NPA Manangement

1. NPA Management by the
Indian Banking Sector
in the Turbulent Economic
Environment
By
Dr. Vijay Kr Khurana

2. NPA Management by the
Indian Banking Sector
in the Turbulent Economic Environment
1. Introduction
2. Factors Impacting Rise in NPAs
3. Indian Scenario
4. NPA Management Strategies
5. Effectiveness of NPA
Management in Indian Banks
6. Impact of Current Economic
Turbulence on NPAs
7. Challenges Ahead
8. Improvement Measures
9. Conclusion
10.References

3. Introduction
Fig 1: Asset Classification
Assets
Performing
Assets
Standard
Assets
Non Performing Assets
(NPA)
Sub -Standard
Assets
Doubtful
Assets
Loss
Assets

4. Introduction
• Assets which do not generate periodical income
are called as Non-Performing Assets (NPA).
• A Non-Performing Asset (NPA) is defined as a
credit facility in respect of which the interest
and/or instalment of principal has remained ‘past
due’ for a specified period of time.(Usually 90
Days or more)
• Mere mention of the word NPA causes alarm bells
ringing in banking sector and financial markets.

5. Introduction
• During the U.S. subprime mortgage
crisis of the late-2000s, NPAs
attained shocking proportions.
Many banks failed in USA during
the years 2008 & 2009
• If the recent eurozone debt crisis
had become much worse, then it
could have become like the 2007
and 2008 financial crash all over
again, with the global banking
system again under threat due to
NPAs in the form of likely default
in government debt.

6. Introduction
• In India also, NPAs have always been cause of
concern in the banking sector & financial
markets. PSBs are reported to have higher NPAs.
• In Jan 2012, SBI etc said that Loan to Kingfisher
has become NPA.

7. Introduction
• In Feb 2012, Banks are said to be reviewing
loan to Air India to be classified as NPA

8. Introduction
Generation / Increase in NPAs can create
following problems:
• Owners do not receive a market return on
their capital.
• Depositors do not receive a market return on
saving.
• Banks tend to redistribute losses to others
• Nonperforming loans epitomize bad
investments
• Nonperforming asset may spill over from the
banking system and contract the money stock,
which may lead to economic contraction.

9. Factors Impacting Rise In NPAs

10. Factors Impacting Rise In NPAs
External factors
• Ineffective legal framework & weak recovery
tribunals
• Lack of demand / economic recession or
slowdown
• Change in Govt. policies
• Wilful defaults by customers
• Alleged political interferences

11. Factors Impacting Rise In NPAs
Internal factors
• Defective Lending process
• Inappropriate / non –use of technology like
MIS , Computerization
• Improper SWOT analysis
• Inadequate credit appraisal system
• Managerial deficiencies
• Absence of regular industrial visits &
monitoring
• Deficiencies in re-loaning process
• Alleged corruption
• Inadequate networking & linkages b/w banks

12. Factors Impacting Rise In NPAs
• In the context of USA subprime mortgage crisis,
following factors were responsible for surge in
NPAs & collapse of many banks during 2007-
09: ......
• Boom and bust in the housing market, Excessive
homeowner speculation, High-risk mortgage
loans and deficiencies in lending/borrowing
practices, Mortgage fraud, Poor securitization
practices, Inaccurate credit ratings,
Inappropriate govt policies, Problems with
monetary policies of central bank etc.

13. Indian Scenario
Table 3.1: Trend in Asset Quality Indicators of SCBs
S
No
SCBs FY
2006-07
2007-08 2008-09 2009-10 2010-11
1 Gross
NPAs (%)
2.5 2.3 2.3 2.4 2.3
2 Net NPAs
(%)
1.0 1.0 1.1 1.1 0.9
3 Fresh NPA
Generation
Rate (%)
1.7 1.8 2.1 2.2 2.0
4 Net
NPAs/Net
Worth (%)
9.2 7.8 8.6 9.1 10.0

14. Indian Scenario
Table 3.2: Trend in Asset Quality Indicators of SCBs
S
No
PSBs FY
2006-07
2007-08 2008-09 2009-10 2010-11
1 Gross
NPAs (%)
2.7 2.2 2.0 2.2 2.3
2 Net NPAs
(%)
1.1 1.0 0.9 1.1 1.1
3 Net
NPAs/Net
Worth (%)
12.1 11.2 11.4 13.5 13.4

15. Indian Scenario
Table 3.3: Trend in Asset Quality Indicators of SCBs
S
No
Private
Banks
FY
2006-07
2007-08 2008-09 2009-10 2010-11
1 Gross
NPAs (%)
2.1 2.4 2.9 2.7 2.3
2 Net NPAs
(%)
0.9 1.1 1.3 1.0 0.6
3 Net
NPAs/Net
Worth (%)
7.8 6.1 7.5 5.3 3.2

16. Indian Scenario
• Gross NPA percentage of SCBs did not increase
by the extent that the stress in the Indian market
during 2008-09 would warrant because of large
loan restructuring over last 2-3 years (4-5% of
total advances);
• Gross NPAs declined marginally from 2.4% as in
March 2010 to 2.3% as in March 2011.
• However, higher provisioning led to a reduction
in Net NPAs from 1.1% as in March 2010 to 0.9%
as in March 2011.

17. Indian Scenario
• Over the last two years, PSBs Gross NPAs rose
from 2% to 2.3%, while private banks’ NPAs
declined from 2.9% to 2.3%.
• Gross NPA percentage of the PSBs got impacted by
slippages from restructured accounts, “Agri Debt
Relief”, and slippages because of automation of
asset classification.
• Better provisioning coverage and a stronger
capitalisation profile allowed private banks report
better solvency (Net NPA/Net Worth) than PSBs
during last few years.

18. NPA Management Strategies
• Indian Banks are pursuing variety of strategies
to control NPAs, which can be studied under two
broad categories as under:
– a. Preventive Management
– b. Curative Management

19. NPA Management Strategies
a. Preventive Management - It is rightly said that
prevention is better than cure.
• Developing ‘Know Your Client’ profile (KYC
• Monitoring Early Warning Signals
• Installing Proper Credit Assessment and Risk
Management Mechanism
• Reduced Dependence on Interest
• Generating Watch-list/Special Mention Category

20. NPA Management Strategies
b. Curative Management
• Re-phasement of loans
• Pursuing Corporate Debt Restructuring (CDR
• Encouraging rehabilitation of potentially viable
units
• Encouraging acquisition of sick units by healthy
units
• Entering compromise schemes with borrowers /
Entering one time settlement

21. NPA Management Strategies
b. Curative Management … contd ….
• Using Lok Adalats for compromise settlement for
smaller loans in “doubtful” and “loss” category.
• Using Securitization & SARFAESI Act
• Using Asset Reconstruction Company (ARC)
• Approaching Debt Recovery Tribunals (DRTs).
• Recovery Action against Large NPAs
• Circulation of Information of Defaulters-
Strengthening Database of Defaulters

22. Effectiveness of NPA
Management in Indian Banks
• While on the whole NPAs have shown declining
trend during last decade, many analysts suspect
that some banks might have fraudulently and in
nexus with auditors have concealed some bad assets
and NPAs in the name of reformation.
• NPAs position remains worrisome in government
banks mainly due to alleged widespread corruption,
ill-motivated decisions on lending taken by some
corrupt officials , due to inaction of such corrupt
officials and alleged political interferences.

23. Effectiveness of NPA
Management in Indian BANKS
• A recent study by Boston Consulting Group (BCG)
found that NPAs fell from a peak of 11.4 per cent in
2001 to just 2.4 per cent in 2010.

24. Effectiveness of NPA
Management in Indian Banks
• Implementation of SARFAESI Act 2002, setting
up of credit information bureaus, internal
improvements such as upgrade of technology
infrastructure, tightening of the appraisal and
monitoring processes, and strengthening of the
risk management platform have contributed to
the improvement.

25. Effectiveness of NPA
Management in Indian Banks
• Even with an assumption of a 20% delinquency in
restructured loans, along with the current forecasts
for a rise in gross NPAs, the overall asset quality of
public sector banks would stabilize within two
years. It would also stay superior to the current
status of European banks.
• BCG expects that by 2025 the Indian banking
sector will be the third largest in the world in terms
of assets, behind China and the US.

26. Impact Of Current Economic
Turbulence On NPAs
• During the U.S. subprime mortgage crisis of the late-
2000s NPAs attained shocking proportions.
• The financial crisis was characterized by a rise in
subprime mortgage delinquencies and foreclosures,
and the resulting decline of securities backed by said
mortgages.
• Around 25 USA banks failed in 2008 (including
Washington Mutual Bank which was acquired by J P
Morgan) and another 140 USA banks failed in 2009.

27. Impact Of Current Economic
Turbulence On NPAs
• By Oct 2008, when Lehman Brothers had
collapsed under the weight of sub-prime
exposures, the crisis had become truly global,
both in spread and impact.
• The NPAs in the UK and US rose from 0.9 per
cent and 1.4 per cent in 2007 to 4.0 per cent and
4.9 per cent in 2009 respectively.
• Just when the global economy was reverting to
the normalcy, another crisis in the nature of
sovereign debt crisis surfaced in late 2009.

28. Impact Of Current Economic
Turbulence On NPAs
• If the current eurozone crisis had become much
worse, then it could be like the 2007 and 2008
financial crash all over again, with the global
banking system under threat again due to NPAs
in the form of likely default in government debt.
• Recession in global economy has impacted India
as well. GDP growth rate is expected to slow down
from 8.5% in the financial year 2010–11 to
around 6.9 - 7.0% for the financial year 2011-12.

29. Impact Of Current Economic
Turbulence On NPAs
• High inflation rate is adversely impacting the
corporate profitability including that of lending
banks.
• Credit to recession-hit sectors like textile and
steel accounts for significant proportion of total
lending by Indian banks.
• Credit to power and infrastructure sectors has
also grown rapidly in the past four years
• In addition State-owned banks have a higher
allocation to small industries, which could get
hurt early if the industrial slowdown
continues.

30. Impact Of Current Economic
Turbulence On NPAs
• Global ratings firm Moody's recently
downgraded its rating of State Bank of India's
(SBI) financial strength by one notch to ‘D+' on
account of the lender's low Tier-I capital ratio
and deteriorating asset quality.
• In March 2012, Moody's lowered its credit
opinion on Syndicate Bank, Union Bank of India
and Bank of India, due to rising bad loans.

31. Impact Of Current Economic
Turbulence On NPAs
• Thereafter, rating agency ICRA downgraded
rating of Central Bank of India, Oriental Bank
of Commerce and Union Bank of India etc, due
to rising bad loans and the high value of
restructured loans.
• Thus NPAs are likely to continue rising in the
near term — due to higher operating costs
including interest costs and a slower economy.
RBI expects non-performing assets (NPA) to
inch up to 2.9 per cent by end-year 2011-12.

32. Challenges Ahead
Overall, the credit profiles of borrowers could
weaken in 2012-13 because of the following
factors:
• Moderation/slowdown in demand conditions;
• Compression of operating profitability and
inability of companies to pass on the higher costs
• Higher interest rates;
• Lacklustre capital markets, which would
constrain access to equity;

33. Challenges Ahead
Contd … credit profiles of borrowers ….
• Project implementation related delays;
• Reduced profitability of new projects (because of
competitive pressures, higher input costs and
higher interest costs) funded with relatively
higher leveraging; and
• Increase in counterparty risks and increasing
concerns over fuel linkages in the power sector.

34. Challenges Ahead
In current economic scenario, Indian banks are
going to face following Asset quality related
challenges ahead.
• Spill-over from restructuring window are not
over yet
• Exposure to State utilities remains an area of
concern
• Credit loss from exposure to micro lending
institutions in Andhra Pradesh is likely to hit
banks

35. Challenges Ahead
• Gross NPA percentage could rise to 2.9% by
end-year 2011-12
• Higher interest rates may ensure better deposits
growth in 2012-13
• High proportion of certificates of deposits could
impact NIM (Net Interest Margin) and liquidity
negatively
• Profitability profile may be somewhat stable;
higher operating expenses, credit provisions
could offset increase in NIMs

36. Challenges Ahead
• Increase in interest rate on savings deposits
could reduce NIM
• Interest rate sensitivity may rise; ability to pass
on increase in cost of funds may get reduced
• Operating expenses may remain at an elevated
level in the short term

37. Improvement Measures
• There is need to strengthen sharing of credit
information.
• Sharing of credit information must occur in both
ways between lending institutions & CICs.
• There is need to strengthen Unique Customer
Identification (UCI) across the banking system.
• The Reserve Bank of India is planning to
introduce a comprehensive dynamic provisioning
NPA framework for banks in India with dynamic
and countercyclical elements.

38. Conclusion
• Currently, Indian banks face several challenges,
such as increase in interest rates on saving
deposits, a tighter monetary policy, a large
government deficit, increased stress in some
sectors (such as, State utilities, airlines, and
microfinance), restructured loan accounts,
unamortised pension/gratuity liabilities,
increasing infrastructure loans, and
implementation of Basel III.

39. Conclusion
• NPAs are likely to continue rising in the near
term — due to higher operating costs including
interest costs and a slower economy. RBI expects
non-performing assets (NPA) to inch up to 2.9
per cent by end-year 2011-12.
• Thus RBI & banks need to exercise high degree
of caution in NPA & credit management.

40. NPA Management by the
Indian Banking Sector
in the Turbulent Economic
Environment
By
Dr. Vijay Kr Khurana