8817767 a-report-on-npa-in-banking


Published on


Published in: Career
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

8817767 a-report-on-npa-in-banking

  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 51. 50
  52. 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. 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. 54. 18038.14715.00585.12580.29409.67342.11281.7918426.0322120.8026131.541075.29898.52734.84555.06417.47315.3952
  55. 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 2003.so 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