology inthe banking system, etc., it was decided to dispense with past due concept,with effect from March 31, 2001. Accordingly, as from that date, a Nonperforming asset (NPA) shell be an advance where Interest and /or installment ofprincipal remain overdue for a period of more than 180 days in respect of a TermLoan, The account remains out of order for a period of more than 180 days, inrespect of an overdraft/ cash Credit (OD/CC), The bill remains overdue for aperiod of more than 180 days in the case of bills purchased and discounted,Interest and/ or installment of principal remains overdue for two harvestseasons but for a period not exceeding two half years in the case of an advancegranted for agricultural purpose, and Any amount to be received remains overduefor a period of more than 180 days in respect of other accounts. With a view tomoving towards international best practices and to ensure greater transparency,it has been decided to adopt the 90 days overdue norm for identification ofNPAs, form the year ending March 31, 2004. Accordingly, with effect form March31, 2004, a non-performing asset (NPA) shell be a loan or an advance where;Interest and /or installment of principal remain overdue for a period of morethan 90 days in respect of a Term Loan,64
  • 68. The account remains out of order for a period of more than 90 days, in respectof an overdraft/ cash Credit (OD/CC), The bill remains overdue for a period ofmore than 90 days in the case of bills purchased and discounted, Interest and/or installment of principal remains overdue for two harvest seasons but for aperiod not exceeding two half years in the case of an advance granted foragricultural purpose, and Any amount to be received remains overdue for a periodof more than 90 days in respect of other accounts.65
  • 69. CLASSIFICATION OF LOANSIn India the bank loans are classified on the following basis. PerformingAssets: Loans where the interest and/or principal are not overdue beyond 180days at the end of the financial year. Non-Performing Assets: Any loanrepayment, which is overdue beyond 180 days or two quarters, is considered asNPA. According to the securitisation and reconstruction of financial assets andenforcement of security interest ordinance, 2002  non-performing asset (NPA)means  an asset or account of a borrower, which has been classified by a bankor financial institution as sub-standard, doubtful or loss asset, in accordancewith the directions or guidelines relating to asset classifications issued bythe Reserve Bank  Internationally, income from non-performing assets is notrecognized on accrual basis, but is taken into account as income only when it isactually received. It has been decided to adopt similar practice in our countryalso. Banks have been advised that they should not charge and take to incomeaccount the interest on all Non-performing assets. An asset becomes non-performing for a bank when it ceases to generate income.66
  • 70. The basis for treating a credit facility as non-performing is as follows:INCOME RECOGNITION:S.N Nature of Credit Facility Basis for Treating as NPA A term loan is to betreated as NPA if interest remains past due for a period of 4 quarters for theyear ended 31-3-1993,3 quarters for the year ended 31-3-1994 and 2 quarters forthe year ended 31-3-1995 and onwards. Past due means an amount reaming outstanding or unpaid for 30 days beyond due date. For e.g., interest due on 31-3-1993 becomes past due on 30-4-1993, if it is not received by that date. A cashcredit or overdraft account should be treated as NPA if the account remains outof order for a period of four quarters during the year ended 31-3-1993,threequarters during the year ended 31-3-1994 and two quarters during the year ended313-1995 and onwards. An account may be treated as out of order if any of thefollowing three conditions is met The balance outstanding in the account remainscontinuously in excess of the sanctioned limit or drawing power. OR The balanceoutstanding is within the limit/drawing power, but there are no credits in theaccount continuously for a period of six months as on the date of the balancesheet of the bank.I.Term LoansII.Cash Credit & Overdrafts67
  • 71. OR There are some credits but the credits are not enough to cover the interestdebited to the account during the same period. III. Bill Purchased andDiscounted An account should be treated as NPA if the bill remains overdue andunpaid for a period of four quarters during the year ended 31st March, 1994 andtwo quarters during the year ended 31st March, 1995 and onwards. It may be addedthat overdue interest should not be charged and taken to income account inrespect of overdue bills unless it is realized.IV.Other Accounts Any other credit facility should be treated as NPA if any amountto be received in respect of that facility remains past due for a period of fourquarters during the year ended 31st March 1993. There quarters during the yearended 31st March 1994 and two quarters during the year ended 31st March 1995 andonwards.ASSET CLASSIFITION:68
  • 72. S.NCategory of assets I. Standard AssetsBasis for Deciding the category An asset, which does not disclose any problemand also does not carry more than normal risk attached to the business, itshould not fall under this category of NPA.II. Sub-Standard Assets An asset, which has been identified as NPA for a periodnot exceeding two years. In the case of term loan, if installments of principalare overdue for more than one year but not exceeding two years, it is to betreated as sub-standard asset. An asset where the terms of the loan agreementregarding interest and principal have been re-negotiated or re-scheduled shouldbe classified as sub-standard and should remain in such category for at leasttwo years of satisfactory performance under the re-negotiated or rescheduledterms. In other words, the classification of assets should not be upgradedmerely as a result of re-scheduling unless there is satisfactory compliance ofthe above condition. III. Doubtful Assets An asset, which remains NPA for morethan two years. Here too, rescheduling does not entitle a bank to upgrade thequality of an advance automatically.69
  • 73. In the case of a term loan, if installments of principal are overdue for morethan two years, it is to be treated as doubtful. IV. Loss Assets An asset whereloss has been identified by the bank or internal/external auditors or by RBIinspection but the amount has not been written-off, wholly or partly. In otherwords, such an asset is considered unrealizable and of such little value thatits continuance as a bankable asset is not warranted although there may be somesalvage or recovery value.70
  • 74. INDIAN ECONOMY AND NPASUndoubtedly 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, poorinfrastructure facilities, sticky legal system, cutting of exposures to emergingmarkets by FIIs, etc. Further, international rating agencies like, Standard &Poor have lowered Indias credit rating to sub-investment grade. Such negativeaspects have often outweighed positives such as increasing forex reserves and amanageable inflation rate. Under such a situation, it goes without saying thatbanks are no exception and are bound to face the heat of a global downturn. Onewould be surprised to know that the banks and financial institutions in Indiahold non-performing assets worth Rs. 1,10,000 crores. Bankers have realized thatunless the level of NPAs is reduced drastically, they will find it difficult tosurvive. The actual level of Non Performing Assets in India is around $40billion much higher than government s estimation of $16 billion. Thisdifference is largely due to the discrepancy in accounting the NPAs followed byIndia and rest of the world. The Accounting norms of the India are lessstringent than those of the developed economies. the Indian banks also have thetendency to extend the past dues. Considering the GDP of India nearly $470billion, the NPAs are 8% of total GDP, which was better than the many Asiancountries. the NPA of china was 45%of the GDP, while Japan had NPAs of 25% ofthe GDP and Malaysia had 42%. The aggregate level of the NPAs in Asia hasincreased from $1.5 billion in 2000 to $2 billion in 2002.looking to suchoverall picture of the market, we can say that India is performing well and thesteps taken are looking favorable.NPA CHARACTERISTICS IN INDIA71
  • 75. 1. Size of NPA Portfolios Reviewed On an overall basis, in comparison to theGross NPA portfolio of the financial sector in India for the year ended March31, 2003, approximately Rs. 452 billion from the total gross NPAs of Indianbanking sectors • Public Sector Banks cover 55% of gross NPAs • Privatesector banks cover 11% of gross NPAs • Foreign sector banks cover 3.02%, and• Financial institutions cover 29%2. Sectoral Segmentation Banks in India are required to reserve a part of theirlending for the priority sector. Broadly this comprises the sub-sectors such asAgriculture, Small Scale Industries, and other activities such as smallbusiness, retail trade, small transport operators, professional and selfemployed persons, housing, education loans, micro-credit etc. In addition,certain investments in bonds issued by State Financial Corporations (SFCs),State Industrial Development Corporations (SIDCs), etc. are also recognized aspriority sector lending provided such bonds have been issued exclusively tofinance priority sector activities. As seen from the Chart below, around 23% ofthe NPA portfolio is in the priority sector including agriculture, small scaleand others. The balance 77% belongs to NPAs in the non-priority sector whichincludes NPAs pertaining to public sector undertakings, corporate and retailborrowers. Within the non-priority sector, a large proportion of NPAs (more than96%) by gross value are in the corporate segment. The largest proportion amongthe corporate borrowers is private sector corporate borrowers. Since thesectoral segmentation norms are applicable to banks only the above graph issomewhat skewed (participant lenders included financial institutions). Givenbelow is the sectoral segmentation in public sector banks only. Priority sectorNPAs constitutes 46% of the NPA portfolio of participant public sector banks byvalue. In the non-priority sector corporate borrowers form the largestproportion of NPAs.72
  • 76. Sectoral Segmentation0% 2% 47% 14% 5% Agriculture Retail Borrower Corporate Borrower 13% 19%other Small Scale IndustryJoint sector State Owned Co3. Industry Classification Most of the participant lenders have provided us withdetailed NPA profile for large NPAs. The remainder of our analysis for NPAprofiling, therefore, focuses on the large NPA portfolio. The total large NPA(individual gross value above Rs 10 million) portfolio of the participatingbanks amounts to Rs 357 billion approximately. The top 5 industries with maximumLarge NPAs (by gross value) for the participant lenders included in this studyare Textiles, Iron & Steel, Chemicals, Engineering and (non ferrous) Metals. TheLarge NPAs of these 5 industries alone comprise approximately half of the totalLarge NPA portfolio (by gross value) of the participating lenders. At 15%, theTextiles industry is the single largest contributor to the gross Large NPAs ofthe participating lenders. It is followed by Iron & Steel with 14%, Chemicalswith 9%, Engineering with 8% and Metals with 5%. The participant lendersprovided loan grading segmentation of the Large NPAs in the top 5 industriesviz. textiles, iron & steel, chemicals, engineering and metals. Only about 20%of the Large NPA portfolio by gross value is in sub-standard assets. Thisindicates that the rehabilitation potential of, about 80% of the Large NPAportfolio in each of the top 5 industries is somewhat limited.73
  • 77. Nearly 68% of the gross NPAs by gross value are in the doubtful category. Withinthis, 28% by gross value are in the C3 subcategory. It might be worth notingthat C3 category comprises assets that have been non-performing for at least 5years and that there is no upper time limit on holding assets in the C3 categoryif the lender is able to provide evidence that collateral exists. Also nearly15% to 18% of the Large NPAs in each of the top industries (other thanChemicals) are loss assets.Industry Classification15% 49% 14%5% Textiles Engineering Iron & Steel Metals8%9%Chemicals Other4.State-wise Distribution Data was collected from participant lenders on statewise distribution of their Large NPAs. The top 5 states with maximum Large NPAs(by gross value) for the lenders included in this study are Maharashtra(including Goa), Gujarat, Delhi (including Rajasthan), Andhra Pradesh and TamilNadu. The Large NPAs in these 5 states alone comprise approximately 65% of thetotal Large NPA portfolio (by gross value) of the lenders in the sample.Maharashtra (including Goa) with nearly 24% is the single largest contributor tothe gross Large NPAs of the participant lenders. It is followed by Gujarat with11%, Delhi (including Rajasthan) with slightly more than 10%, Andhra Pradeshwith 10% and Tamil Nadu with just under 10%.74
  • 78. State Wise Distribution24% 11% 10% Delhi, Rajesthan Other35%10% Maharashtra Andhra Pradesh10%Gujarat Tamil Nadu5. Region-wise Distribution The NPA portfolios of lenders covered in the studyhave been segmented into the following regions: • Northern - J&K, HimachalPradesh, Punjab, Haryana, Delhi, Rajasthan, Uttaranchal and UP • Eastern -North eastern states, West Bengal, Orissa, Bihar and Jharkhand • Southern -Tamil Nadu, Kerala, Pondicherry, Andhra Pradesh, Karnataka • Western -Maharashtra, Goa, Gujarat • Central - Madhya Pradesh, Chattisgarh Based on theabove segmentation, the region-wise distribution of Large NPAs of theparticipant Lenders taken together is provided in the Chart below: The Westernregion (with 35%) has the maximum Large NPAs (by gross value) of theparticipating lenders. This is followed by the Southern and Northern Regionswith 24% each. Eastern and Central regions have a lower proportion of NPAs bygross value at 10% and 6% respectively. On an overall basis, the geographicaldistribution of NPAs is clearly linked to the level of industrialization invarious parts of India. The Western region in general and Maharashtra andGujarat, in particular, are amongst the more industrialized areas of India. As aresult, these areas have also attracted the maximum amount of bank credit. Theslowdown in industrial activity during the past few years has also been morepronounced in these areas, which has resulted in a higher proportion of NPAs.75
  • 79. Regional Distribution6% 36% 10% 24% Northern Estern Southern Western Central 24%6. Operating Status of Assets In order to assess the rehabilitation potential ofthe Large NPAs, we had requested banks to provide break-down of their Large NPAportfolio between operating/nonoperating and implementation status. The tablebelow provides a break-up of the NPA portfolio of all participating banks on thebasis of operating status. As can be seen, only a very small proportion of theLarge NPA portfolio (by gross value) is under implementation. The remaining ismore or less equally split between assets which are operating and those whichare not.7. Security Profile The data on break-up of the number and gross value of theLarge NPAs based on the type of security (Fixed assets/current assets) was alsoreceived from the participant lenders. It can be seen from the Chart below that89% of the secured large NPAs are secured against Fixed Assets, which suggeststhat some value might be preserved even if assets are not operating. 8. PossibleIncrease in Near Future76
  • 80. Several measures are being taken both by the Government, Reserve Bank of Indiaand by the banks and institutions themselves to reduce the level of NPAs in thesystem. While the absolute value of NPAs has been increasing marginally, the NPAratios (both gross and net) have been declining over the last few years. In factin the year ended March 31, 2003, the levels of NPAs have also declined inabsolute terms also as compared to the previous year. The Indian system ismoving towards international practices which utilize significant qualitativemeasures in addition to quantitative measures. Such a change may contribute tostandard loans being graded as NPAs in the future. Also, according to someestimates, the application of the 90 days past due criteria from March 31, 2004(as proposed by RBI) will increase gross NPAs by 3-5% of gross advances.77
  • 81. UNDERLYING REASONS FOR NPAS IN INDIAAn internal study conducted by RBI shows that in the order of prominence, thefollowing factors contribute to NPAs. Internal Factors • Diversion of fundsfor o Expansion/diversification/modernization o Taking up new projects oHelping/promoting associate concerns time/cost overrun during the projectimplementation stage Business (product, marketing, etc.) failure Inefficiency inmanagement Slackness in credit management and monitoring Inappropriatetechnology/technical problems Lack of co-ordination among lenders• • • • •External Factors • • • • • • Recession Input/power shortage Priceescalation Exchange rate fluctuation Accidents and natural calamities, etc.Changes in Government policies in excise/ import duties, pollution controlorders, etc. As mentioned earlier, we held discussions with lenders andfinancial sector experts on the causes of NPAs in India and whilst the above-mentioned causes were reaffirmed, some others were also mentioned. A briefdiscussion is provided below. Liberalization of economy/removal ofrestrictions/reduction of tariffs A large number of NPA borrowers were unable tocompete in a competitive market in which lower prices and greater choices wereavailable to consumers. Further, borrowers operating in specific industries havesuffered due to political, fiscal and social •78
  • 82. compulsions, compounding pressures from liberalization (e.g., sugar andfertilizer industries) Lax monitoring of credits and failure to recognize EarlyWarning Signals It has been stated that approval of loan proposals is generallythorough and each proposal passes through many levels before approval isgranted. However, the monitoring of sometimes-complex credit files has notreceived the attention it needed, which meant that early warning signals werenot recognised and standard assets slipped to NPA category without banks beingable to take proactive measures to prevent this. Partly due to this reason,adverse trends in borrowers performance were not noted and the position furtherdeteriorated before action was taken. Over optimistic promoters Promoters wereoften optimistic in setting up large projects and in some cases were not fullyabove board in their intentions. Screening procedures did not always highlightthese issues. Often projects were set up with the expectation that part of thefunding would be arranged from the capital markets, which were booming at thetime of the project appraisal. When the capital markets subsequently crashed,the requisite funds could never be raised, promoters often lost interest andlenders were left stranded with incomplete/unviable projects. Directed lendingLoans to some segments were dictated by Governments policies rather thancommercial imperatives. Highly leveraged borrowers Some borrowers were undercapitalized and over burdened with debt to absorb the changing economicsituation in the country. Operating within a protected market resulted in lowappreciation of commercial/market risk. Funding mismatch There are said to bemany cases where loans granted for short terms were used to fund long termtransactions. • High Cost of Funds Interest rates as high as 20% were notuncommon. Coupled with high leveraging and falling demand, borrowers could notcontinue to service high cost debt. Willful Defaulters There are a number ofborrowers who have strategically defaulted on their debt service obligationsrealizing that the legal recourse available to creditors is slow in achievingresults • • • • • •79
  • 83. EXISTING SYSTEMS/PROCEDURES FOR NPA IDENTIFICATION AND RESOLUTION IN INDIA1. Internal Checks and Control Since high level of NPAs dampens the performanceof the banks identification of potential problem accounts and their closemonitoring assumes importance. Though most banks have Early Warning Systems(EWS) for identification of potential NPAs, the actual processes followed,however, differ from bank to bank. The EWS enable a bank to identify theborrower accounts which show signs of credit deterioration and initiate remedialaction. Many banks have evolved and adopted an elaborate EWS, which allows themto identify potential distress signals and plan their options beforehand,accordingly. The early warning signals, indicative of potential problems in theaccounts, viz. persistent irregularity in accounts, delays in servicing ofinterest, frequent devolvement of L/Cs, units financial problems, marketrelated problems, etc. are captured by the system. In addition, some of thesebanks are reviewing their exposure to borrower accounts every quarter based onpublished data which also serves as an important additional warning system.These early warning signals used by banks are generally independent of riskrating systems and asset classification norms prescribed by RBI. The majorcomponents/processes of a EWS followed by banks in India as brought out by astudy conducted by Reserve Bank of India at the instance of the Board ofFinancial Supervision are as follows: i) Designating Relationship Manager/Credit Officer for monitoring account/s ii) Preparation of `know your clientprofile iii) Credit rating system iv) Identification of watch-list/specialmention category accounts v) Monitoring of early warning signals80
  • 84. Relationship Manager/Credit Officer The Relationship Manager/Credit Officer isan official who is expected to have complete knowledge of borrower, hisbusiness, his future plans, etc. The Relationship Manager has to keep inconstant touch with the borrower and report all developments impacting theborrowal account. As a part of this contact he is also expected to conductscrutiny and activity inspections. In the credit monitoring process, theresponsibility of monitoring a corporate account is vested with RelationshipManager/Credit Officer. `Know your client profile (KYC) Most banks in Indiahave a system of preparing `know your client (KYC) profile/credit report. As apart of `KYC system, visits are made on clients and their places ofbusiness/units. The frequency of such visits depends on the nature and needs ofrelationship. Credit Rating System The credit rating system is essentially onepoint indicator of an individual credit exposure and is used to identify measureand monitor the credit risk of individual proposal. At the whole bank level,credit rating system enables tracking the health of banks entire creditportfolio. Most banks in India have put in place the system of internal creditrating. While most of the banks have developed their own models, a few bankshave adopted credit rating models designed by rating agencies. Credit ratingmodels take into account various types of risks viz. financial, industry andmanagement, etc. associated with a borrowal unit. The exercise is generally doneat the time of sanction of new borrowal account and at the time of review /renewal of existing credit facilities. Watch-list/Special Mention Category Thegrading of the banks risk assets is an important internal control tool. Itserves the need of the Management to identify and monitor potential risks of aloan asset. The purpose of identification of potential NPAs is to ensure thatappropriate preventive / corrective steps could be initiated by the bank toprotect against the loan asset becoming non-performing. Most of the banks have asystem to put certain borrowal accounts under watch list or special mentioncategory if performing advances operating under adverse business or economicconditions are exhibiting certain distress signals. These accounts generallyexhibit weaknesses which are correctable but warrant banks closer attention.The categorisation of such accounts in watch list or special mention categoryprovides • • ••81
  • 85. early warning signals enabling Relationship Manager or Credit Officer toanticipate credit deterioration and take necessary preventive steps to avoidtheir slippage into non performing advances. Early Warning Signals It isimportant in any early warning system, to be sensitive to signals of creditdeterioration. A host of early warning signals are used by different banks foridentification of potential NPAs. Most banks in India have laid down a series ofoperational, financial, transactional indicators that could serve to identifyemerging problems in credit exposures at an early stage. Further, it is revealedthat the indicators which may trigger early warning system depend not only ondefault in payment of installment and interest but also other factors such asdeterioration in operating and financial performance of the borrower, weakeningindustry characteristics, regulatory changes, general economic conditions, etc.Early warning signals can be classified into five broad categories viz. (a)financial (b) operational (c) banking (d) management and (e) external factors.Financial related warning signals generally emanate from the borrowers balancesheet, income expenditure statement, statement of cash flows, statement ofreceivables etc. Following common warning signals are captured by some of thebanks having relatively developed EWS. Financial warning signals • • • •• • • • • • • • • • Persistent irregularity in the accountDefault in repayment obligation Devolvement of LC/invocation of guaranteesDeterioration in liquidity/working capital position Substantial increase in longterm debts in relation to equity Declining sales Operating losses/net lossesRising sales and falling profits Disproportionate increase in overheads relativeto sales Rising level of bad debt losses Operational warning signals Lowactivity level in plant Disorderly diversification/frequent changes in planNonpayment of wages/power bills Loss of critical customer/s •82
  • 86. • •Frequent labor problems Evidence of aged inventory/large level of inventoryManagement related warning signals • • • • • • • Lack of co-operation from key personnel Change in management, ownership, or key personnelDesire to take undue risks Family disputes Poor financial controls Fudging offinancial statements Diversion of fundsBanking related signals • • • • • • Declining bankbalances/declining operations in the account Opening of account with other bankReturn of outward bills/dishonored cheques Sales transactions not routed throughthe account Frequent requests for loan Frequent delays in submitting stockstatements, financial data, etc.Signals relating to external factors • • • • • Economic recessionEmergence of new competition Emergence of new technology Changes in government /regulatory policies Natural calamities2. Management/Resolution of NPAs A reduction in the total gross and net NPAs inthe Indian financial system indicates a significant improvement in management ofNPAs. This is also on account of various resolution mechanisms introduced in therecent past which include the SRFAESI Act, one time settlement schemes, settingup of the CDR mechanism, strengthening of DRTs.83
  • 87. From the data available of Public Sector Banks as on March 31, 2003, there were1,522 numbers of NPAs as on March 31, 2003 which had gross value greater thanRs. 50 million in all the public sector banks in India. The total gross value ofthese NPAs amounted to Rs. 215 billion. The total number of resolutionapproaches (including cases where action is to be initiated) is greater than thenumber of NPAs, indicating some double counting. As can be seen, suit filed andBIFR are the two most common approaches to resolution of NPAs in public sectorbanks. Rehabilitation has been considered/adopted in only about 13% of thecases. Settlement has been considered only in 9% of the cases. It is likely tohave been adopted in even fewer cases. Data available on resolution strategiesadopted by public sector banks suggest that Compromise settlement schemes withborrowers are found to be more effective than legal measures. Many banks havecome out with their own restructuring schemes for settlement of NPA accounts. 3.Credit Information Bureau State Bank of India, HDFC Limited, M/s. Dun andBradstreet Information Services (India) Pvt. Ltd. and M/s. Trans Union to serveas a mechanism for exchange of information between banks and FIs for curbing thegrowth of NPAs incorporated credit Information Bureau (India) Limited (CIBIL) inJanuary 2001. Pending the enactment of CIB Regulation Bill, the RBI constituteda working group to examine the role of CIBs. As per the recommendations of theworking group, Banks and FIs are now required to submit the list of suit-filedcases of Rs. 10 million and above and suitfiled cases of willful defaulters ofRs. 2.5 million and above to RBI as well as CIBIL. CIBIL will share thisinformation with commercial banks and FIs so as to help them minimize adverseselection at appraisal stage. The CIBIL is in the process of gettingoperationalised. 4. Willful Defaulters RBI has issued revised guidelines inrespect of detection of willful default and diversion and siphoning of funds. Asper these guidelines a willful default occurs when a borrower defaults inmeeting its obligations to the lender when it has capacity to honor theobligations or when funds have been utilized for purposes other than those forwhich finance was granted. The list of willful defaulters is required to besubmitted to SEBI and RBI to prevent their access to capital markets. Sharing ofinformation of this nature helps banks in their due diligence exercise and helpsin avoiding financing unscrupulous elements. RBI has advised lenders to initiatelegal measures including criminal actions,84
  • 88. wherever required, and undertake a proactive approach in change in management,where appropriate. 5. Legal and Regulatory Regime A. Debt Recovery TribunalsDRTs were set up under the Recovery of Debts due to Banks and FinancialInstitutions Act, 1993. Under the Act, two types of Tribunals were set up i.e.Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT). TheDRTs are vested with competence to entertain cases referred to them, by thebanks and FIs for recovery of debts due to the same. The order passed by a DRTis appealable to the Appellate Tribunal but no appeal shall be entertained bythe DRAT unless the applicant deposits 75% of the amount due from him asdetermined by it. However, the Affiliate Tribunal may, for reasons to bereceived in writing, waive or reduce the amount of such deposit. Advances of Rs.1 mn and above can be settled through DRT process. An important power conferredon the Tribunal is that of making an interim order (whether by way of injunctionor stay) against the defendant to debar him from transferring, alienating orotherwise dealing with or disposing of any property and the assets belonging tohim within prior permission of the Tribunal. This order can be passed even whilethe claim is pending. DRTs are criticised in respect of recovery madeconsidering the size of NPAs in the Country. In general, it is observed that thedefendants approach the High Country challenging the verdict of the AppellateTribunal which leads to further delays in recovery. Validity of the Act is oftenchallenged in the court which hinders the progress of the DRTs. Lastly, manyneeds to be done for making the DRTs stronger in terms of infrastructure. B.Lokadalats The institution of Lokadalat constituted under the Legal ServicesAuthorities Act, 1987 helps in resolving disputes between the parties byconciliation, mediation, compromise or amicable settlement. It is known foreffecting mediation and counselling between the parties and to reduce burden onthe court, especially for small loans. Cases involving suit claims upto Rs. lmillion can be brought before the Lokadalat and every award of the Lokadalatshall be deemed to be a decree of a Civil Court and no appeal can lie to anycourt against the award made by the Lokadalat.85
  • 89. Several people of particular localities/ various social organisations areapproaching Lokadalats which are generally presided over by two or three seniorpersons including retired senior civil servants, defense personnel and judicialofficers. They take up cases which are suitable for settlement of debt forcertain consideration. Parties are heard and they explain their legal position.They are advised to reach to some settlement due to social pressure of seniorbureaucrats or judicial officers or social workers. If the compromise is arrivedat, the parties to the litigation sign a statement in presence of Lokadalatswhich is expected to be filed in court to obtain a consent decree. Normally, ifsuch settlement contains a clause that if the compromise is not adhered to bythe parties, the suits pending in the court will proceed in accordance with thelaw and parties will have a right to get the decree from the court. In general,it is observed that banks do not get the full advantage of the Lokadalats. It isdifficult to collect the concerned borrowers willing to go in for compromise onthe day when the Lokadalat meets. In any case, we should continue our efforts toseek the help of the Lokadalat. C. Enactment of SRFAESI Act The "TheSecuritisation and Reconstruction of Financial Assets and Enforcement ofSecurity Interest Act" (SRFAESI) provides the formal legal basis and regulatoryframework for setting up Asset Reconstruction Companies (ARCs) in India. Inaddition to asset reconstruction and ARCs, the Act deals with the followinglargely aspects, viz. • • • Securitisation and Securitisation CompaniesEnforcement of Security Interest Creation of a central registry in which allsecuritization and asset reconstruction transactions as well as any creation ofsecurity interests has to be filed.The Reserve Bank of India (RBI), the designated regulatory authority for ARCShas issued Directions, Guidance Notes, Application Form and Guidelines to Banksin April 2003 for regulating functioning of the proposed ARCS and theseDirections/ Guidance Notes cover various aspects relating to registration,operations and funding of ARCS and resolution of NPAs by ARCS. The RBI has alsoissued guidelines to banks and financial institutions on issues relating totransfer of assets to ARCS, consideration for the same and valuation ofinstruments issued by the ARCS. Additionally, the Central Government has issuedthe security enforcement rules ("Enforcement Rules"), which lays down theprocedure to be followed by a secured creditor while enforcing its securityinterest pursuant to the Act.86
  • 90. The Act permits the secured creditors (if 75% of the secured creditors agree) toenforce their security interest in relation to the underlying security withoutreference to the Court after giving a 60 day notice to the defaulting borrowerupon classification of the corresponding financial assistance as a non-performing asset. The Act permits the secured creditors to take any of thefollowing measures: • Take over possession of the secured assets of theborrower including right to transfer by way of lease, assignment or sale; •Take over the management of the secured assets including the right to transferby way of lease, assignment or sale; • Appoint any person as a manager of thesecured asset (such person could be the ARC if they do not accept any pecuniaryliability); and • Recover receivables of the borrower in respect of anysecured asset which has been transferred. After taking over possession of thesecured assets, the secured creditors are required to obtain valuation of theassets. These secured assets may be sold by using any of the following routes toobtain maximum value. • By obtaining quotations from persons dealing in suchassets or otherwise interested in buying the assets; • By inviting tendersfrom the public; • By holding public auctions; or • By private treaty.Lenders have seized collateral in some cases and while it has not yet beenpossible to recover value from most such seizures due to certain legal hurdles,lenders are now clearly in a much better bargaining position vis-a-visdefaulting borrowers than they were before the enactment of SRFAESI Act. Whenthe legal hurdles are removed, the bargaining power of lenders is likely toimprove further and one would expect to see a large number of NPAs beingresolved in quick time, either through security enforcement or throughsettlements. Asset Reconstruction Companies Under the SRFAESI Act ARCS can beset up under the Companies Act, 1956. The Act designates any person holding notless than 10% of the paid-up equity capital of the ARC as a sponsor andprohibits any sponsor from holding a controlling interest in, being the holdingcompany of or being in control of the ARC. The SRFAESI and SRFAESI Rules/Guidelines require ARCS to have a minimum net-owned fund of not •87
  • 91. less than Rs. 20,000,000. Further, the Directions require that an ARC shouldmaintain, on an ongoing basis, a minimum capital adequacy ratio of 15% of itsrisk weighted assets. ARCS have been granted a maximum realisation time frame offive years from the date of acquisition of the assets. The Act stipulatesseveral measures that can be undertaken by ARCs for asset reconstruction. Theseinclude: a) Enforcement of security interest; b) Taking over or changing themanagement of the business of the borrower; c) The sale or lease of the businessof the borrower; d) Settlement of the borrowers dues; and e) Restructuring orrescheduling of debt. ARCS are also permitted to act as a manager of collateralassets taken over by the lenders under security enforcement rights available tothem or as a recovery agent for any bank or financial institution and to receivea fee for the discharge of these functions. They can also be appointed to act asa receiver, if appointed by any Court or DRT.88
  • 92. D. Institution of CDR Mechanism The RBI has instituted the Corporate DebtRestructuring (CDR) mechanism for resolution of NPAs of viable entities facingfinancial difficulties. The CDR mechanism instituted in India is broadly alongthe lines of similar systems in the UK, Thailand, Korea and Malaysia. Theobjective of the CDR mechanism has been to ensure timely and transparentrestructuring of corporate debt outside the purview of the Board for Industrialand Financial Reconstruction (BIFR), DRTs or other legal proceedings. Theframework is intended to preserve viable corporates affected by certaininternal/external factors and minimise losses to creditors/other stakeholdersthrough an orderly and coordinated restructuring programme. RBI has issuedrevised guidelines in February 2003 with respect to the CDR mechanism. Corporateborrowers with borrowings from the banking system of Rs. 20 crores and aboveunder multiple banking arrangement are eligible under the CDR mechanism.Accounts falling under standard, sub-standard or doubtful categories can beconsidered for restructuring. CDR is a non-statutory mechanism based on debtor-creditor agreement and inter-creditor agreement. Restructuring helps in aligningrepayment obligations for bankers with the cash flow projections as reassessedat the time of restructuring. Therefore it is critical to prepare arestructuring plan on the lines of the expected business plan alongwithprojected cash flows. The CDR process is being stabilized. Certain revisions areenvisaged with respect to the eligibility criteria (amount of borrowings) andtime frame for restructuring. Foreign banks are not members of the CDR forum,and it is expected that they would be signing the agreements shortly. Howeverthey attend meetings. The first ARC to be operational in India- AssetReconstruction Company of India (ARGIL) is a member of the CDR forum. Lenders inIndia prefer to resort to CDR mechanism to avoid unnecessary delays in multiplelender arrangements and to increase transparency in the process. While in theRBI guidelines it has been recommended to involve independent consultants, banksare so far resorting to their internal teams for recommending restructuringprograms. As of March 31, 2003, 60 cases worth Rs. 44,369 crores had beenreferred to the CDR, of which 29 cases worth Rs. 29,167 crores have beenapproved for restructuring. E. Compromise Settlement Schemes • One TimeSettlement Schemes89
  • 93. RBI has issued guidelines under the one time settlement scheme which will coverall NPAs in all sectors, which have become doubtful or loss as on 31st March2000. The scheme also covers NPAs classified as sub-standard as on 31st March2000, which have subsequently become doubtful or loss. All cases on which thebanks have initiated action under the SRFAESI Act and also cases pending beforeCourts/DRTs/BIFR, subject to consent decree being obtained from theCourts/DRTs/BIFR are covered. However cases of willful default, fraud andmalfeasance are not covered. As per the OTS scheme, for NPAs upto Rs. 10 crores,the minimum amount that should be recovered should be 100% of the outstandingbalance in the account. For NPAs above Rs. 10 crores the CMDs of the respectivebanks should personally supervise the settlement of NPAs on a case to casebasis, and the Board of Directors may evolve policy guidelines regarding onetime settlement of NPAs as a part of their loan recovery policy. As on March 31,2003 under the OTS scheme for NPAs upto Rs. 10 crores a total of 52,669applications amounting to Rs. 519 crores were received. Of these recoveriesaffected were for 30,888 cases amounting to Rs. 168 crores. For OTS under banksown scheme the corresponding recoveries were for 1.62 lakh accounts amounting toRs. 1,583 crores. Negotiated Settlement Schemes The RBI/Government has beenencouraging banks to design and implement policies for negotiated settlements,particularly for old and unresolved NPAs. The broad framework for suchsettlements was put in place in July 1995. Specific guidelines were issued inMay 1999 to public sector banks for one-time settlements of NPAs of small scalesector. This scheme was valid until September 2000 and enabled banks to recoverRs 6.7 billion from various accounts. Revised guidelines were issued in July2000 for recovery of NPAs of Rs. 50 million and less. These guidelines wereeffective until June 2001 and helped banks recover Rs. 26 billion. F. IncreasedPowers to NCLTs and the Proposed Repeal of BIFR In India, companies whose networth has been wiped out on account of accumulated losses come under the purviewof the Sick Industrial Companies Act (SICA) and need to be referred to BIFR.Once a company is referred to the BIFR (and even if an enquiry is pending as towhether it should be admitted to BIFR), it is afforded protection againstrecovery proceedings from its creditors. BIFR is widely regarded as a stumblingblock in recovering value from •90
  • 94. NPAs. Promoters systematically take refuge in SICA - often there is a scrambleto file a reference in BIFR so as to obtain protection from debt recoveryproceedings. The recent amendments to the Companies Act vest powers for revivaland rehabilitation of companies with the National Company Law Tribunal (NCLT),in place of BIFR, with modifications to address weaknesses experienced under theSICA provisions. The NCLT would prepare a scheme for reconstruction of any sickcompany and there is no bar on the lending institution of legal proceedingsagainst such company whilst the scheme is being prepared by the NCLT. Therefore,proceedings initiated by any creditor seeking to recover monies from a sickcompany would not be suspended by a reference to the NCLT and, therefore, theabove provision of the Act may not have much relevance any longer and probablydoes not extend to the tribunal for this reason. However, there is a possibilityof conflict between the activities that may be undertaken by the ARC, e.g.change in management, and the role of the NCLT in restructuring sick companies.The Bill to repeal SICA is currently pending in Parliament and the process ofstaffing of NCLTs has been initiated. This is expected to make recoveryproceedings faster.91
  • 95. APPROPRIATENESS OF THE EXISTING SYSTEMSMost of the participant lenders have special NPA management cells at HeadOffices for dealing with NPAs. The participants were generally of the view thatthough time and resources were adequate for dealing with NPAs, skills needed tobe improved upon. Within the constraints of the existing legal and regulatoryenvironment banks in India have done a commendable job in bringing down thelevels of NPAs in recent years. However, with the tightening of NPA recognitionnorms, which would mean early recognition and faster provisioning of NPAs, banksnow need to evolve systems that help them identify potential NPAs and take quickaction to: • Prevent the potential NPA from actually becoming non-performing,and • Avoid increasing their exposure to such potential NPAs.92
  • 96. INTERNATIONAL PRACTICES ON NPA MANAGEMENTSubsequent to the Asian currency crisis which severely crippled the financialsystem in most In addition to the above, some of the more recent and aggressivesteps to resolve NPAs have been taken by Taiwan. Taiwanese financialinstitutions have been encouraged to merge (though with limited success) andform bank based AMCs through the recent introduction of Financial HoldingCompany Act and Financial Institution Asian countries, the magnitude of NPAs inAsian financial institutions was brought to light. Driven by the need toproactively tackle the soaring NPA levels the respective Governments embarkedupon a program of substantial reform. This involved setting up processes forearly identification and resolution of NPAs. The table below provides a crosscountry comparison of approaches used for NPA resolution. Mergers Act. Alongsidethe Ministry of Finance has followed a carrot and stick policy of specifying therequired NPA ratios for banks (5% by end 2003), while also providing flexibilityin modes of NPA asset resolution and a conducive regulatory and tax environment.Deferred loss write-off provisions have been instituted to provide breathingspace for lenders to absorb NPA write-offs. While it is too early to commentonlhe success of the NPA resolution process in Taiwan, the early signs areencouraging. Detailed below are the some key NPA management approaches adoptedby banks in South East Asian countries. 1. Credit Risk Mitigation As part of theoverall credit function of the bank, early recognition of loans showing signs ofdistress is a key component. Credit risk management focuses on assessing creditrisk and matching it with capital or provisions to cover expected losses fromdefault. 2. Early Warning Systems Loan monitoring is a continuous process andEarly Warning Systems are in place for staff to continuously be alert forwarning signs.93
  • 97. 3. Asset Management Companies To resolve NPA problems and help restore thehealth and confidence of the financial sector, the countries in South East Asiahave used one broad uniform approach, i.e. they set up specialised AssetManagement Companies (AMCs) to tackle NPAs and put in place Debt Restructuringmechanism to bring creditors and debtors together, often working along withindependent advisors. This broad approach was locally adapted and used with avarying degree of efficacy across the region. For example, while in somecountries a centralised government sponsored AMC model has been used, in othersa more decentralized approach has been used involving the creation of several"bankbased" AMCs. Further different countries have allowed/used differentapproaches (inhouse restructuring versus NPA Sale) to resolve their NPAs.Additionally, the efficacy of bankruptcy and foreclosure laws has varied invarious countries. A number of factors influenced the successful resolution ofNPAs through sale to AMCs and some of these key factors are discussed belowIncreasing willingness to sell NPAs to AMCs Bottlenecks often persist on accountof reluctance of lenders to transfer assets to the AMCs at values lower than thebook value to prevent a hit to their financials. Banks in Malaysia wereencouraged to transfer their assets to Danaharta - AMC in Malaysia by providingthem with upside sharing arrangements and the facility to defer the write-off offinancial loss on transfer for 5 years. These incentives coupled with thedirective of the Central Bank to make adjustments in the book values of theassets not transferred to Danaharta (after Danaharta identifies them) weresufficient to ensure effective sale to the AMC. In Taiwan, there is a regulatoryrequirement to reduce for banks to reduce NPAs to 5% by the end of 2003.Consequently there is an increasing number of NPA auctions by the banks.Effective resolution strategy A significant dimension influencing NPA resolutionand investor participation is the ease of implementation of recovery strategies.AMCs like Danaharta have been provided with a strong platform to affect theresolution of NPAs with clearly laid down creditors rights. Danaharta has beenallowed to foreclose property without reference to the Court and thus has beenable to dispose collateral swiftly by using the tender route. Special resolutionmechanisms that have involved minimal intervention of the Court have also servedto entice investor interest in the NPA market in certain countries like Taiwan.On the other hand the operations of Thailand Asset Management Corporation, the• •94
  • 98. Government owned AMC, have been hindered by deficiencies in the Bankruptcy Lawprovisions. Appointment of Special Administrators In Malaysia, it has been ableto exercise considerable influence over the restructuring process through theappointment of special administrators that have prepared workout plans and haveexercised management control over the assets of the borrower during planpreparation and implementation stages. The restructuring process affected by theautomatic moratorium that comes into place at the time of the administrator sappointment. 4. out of court restructuring Most Asian countries adopted  outof court  restructuring mechanism to minimize court intervention and speed uprestructuring of potentially viable entities. Internationally, restructuring ofNPAs often involves significant operational restructuring in addition tofinancial restructuring. The operational restructuring measures typicallyinclude the following areas: • • • • • Revenue enhancement Costreduction Process improvement Working capital management •Sale of redundant/surplus assts Once the restructuring measures have been agreedby stakeholders, a complete restructuring plan is prepared which takes intoaccount all the agreed restructuring measures. This includes establishment of atimetable and assignment of responsibilities. Usually, lenders will alsoestablish a protocol for monitoring of progress on the operational restructuringmeasures. This would typically involve the appointment of an independentmonitoring agency. As seen from the Asian experience, in general, NPA resolutionhas been most successful when • Flexibility in modes of asset resolution(restructuring, third party sales) has been provided to lenders. • Conduciveand transparent regulatory and tax environment, particularly pertaining todeferred loss write offs, Foreign Direct Investment and bankruptcy/foreclosureprocesses has been put in place. • Performance targets set for banks to getthem to resolve NPAs by a certain deadline.95
  • 99. 96
  • 100. RATIO ANALYSISThe relationship between two related items of financial statements is known asratio. A ratio is just one number expressed in terms of another. The Ratio iscustomarily expressed in three different ways. It may be expressed as aproportion between the two figures. Second it may be expressed in terms ofpercentage. Third, it may be expressed in terms of rates. The use of ratio hasbecome increasingly popular during the last few years only. Originally, thebankers used the current ratio to judge the capacity of the borrowing businessenterprises to repay the loan and make regular interest payments. Today it hasassumed to be important tool that anybody connected with the business turns toratio for measuring the financial strength and the earning capacity of thebusiness.97
  • 101. 1. GROSS NPA RATIO: Gross NPA Ratio is the ratio of gross NPA to gross advancesof the Bank. Gross NPA is the sum of all loan assets that are classified as NPAas per the RBI guidelines. The ratio is to be counted in terms of percentage andthe formula for GNPA is as follows: Gross NPA ratio = Gross NPA *100 GrossadvancesS.No.1 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19Name of Bank2 NATIONALISED BANKS Allahabad Bank Andhra Bank Bank of Baroda Bank of IndiaBank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena BankIndian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab and Sind BankPunjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank ofIndia Vijaya BankGross NPA to Gross advances 2001 2002 2003 4 517.66 6.13 14.11 10.25 12.35 7.48 16.05 5.40 25.34 21.76 11.81 5.21 18.45 11.717.87 11.64 11.20 21.54 10.0016.94 5.26 12.39 9.37 10.44 6.22 14.70 5.19 24.11 17.86 11.35 6.57 18.19 11.388.35 9.59 10.77 16.36 9.3913.65 4.89 11.02 8.55 9.55 5.96 13.06 5.27 17.86 12.39 10.29 6.94 19.25 11.588.32 8.24 8.96 12.15 6.1898
  • 102. 2 3 1 2 3 4 5 6 7Total of 19 NAT. Bank S State Bank of India Associates of SBI State Bank ofBikaner & Jaipur State Bank of Heyderabad State Bank of Indore State Bank ofMysore State Bank of Patiala State Bank of Saurashtra State Bank of TravancoreTotal of 7 Associates Total of State Bank Group Total of Public Sector Bank S12.16 12.9311.01 11.959.17 9.3412.91 14.03 9.46 12.83 9.66 14.57 11.389.36 10.08 7.18 12.07 6.94 10.18 9.418.15 7.28 5.53 10.14 4.80 7.32 6.6712.73 12.3711.23 11.098.68 9.36The table above indicates the quality of credit portfolio of the banks. Highgross NPA ratio indicates the low credit portfolio of bank and vice-a-versa. Wecan see from the above table that the Punjab and Sind Bank has the higher grossNPA ratio of 19.25 % followed by the Dena Bank with 17.86 %. The Allahabad Bank,Central Bank of India and united Bank of India also have higher gross NPA ratiowith 13.65 %, 13.06% and 12.15%. Whereas the state Bank of Patiala, Andhra Bankand Canara Bank showed lower ratio with 4.8 %, 4.89 % and 5.96 % in the year2003.99
  • 103. 2. NET NPA RATIO The net NPA percentage is the ratio of net NPA to net advances,in which the provision is to be deducted from the gross advance. The provisionis to be made for NPA account. The formula for that is: Net NPA Ratio = GrossNPA-Provision * 100 Gross Advances-ProvisionsS.No. 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19Name of Bank 2NATIONALISED BANKS Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bankof Maharashtra Canara Bank Central Bank of India Corporation Bank Dena BankIndian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab and Sind BankPunjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank ofIndia Vijaya Bank Total of 19 NAT.Net NPA to Net Advances 2001 2002 2003 3 4 511.23 2.95 6.77 6.72 7.41 4.84 9.72 1.98 18.37 10.06 7.01 3.60 12.27 6.74 4.056.35 6.87 10.50 6.23 7.5611.09 2.45 4.98 6.02 5.81 3.89 7.98 2.31 16.31 8.28 6.32 3.2 11.7 5.32 4.63 5.456.26 7.9 6.02 6.637.08 1.79 3.72 5.59 4.82 3.59 6.74 1.65 11.83 6.15 5.23 1.4 10.89 3.86 4.29 4.364.91 5.52 2.8 5.05100
  • 104. 2 3 1 2 3 4 5 6 7Bank S State Bank of India Associates of SBI State Bank of Bikaner & JaipurState Bank of Heyderabad State Bank of Indore State Bank of Mysore State Bank ofPatiala State Bank of Saurashtra State Bank of Travancore Total of 7 AssociatesTotal of State Bank Group Total of Public Sector Bank S6.035.634.57.83 7.82 5.91 7.65 4.92 7.30 7.75 7.03 6.90 7.374.96 4.97 3.58 7.36 2.94 4.95 5.72 4.93 5.28 6.154.13 3.25 2.66 5.19 1.49 3.53 3.06 3.33 3.92 4.59This ratio indicates the degree of risk in the portfolio of the banks. High NPAratio indicates the high quantity of risky assets in the Banks for which noprovision are made. From the table it becomes clear that the NPA ratio of almostall the Banks have been improved quite well as compared to the previous year.The Dena bank has the highest NPA ratio of 11.83 % followed by the Punjab andthe Sind Bank with 10.89 %. The Oriental Bank of Commerce has showed the lowestNPA ratio 1.4 % and State Bank of Patiala, Andhra Bank have also showed lowerNPA ratio with 1.49 % and 1.79 % in 2003.101
  • 105. 3. PROVISION RATIO Provisions are to be made for to keep safety against the NPA,& it directly affect on the gross profit of the Banks. The provision Ratio isnothing but total provision held for NPA to gross NPA of the Banks. The formulafor that is, Provision Ratio= Total Provision *100 Gross NPAsS.No.1 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18Name of Bank2 NATIONALISED BANKS Allahabad Bank Andhra Bank Bank of Baroda Bank of IndiaBank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena BankIndian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab and Sind BankPunjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank ofIndia2001 3Provision Ratio 2002 2003 4 512.41359 27.12827 18.20021 15.14677 22.22032 39.34958 13.03443 55.74535 17.7859814.22552 11.68812 56.54534 8.719973 13.91781 5.849618 14.07922 17.3017 8.33221116.37335 42.56687 17.00332 24.26733 29.7467 43.30727 16.02666 59.73437 16.2338112.59246 21.23407 62.67559 12.88284 22.01548 8.05847 23.37148 45.66927 19.598851.57969 60.58894 22.64546 30.99369 31.1799 39.53806 19.06073 66.40856 23.4532224.62971 19.93377 61.60174 22.16795 29.61992 19.33994 30.48321 31.46368 26.15319102
  • 106. 19Vijaya Bank Total of 19 NAT. Bank S State Bank of India Associates of SBI StateBank of Bikaner & Jaipur State Bank of Heyderabad State Bank of Indore StateBank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank ofTravancore Total of 7 Associates Total of State Bank Group Total of PublicSector Bank S18.11168 17.50478 14.882110.330767 22.0371 23.3323346.64319 29.01683 34.580012 3 1 2 3 4 5 6 722.78741 16.37118 23.07381 2.68102 6.931275 11.71304 6.173586 35.51276 738.0781491.879238.64336 18.66124 41.42786 3.762056 8.911607 15.36264 9.48382 49.08146 999.9431669.918640.9416 24.79229 38.00241 5.682238 10.97581 20.2686 11.47415 63.10697 1021.9351077.571This Ratio indicates the degree of safety measures adopted by the Banks. It hasdirect bearing on the profitability, Dividend and safety of shareholders fund. If the provision ratio is less, it indicates that the Banks has made underprovision. The highest provision ratio is showed by corporation Bank with 66.40% followed by Oriental Bank of commerce with 61.60 %. The lowest provision ratiois showed state Bank of Patiala with only 10.97 % in the year 2003.103
  • 107. 4. Problem asset ratio It is the ratio of gross NPA to total asset of the bank.The formula for that is:Problem Asset Ratio =GrossNPAs TotalAsset s* 100S.No. 1 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2 1 2 3 4Name of the Bank 2 NATIONALISED BANKS Allahabad Bank Andhra Bank Bank of BarodaBank of India Bank of Maharashtra Canara Bank Central Bank of India CorporationBank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjaband Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of IndiaUnited Bank of India Vijaya Bank Total of 19 NAT. Bank S State Bank of IndiaState Bank of Bikaner & Jaipur State Bank of Heyderabad State Bank of IndoreState Bank of Mysore 104Proble asset ratio 2001 2002 2003 3 4 50.082575 0.023056 0.066102 0.05765 0.046042 0.032325 0.068832 0.024602 0.1076720.088552 0.053851 0.021637 0.076565 0.054473 0.038048 0.04698 0.052757 0.0656870.041729 0.054367 0.050294 0.025513 0.509056 0.364796 0.061197 0.080836 0.0250340.06331 0.053319 0.042217 0.029284 0.064166 0.022329 0.105934 0.071882 0.0513120.029525 0.079386 0.056777 0.04091 0.042466 0.027402 0.026461 2.277083 0.0520640.04447 0.0377 0.040619 0.032511 0.060327 0.065648 0.023531 0.054499 0.0496430.03842 0.03016 0.056807 0.025021 0.08018 0.046072 0.046082 0.033726 0.0860460.057759 0.041242 0.039139 0.04676 0.039516 0.026497 0.046611 0.035932 0.1311470.029777 0.003861 0.007334
  • 108. 5 6 7State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Total of7 Associates Total of State Bank Group Total of Public Sector Bank S0.250527 0.224613 0.00555 0.004785 0.00229 0.0255130.03615 0.047306 0.044115 0.041829 0.043882 0.048880.021317 0.004318 0.011124 0.140769 0.8533071.5289It has been direct bearing on return on assets as well as liquidity riskmanagement of the bank. High problem asset ratio, which means high liquid. fromthe above table it becomes clear that Punjab and Sind Bank and Dena Bank havethe high ratio of 8.6% and 8.0%.thts ratio implies that the both above bankshave the liquid assets through which they will be able torepay their liabilitiesof deposits quickly as compared to other banks.105
  • 109. 5. Capital Adequacy Ratio Capital Adequacy Ratio can be defined as ratio of thecapital of the Bank, to its assets, which are weighted/adjusted according torisk attached to them i.e. Capital Adequacy Ratio = Capital * 100Risk Weighted AssetsAs per prudential Norms Banks were required to achieve 8% CAR, increased to 9%by March 2000. For the purpose of capital Adequacy Achievement, the capital basei.e. Tire I + Tire II should not be less than the prescribed % of total RiskWeighted Assets of the bank.S.No. 1 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2 3 1 2 3 Name of theBank 2 NATIONALISED BANKS Allahabad Bank Andhra Bank Bank of Baroda Bank ofIndia Bank of Maharashtra Canara Bank Central Bank of India Corporation BankDena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab andSind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of IndiaUnited Bank of India Vijaya Bank Total of 19 NAT. Bank S State Bank of IndiaAssociates of SBI State Bank of Bikaner & Jaipur State Bank of Heyderabad StateBank of Indore 2001 3 10.5 13.4 12.8 12.23 10.64 9.84 10.02 13.03 7.73 -12.7710.24 11.81 11.42 10.24 11.72 9.05 10.86 10.40 11.50 12.79 12.39 12.28 12.73Capital adequacy ratio 2002 2003 4 5 10.62 12.59 11.32 10.68 11.16 11.88 9.5817.90 7.64 1.70 10.82 10.99 10.70 10.70 12.12 9.64 11.07 12.02 12.25 13.35 12.2613.67 12.78 11.15 13.62 12.65 12.02 11.76 12.50 10.51 18.50 9.33 10.85 11.3014.04 10.43 12.02 11.03 10.04 12.41 15.17 12.66 13.50 13.08 14.91 13.09106
  • 110. 4 5 6 7State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bankof Travancore11.16 12.37 13.89 11.7911.81 12.55 13.20 12.5411.62 13.57 13.68 11.30The capital adequacy ratio is important for the to maintain as per the bankingregulations. As far as this ratio is concerned the Corporation Bank has shownmuch appreciated result by acquiring the ratio of 18.50% followed by the UnitedBank of India and State Bank of Hydrabad having ratios of 15.17%and 14.91%. Butone remarkable performance is done by the Indian Bank which had CAR in negativewith -12.77% in 2001 but improved its performance in 2003 by acquiring CAR10.85% Tire-I: Paid up capital, Statutory Reserve, Revenue capital reserves(excluding revolution reserve) and other undisclosed reserves LESS accumulatedlosses till the current year, investment in subsidiaries, other intangibleassets. Tire-II: Property Revaluation discounted by 55%, Subordinate Loans,Privately placed Bonds, Hybrid capital, Investment Fluctuation Reserve,provisions on standard assets. & Capital should not exceed Tire-I107
  • 111. 6. SUB-STANDARD ASSETS RATIO It is the ratio of Total Substandard Assets toGross NPA of the bank. Substandard Assets Ratio= total substandard assets *100Gross NPAsThe ratios calculated below are for the entire public sector banks: (Rs. Incrore) Year Substandard Assets Gross NPAs 2001 14745 54674.47 2002 1578856476.13 2003 14909 54087.08Calculations of ratio 2001 26.96% 2002 27.95% 2003 27.56%It indicates scope of up gradation/improvement in NPA. Higher substandard assetratio means that in whole NPA the sub standard ratio has major proportion, whichindicates that there is a high scope for advance up gradation or improvementbecause it will be very easy to recover the loan as minimum duration of default.Till 2000 this ratio of PSB was very high but dropped in recent years &thanagain it increased, which means there is a need of advance up gradation.108
  • 112. 7.DOUBTFUL ASSET RATIO: It is the ratio of Total Doubtful Assets to Gross NPAsof the bank. Doubtful Asset Ratio= total doubtful assets *100 Gross NPAs 200233658 56476.13 2003 32340 54087.08YearDoubtful Assets Gross NPAs2001 33485 54674.47The ratios calculated below are for the entire public sector banks: 2001 20022003 61.24% 59.59% 59.79%It indicates the scope of compromise for NPA reduction. Above table shows thedoubtful asset ratio of PSB, which is quite low in 2000 but has increased inrecent years. This means that the bank will have to go through compromisemeasure for increasingly number of times as its substandard ratio has decreasedin recent years.109
  • 113. 8.LOSS ASSET RATIO: It is the ratio of total loss assets to Gross NPA of thebank. Loss Asset Ratio= Total Loss Assets * 100 Gross NP A 2001 6544 54674.472002 7061 56476.13 2003 6840 54087.08YearLoss Assets Gross NPAsThe ratios calculated below are for the entire public sector banks: 2001 20022003 11.96% 12.50% 12.65%It indicates the proportion of bad loans in the bank. Above table shows sLossAsset Ratio of PSB, which shows that the bank has maintained lower loss assetratio, which indicate that the bank has lower bad loans. However compared to theratio of 1999-2000 the same has increased in the recent year, which isdetrimental to the bank. The bank must take necessary steps to control thisratio, as it is the indication that there is increasing incidence of erosion ofsecurities and fraudulent Loan Accounts in the bank.110
  • 114. CONCLUSIONAnalysisFish eye view of the ratio analysis Ratios 1. Gross NPA Ratio 2. Net NPA Ratio3. Provision Ratio 4. Problem Asset Ratio 5. Capital Adequacy Ratio Goodperformers Bad performers111
  • 115. Classifications of Loan Assets of PSBs:Standard Bank Group/Year Public Sector Banks 1999 2,73,618 84.1 16,033 4.929,252 9.0 2000 3,26,783 86.0 16,361 4.3 30,535 8.0 2001 3,87,360 87.6 14,7453.3 33,485 7.6 2002 4,52,862 88.9 15,788 3.1 33,658 6.6 6,425 2.0 51,710 15.93,25,328 6,398 1.7 53,294 14.0 3,80,077 6,544 1.5 54,774 12.4 4,42,134 7,061 1.456,507 11.1 5,09,369 Assets Amount Substandard Assets Doubtful Loss Assets TotalNPAs Assets Total Advances % Amount% Amount % Amount % Amount % AmountAs per the above table, given the maximum advances in 2002 amount which 5,01,369crore which increase from the 3,25,328. They are trying to reduce the NPA byvarious means. In 2002 total NPA of PSBs has 11.9% , which is reduce from the15.9% in 1999 Percentage of standard assets increased from 84.1% to 88.9% duringthe 1990 to 2002. % of loss assets, decreased from 2.0% to 1.4% during the 1999to 2002. In future, if it will reduce in this manner then it will reduce up to0% NPA.112
  • 116. Sector Wise Classification 0f NPA:(Amount in Rs. crore) Bank Group Non-priority Public Sector Total Sector AmountPer cent Amount Per cent Amount Per cent Amount Priority SectorA. State Bank of India and its Associates 1995 1996 1997 1998 1999 2000 20012002 6967 7041 7247 7470 8318 8947 8928 9019 52.5 53.7 50.4 48.1 44.6 45.2 44.245.7 48.7 45.6 46.3 45.5 43.2 44.1 46.2 43.9 50.0 48.3 47.7 46.4 43.7 44.5 45.444.5 5496 5263 6291 7390 9668 10266 10050 10105 12366 13804 15050 15717 1794018258 17257 20146 17861 19067 21341 23107 27608 28524 27307 30251 41.4 40.1 43.847.6 51.9 51.9 49.8 51.2 49.2 52.2 51.5 52.2 54.3 54.5 52.3 54.8 46.5 48.2 49.050.6 53.4 53.5 51.4 53.5 809 816 829 662 655 560 1213 619 507 595 632 700 841495 498 496 1316 1411 1461 1362 1496 1055 1711 1116 6.1 6.2 5.8 4.3 3.5 2.8 6.03.1 2.0 2.2 2.2 2.3 2.5 1.5 1.5 1.3 3.4 3.6 3.4 3.0 2.9 2.0 3.2 2.0 13271 1312014367 15522 18641 19773 20191 19744 25115 26464 29209 30130 33069 33521 3298336763 38385 39584 43577 45653 51710 53294 53174 56507B. NATIONALIZED BANKS 1995 12242 1996 12065 1997 13527 1998 13714 1999 142882000 14768 2001 15228 2002 16121 C. Public Sector Banks (A+B) 1995 19209 199619106 1997 20774 1998 21184 1999 22606 2000 23715 2001 24159 2002 25139113
  • 117. SECTOR-WISE NPA POSITION2% 45% 53%Priority Sector Public SectorNon-priority SectorThe above chart represent the NPA position in different types of sectors likepriority, Non priority and public sector. The highest % of NPAs are in the Non-priority sector under which the criteria of to given loans are not to bemaintained strictly so far. The NPA % of Non-priority sector is highest with 53%whereas 45% NPAs in priority sector which included agriculture, small-scaleindustry, small business etc.114
  • 118. The glance of NPAs year by year (Rs. In crore) year 1997 1998 1999 2000 20012002 2003 NPAs 47,300 50,815 58,554 60,408 63,883 80246 94905However the problem of NPAs has made its home since last three and half decade,since then it is found that the NPAs are increasing year by year. If we look tothe numbers of the NPAs , we may find that in 1997 the NPAs were atRs.47,300crore and in 2001 they were at Rs. 63,883, but after this period theNPAs increased in the Indian banking sector very drastically. It reached toRs.80246crore in 2002 and in 2003 it touched to the Rs. 94,905crore. RecentlyRBI is taking its measures but but the result is not up to the expectations andno doubt that some of the measures have been wrathful to the banks, what I thinkis that those steps should be taken out that would help the banks to reduce theproblem of increasing NPAs. The Banks should also be very specific whileproviding credit facility to the borrowers. The banks before giving creditfacilities should perform basic calculations of the borrowers  capacity to paythe debt back. However, this only is not necessary, banks should regularlyevaluate the financial position of the borrower companies.115
  • 119. SuggestionsThrough RBI has introduced number of measures to reduce the problem ofincreasing NPAs of the banks such as CDR mechanism. One time settlement schemes,enactment of SRFAESI act, etc. A lot of measures are desired in terms ofeffectiveness of these measures. What I would like to suggest for reducing theevolutions of the NPAs of Public Sector Banks are as under. (1) Each bank shouldhave its own independent credit rating agency which should evaluate thefinancial capacity of the borrower before than credit facility. The creditrating agency should regularly evaluate the financial condition of the clients.Special accounts should be made of the clients where monthly loan concentrationreports should be made. It is also wise for the banks to carryout specialinvestigative audit of all financial and business transactions and books ofaccounts of the borrower company when there is possibility of the diversion ofthe funds and mismanagement. The banks before providing the credit facilities tothe borrower company should analyse the major heads of the income andexpenditure based on the financial performance of the comparable companies inthe industry to identify significant variances and seek explanation for the samefrom the company management. They should also analyse the current financialposition of the major assets and liabilities. Banks should evaluate the SWOTanalysis of the borrowing companies i.e. how they would face the environmentalthreats and opportunities with the use of their strength and weakness, and whatwill be their possible future growth in concerned to financial and operationalperformance.(2)(3)(4)(5)(6)116
  • 120. (7)Independent settlement procedure should be more strict and faster and thedecision made by the settlement committee should be binding both borrowers andlenders and any one of them failing to follow the decision of the settlementcommittee should be punished severely. There should be proper monitoring of therestructured accounts because there is every possibility of the loans slippinginto NPAs category again. Proper training is important to the staff of the banksat the appropriate level with on going process. That how they should deal theproblem of NPAs, and what continues steps they should take to reduce the NPAs.Willful Default of Bank loans should be made a Criminal Offence. No loan is tobe given to a Group whose one or the other undertaking has become a Defaulter.(8)(9)(10) (11)117
  • 121. Conclusion To The ProblemA report is not said to be completed unless and until the conclusion is given tothe report. A conclusion reveals the explanations about what the report hascovered and what is the essence of the study. What my project report covers isconcluded below. The problem statement on which I focused my study is  NPAsthe big challenge before the Public Sector Banks . The Indian banking sectoris the important service sector that helps the people of the India to achievethe socio economic objective. The Indian banking sector has helped the businessand service sector to develop by providing them credit facilities and otherfinance related facilities. The Indian banking sector is developing with goodappreciate as compared to the global benchmark banks. The Indian banking systemis classified into scheduled and non scheduled banks. The Public Sector Banksplay very important role in developing the nation in terms of providing goodfinancial services. The Public Sector Banks have also shown good performance inthe last few years. The only problem that the Public Sector Banks are facingtoday is the problem of non performing assets. The non performing assets meansthose assets which are classified as bad assets which are not possibly bereturned back to the banks by the borrowers. If the proper management of theNPAs is not undertaken it would hamper the business of the banks. The NPAs woulddestroy the current profit, interest income due to large provisions of the NPAs,and would affect the smooth functioning of the recycling of the funds. If weanalyse the past years data, we may come to know that the NPAs have increasedvery drastically after 2001. in 1997 the gross NPAs of the Indian banking sectorwas 47,300crore where as in 2001 the figure was 63,883 and which increased atfaster rate in 2003 with 94,905crore. The Public Sector Banks involve its nearly50% of share in the NPAs.Thus we can imagine how Public Sector Banks arefunctioning. The RBI has also been trying to take number of measures but theratio of NPAs is not decreasing of the banks. The banks must find out themeasures to118
  • 122. reduce the evolving problem of the NPAs. If the concept of NPAs is taken verylightly it would be dangerous for the Indian banking sector. The reduction ofthe NPAs would help thebanks to boost up their profits, smooth recycling offunds in the nation. This would help the nation to develop more banking branchesand developing the economy by providing the better financial services to thenation.119
  • 123. BIBLIOGRAPHY• • • • • • •M Y Khan and Public Sector Banks K Jain  management Accounting  Tata McGraw-Hill Publishing Company Limited,new Delhi 1999. Banking Finance (February 2003)Banking Finance (April 2003) IBA Bulletin (January 2004), (February 2003),Monthly journal published by Indian Banks  Associations. Banking Annual(Octomber 2003) published by Business Standard. o Indian Banking Sector o Non performing assets and banking sectors oImpact of NPAs on the working of the Public Sector Banks o Steps taken by reduce the NPAs of the banks120