Description
Documentation about understanding the concept of NPAs and effective ways to manage the NPA’s in the ever changing economic and financial scenario and concluding remarks.
2009
SIBM, Pune Biswadeep Ghosh MBA I Finance Roll No. 31262
Effective Management of non performing assets (NPA) A fresh perspective on the management of NPAs is Banks in India
Research report submitted to Prof. Rajesh Panda
Effective Management of non performing assets
P a g e |I
Abstract
A strong banking sector is important for flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Non-performing assets are one of the major concerns for banks in India. NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which reduces the over all profits and shareholders value. The issue of Non Performing Assets has been discussed at length for financial system all over the world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade. The paper deals with understanding the concept of NPAs and effective ways to manage the NPA’s in the ever changing economic and financial scenario and concluding remarks.
Effective Management of non performing assets
P a g e | II
Acknowledgement
The completion of a project is the effort of many intellectuals. This dissertation would not have been complete without the inspiration and able guidance of Prof. Rajesh panda, faculty, SIBM Pune. His guidance was a persistent source of direction throughout the period of the project. Also, the acknowledgement won’t be complete without expressing my thanks towards Mr. Arun Mudbidri, director SIBM, for giving me chance to undertake this project.
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Table of Contents
Abstract ...................................................................................................................................... II Acknowledgement ........................................................................................................................III Context ....................................................................................................................................... 1 Objectives: .................................................................................................................................. 2 Methodology ............................................................................................................................... 2 Sample and population: ............................................................................................................. 2 Justification for methodology: .................................................................................................... 2 Literature Review ......................................................................................................................... 2 Problems being addressed .......................................................................................................... 2 Central focus of the study .......................................................................................................... 3 Sample: ................................................................................................................................... 3 NPA Management Systems in Practice ............................................................................................ 3 Prevent Slippage and Manage NPAs ............................................................................................... 6 Basic borrower data................................................................................................................... 6 Daily account activity ................................................................................................................ 6 Continuous surveillance every quarter ......................................................................................... 6 Daily statement of check returns both inward and outward ............................................................. 7 Overdue term loans ................................................................................................................... 7 A weekly and monthly summary of overdue term loans ................................................................. 7 Loan concentration statements .................................................................................................... 7 Weekly statement of overdue bills purchased and discounted ......................................................... 7 Monthly statement of insurance for securities due for renewal ........................................................ 8 Limits due for renewal ............................................................................................................... 8 Watch category statement .......................................................................................................... 8 Assets classification and downgrade statement ............................................................................. 9 Assets recovery/reconstruction ................................................................................................... 9 Statement of recoveries.............................................................................................................. 9 Conclusion .................................................................................................................................. 9 References ..................................................................................................................................10 Author’s CV ...............................................................................................................................10
Total word count: 2610 words
Effective Management of non performing assets
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Context
Non-performing assets (NPAs) have been a great worry for India's public sector banks (PSBs), which are either wholly or partly owned by the Indian government. Increasing provisions for NPAs every year have been a drain on the profitability of these banks. With the countdown started for the adoption of Basel II norms, fear of breaching the minimum level of capital adequacy looms large for some of these banks. Some of them have gone to the public with initial and subsequent offer of equity shares and have improved their Tier I capital. No doubt the banks' profits are higher as a result of increased levels of credit in a buoyant economy. Some have raised their Tier II capital through bond issuance. Net NPAs of these banks have been decreasing. However, sooner or later the NPA bubble may burst and mar the balance sheets of these banks unless they prevent further slippage to NPAs by means of better credit monitoring. With the increase in retail credit, and the scope for further increase, banks must improve their credit monitoring systems and practices. It is common knowledge that an account does not become an NPA overnight. There will be advance-warning signals that prudent bankers should heed and act upon. On Basel II, India's central bank, the Reserve Bank of India (RBI), has advised that the foreign banks operating in India, and domestic banks with a presence outside India, are to migrate to the standardized approach for credit risk and the basic indicator approach for operational risk with effect from 31 March 2008. All other scheduled commercial banks were encouraged to migrate to these approaches under Basel II in alignment with them but in any case not later than 31 March 2009. The Basel Committee on Banking Supervision (BCBS) had undertaken the Fifth Quantitative Impact Study (QIS-5) to assess the impact of adoption of the revised Framework. Eleven Indian banks, accounting for about 50% of market share (by assets), participated in the QIS-5 exercise. It transpired from an empirical analysis that the combined capital adequacy ratio of these banks is expected to come down by about 100 basis points when these banks apply Basel II norms. If the capital adequacy breaches the minimum level, besides the RBI stepping in with various measures of prompt corrective action, a spate of problems would arise for the banks in the international market. Those banks will not be able to increase their asset base etc.
Banks can improve their capital adequacy in three ways: by increasing the Tier I capital through a public issue or private placement of equity shares, by increasing Tier II capital by issuing bonds/preference shares and, thirdly, by improving their net worth by increased profits.
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Profits can be increased by procuring more low and no-cost deposits, by increasing advances, by improving income from other sources and by reducing costs. With better credit appraisal and monitoring, the bank can decrease its amount of NPAs. Fewer NPAs result in less provisioning requirements and improved profits. Provisions can be reduced if slippages to NPAs are arrested. When recoveries are made in NPAs and provisions made are reversed, profits improve.
Objectives:
? ? ? ? Study the Indian banking system Area of operations of different types of banks Analyse growth over the years Provide a better understanding of the banking system
Methodology
Sample and population:
The banking sector comprising of nationalized banks, foreign banks and other commercial banks have been covered in their entirety.
Justification for methodology:
Performance indicators like profitability ratios, return on assets, number of branches, number of employees, capital and reserves and surplus, number of branches, deposits and advances, cost of funds etc. measure the performance of banks from all possible angles to capture the various aspects of banking.
Literature Review
Problems being addressed
Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability and endurability
Effective Management of non performing assets
P a g e |2
of the affected banks. The positive results of the chain of measures affected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary period have been neutralized by the ill effects of this surging threat. Despite various correctional steps administered to solve and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. The severity of the problem is however acutely suffered by Nationalised Banks, followed by the SBI group, and the all India Financial Institutions.
Central focus of the study
? ? ? ? ? To understand the meaning & nature of NPAs. To study the various economic reforms wrt to NPA’s To examine the causes for NPAs in banks in India. To study the NPA’s and their management in other countries. To suggest innovative ideas for effective management of NPAs in India.
Sample:
The study is a comprehensive one covering all the nationalised banks, foreign banks and other scheduled commercial banks.
NPA Management Systems in Practice
Several institutional mechanisms have been developed in India to deal with NPAs such as tightening of legal provisions; the passing of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002; introduction of debt recovery tribunals (DRTs); lok adalats (public courts); corporate debt restructuring (CDR) mechanism for large advances to corporate borrowers; etc. However, effective management of NPAs requires appropriate internal checks and balances and effective use of computerization in these banks. Most of the public sector banks in India have brought at least 90% of their branches under the core banking solution. With the existing levels of infrastructure available, the public sector banks can monitor credit and manage NPAs better than they do now.
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Most banks have introduced or updated their know your customer (KYC) profiles. Credit rating exercises are generally done by the branches or controlling offices at the time of sanction or review/renewal of existing credit facilities - generally once a year. As far as credit monitoring is concerned, besides regulation of drawing power with the periodical stock statements submitted by the borrower and periodical inspection of stocks by a supervisory official of the branch, banks have reporting systems for accounts with working capital credits of Rs10m and over, by way of continuous surveillance system (CSS) reports and quarterly information systems (QIS). Although these reports are system generated, they receive scant attention either at the branch or at the controlling office. Sometimes these reports are handwritten. There is no proper check of stock statements, QIS or the CSS and the inspection is done in a haphazard manner. Operations in the account need to be checked by the branch officials to ensure that the account shows healthy fluctuations and there is no diversion of funds. Reserve Bank of India has asked banks to introduce Watch/Special Watch category accounts to segregate accounts, which show signs of sickness. An account has to pass through this stage
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before it is classified as NPA. But, in practice, this does not often happen. This can lead to surprises at the end of the year for controlling offices, statutory auditors and the RBI, who then point out that an account has become an NPA, that provision needs to be made and a memorandum of change in provision given by the auditor or the central bank. It often transpires that the account had not passed through the Watch category stage. It is possible that the branch management either overlooked it, or thought that the statutory auditor would also overlook it. The branch management fights last minute duels with the auditor or RBI justifying lower provision. The controller, namely the RBI, does not agree and ultimately provision is made for a higher amount as insisted by the RBI. In the interest of corporate governance and proper disclosure, it is necessary that the systems are more transparent and reflect the true state of affairs. Banks now have a monthly NPA recovery management information system (MIS), which gives the NPA level at the beginning and end of the month, and includes other additions, cash recoveries and upgrades during the month. This MIS is not system-generated but prepared manually. Budgets are given for branches for cash recovery and the position is monitored at the end of the month. Identification of staff lapses and accountability when an account becomes bad is still a relative term with PSBs. There is still no foolproof system at PSBs for identification of staff lapses. But how can you prevent an account becoming an NPA when it throws early warning signals and how can you manage an NPA better?
Net NPA ratio
1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 1.32 1.43 0.92 0.97 0.77 1.09 0.73 0.78 1.01 1.00
2006-07
2007-08
2006-07
2007-08
2006-07
2007-08
2006-07
2007-08
2006-07
2007-08
Net NPA ratio
All Banks SBI & its Associates Nationalised Banks Other SCBs Foreign Banks
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Prevent Slippage and Manage NPAs
Non-performing assets (NPAs) have been a great worry for India's public sector banks. Increasing provisions for NPAs every year have been a drain on the profitability of these banks, but there are methods of preventing NPAs. The various ways of achieving better information management and credit monitoring are mentioned below.
Basic borrower data
The job begins with the know-your-customer (KYC) and credit appraisal stage itself. The banks must first get the basic data on the borrower and this includes details such as name and address of the business unit, name and addresses of business partners, directors, guarantor, details of any authorized advance, credit rating score, details of credit facilities, and other relevant documentation. This should be prepared by the credit officer and approved by the branch head. A monthly MIS to be generated for the branch.
Daily account activity
Details of any unusual transactions or large value transactions in the account, if there is no activity in the account for more than seven days. This should be a daily MIS for the branch management. Unusual transactions would be checks favoring any new customer not already disclosed by the borrower at the time of proposal, checks for round amounts etc. Large value transactions would vary according to the size of the company and the limit or line of credit sanctioned.
Continuous surveillance every quarter
This would have details such as name of the account. Limits sanctioned, drawing power as at the end of the month and outstanding, details of arrival of drawing power - should show clearly value of unpaid stocks not reckoned for drawing power, details of debits over a particular amount in the account with purpose, details of insurance held for securities and expiry date, details of production in the quarter vis-a-vis projections. There should also be surveillance of any shortfall, and all pertinent details, such as whether reasons for it were discussed with the borrower, sales and profit during the quarter vis-a-vis projection, how it compares with the same period for the previous year, or whether the unit would achieve the projected sale for the year based on the performance so far. An analysis of quarterly results of the company should be made. The continuous surveillance statement must be seen and verified by the credit officer and the branch
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head and would be available as a tool for ascertaining staff lapses in case the account goes bad. If the account had thrown signals and the statement also reflected the same and despite that if prompt action is not taken to prevent slippage it becomes easier to identify staff lapses in monitoring.
Daily statement of check returns both inward and outward
This must be verified everyday by the credit officer and the branch manager. It must have a column for their comments where they must record the details of discussion with the borrower about the reasons for the frequent return of check.
Overdue term loans
A daily statement to be generated, indicating name of the account, limit sanctioned, drawing power, outstanding, date and amount of instalment/interest due, date of last inspection of the unit by branch official and name.
A weekly and monthly summary of overdue term loans
This should indicate in addition to the above the details of outstandings in other borrower accounts of the same party and overdues, if any, in such accounts. The monthly statement beyond a cut-off limit should be available to the controlling office simultaneously. The monthly statements should also generate simultaneously a pre programmed politely worded reminder letter to the borrower.
Loan concentration statements
A monthly statement should be generated to show portfolio concentrations by industry, geography and borrower segments. This would just have under each head the name of the borrower, limits sanctioned and outstanding as at the end of every month.
Weekly statement of overdue bills purchased and discounted
This must give the bills outstanding beyond due date for usance bills and 21 days for demand bills. This must have information on name and address of the drawee, whether demand or usance and if usance the tenor, whether a satisfactory credit report has been obtained on the drawee and if not who authorized the purchase or discount without the credit report, whether bills purchased on the drawee have been delayed before or returned earlier. The system should generate a
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reminder to the bank for all bills outstanding beyond seven days from the due date with a copy to the customer for his follow up. The system should reject purchase bills on drawees whose bills have been returned more than once. Monthly statement of overdue bills purchased and discounted should have an additional column for fate of goods covered by the respective consignments and whether this was discussed with the borrower. Similar statements as above have to be generated for foreign bills purchased and discounted - weekly and monthly separately for letter of credit (LC) bills and non-LC bills.
Monthly statement of insurance for securities due for renewal
A letter to the borrower to provide necessary funds for debit and a letter to the insurance company asking for renewal premium should be generated on the first day of every month. This has to be pursued by the credit officer till renewal.
Limits due for renewal
A monthly statement should be generated for the credit officer. It should also be seen by the branch head. A quarterly statement of lapsed limits should be generated with the above details with an extra column for the date of visit by the credit officer and the branch head to the unit for discussions on renewal of limits.
Watch category statement
Accounts with funds overdue of Rs1m (approximately US$25,430) and above are to be included on this statement to be generated on the 15th and 30th of every month. From all the above data a watch category statement is to be generated at the end of every fortnight to the branch head who has to add his comments the same day and a monthly statement should be available to the controlling office on the first working day of every month. The fortnightly statement for the branch and the monthly statement for the controlling office should have the following details: name and address of the unit, date of first sanction and by whom, date of renewal, details of limits sanctioned, drawing power, outstanding, extent of irregularity, reasons for irregularity, when the unit was last inspected, whether the unit is working, whether the documents are in order and when the account is expected to be regularized, what the branch proposes to do to regularize the account and the amount of penal interest recovered. If the account remains overdue for more than six months and remains in watch category for more than nine months with persisting overdues the account is to be transferred to assets recovery or reconstruction department for further course of action.
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Assets classification and downgrade statement
This should be generated once every three months - where a downgrade or slippage is likely, but the loans are assessed as acceptable to the bank, the credit officer should send a mitigation report to the branch head as to why the credit is still acceptable to the bank. It should detail the risks and the mitigants for the same. This would be a monthly statement for the credit officer and the branch head.
Assets recovery/reconstruction
The assets recovery/reconstruction department gets the account for its follow up in the 10th month from the date it fell overdue. Immediately on receipt of the account this department should start the recovery proceedings. The first step would be to visit the unit for a discussion to explore the possibility of resurrecting the unit from its illness and retransfer the account to the branch. The credit officer of the branch or its branch head should also accompany the assets reconstruction department people for the discussion. This branch should actively involve itself in the recovery efforts of the assets reconstruction department because they know the borrower better. The visiting official should record his findings. On the ninth month from the date it became overdue the statement should indicate whether efforts for a one-time settlement with the unit was made. At the end of 12 months the assets reconstruction department should explore the possibility of selling the account to any assets reconstruction corporation for a price. If that is not possible at the end of 18 months they should initiate legal steps if their efforts for an OTS or for revival or for sale to an ARC had failed. If the unit is found to be a willful defaulter then a report should be generated for the RBI. The name and address of the unit and the directors and partners should be blacklisted and any unit in which they are interested which also has received finance from the bank should also be put on the watch category list for an in-depth analysis.
Statement of recoveries
A monthly statement of recoveries made in NPA accounts indicating total NPAs as at the beginning of the month, cash recoveries made during the month, slippage during the month, up gradation during the month, NPA level as at the end of the month to be generated for the branch head. Accounts falling under corporate debt restructuring mechanism should be handled only by the branch and not transferred to the assets reconstruction branch.
Conclusion
Nearly 90% of the operations of the banks in India are now computerized. KYC norms are in place. The banks have introduced credit rating models acquired from credit rating agencies like
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the CRISIL. Although the banks do not price their credit products based on the conclusions derived from the credit rating models but have their own archaic rating exercise for pricing, the contents and conclusions derived from the credit rating models would be very useful for credit monitoring. CBS is available at almost all the medium, large and very large branches where 90% of a bank's total credit is concentrated. With existing computer systems, the banks can put in place the above systems.
References
www.rbi.org.in www.sbi.co.inhttp://finance.indiamart.com/investment_in_india/banks.html www.iibf.org.in www.economics.about.com/cs/finance/a/india_banking.htm www.banknetindia.com www.iba.org.in www.mckinsey.com www.researchandmarkets.com Annual reports of various banks
Author’s CV
Biswadeep Ghosh is currently pursuing his MBA in finance from SIBM, Pune. He is an Engineering graduate from Cochin University. He has over 3 years experience in IT software sector. The author is interested in learning about the workings of the capital markets, and possesses a keen interest in macro economics.
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doc_631413144.docx
Documentation about understanding the concept of NPAs and effective ways to manage the NPA’s in the ever changing economic and financial scenario and concluding remarks.
2009
SIBM, Pune Biswadeep Ghosh MBA I Finance Roll No. 31262
Effective Management of non performing assets (NPA) A fresh perspective on the management of NPAs is Banks in India
Research report submitted to Prof. Rajesh Panda
Effective Management of non performing assets
P a g e |I
Abstract
A strong banking sector is important for flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Non-performing assets are one of the major concerns for banks in India. NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which reduces the over all profits and shareholders value. The issue of Non Performing Assets has been discussed at length for financial system all over the world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade. The paper deals with understanding the concept of NPAs and effective ways to manage the NPA’s in the ever changing economic and financial scenario and concluding remarks.
Effective Management of non performing assets
P a g e | II
Acknowledgement
The completion of a project is the effort of many intellectuals. This dissertation would not have been complete without the inspiration and able guidance of Prof. Rajesh panda, faculty, SIBM Pune. His guidance was a persistent source of direction throughout the period of the project. Also, the acknowledgement won’t be complete without expressing my thanks towards Mr. Arun Mudbidri, director SIBM, for giving me chance to undertake this project.
Effective Management of non performing assets
P a g e | III
Table of Contents
Abstract ...................................................................................................................................... II Acknowledgement ........................................................................................................................III Context ....................................................................................................................................... 1 Objectives: .................................................................................................................................. 2 Methodology ............................................................................................................................... 2 Sample and population: ............................................................................................................. 2 Justification for methodology: .................................................................................................... 2 Literature Review ......................................................................................................................... 2 Problems being addressed .......................................................................................................... 2 Central focus of the study .......................................................................................................... 3 Sample: ................................................................................................................................... 3 NPA Management Systems in Practice ............................................................................................ 3 Prevent Slippage and Manage NPAs ............................................................................................... 6 Basic borrower data................................................................................................................... 6 Daily account activity ................................................................................................................ 6 Continuous surveillance every quarter ......................................................................................... 6 Daily statement of check returns both inward and outward ............................................................. 7 Overdue term loans ................................................................................................................... 7 A weekly and monthly summary of overdue term loans ................................................................. 7 Loan concentration statements .................................................................................................... 7 Weekly statement of overdue bills purchased and discounted ......................................................... 7 Monthly statement of insurance for securities due for renewal ........................................................ 8 Limits due for renewal ............................................................................................................... 8 Watch category statement .......................................................................................................... 8 Assets classification and downgrade statement ............................................................................. 9 Assets recovery/reconstruction ................................................................................................... 9 Statement of recoveries.............................................................................................................. 9 Conclusion .................................................................................................................................. 9 References ..................................................................................................................................10 Author’s CV ...............................................................................................................................10
Total word count: 2610 words
Effective Management of non performing assets
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Context
Non-performing assets (NPAs) have been a great worry for India's public sector banks (PSBs), which are either wholly or partly owned by the Indian government. Increasing provisions for NPAs every year have been a drain on the profitability of these banks. With the countdown started for the adoption of Basel II norms, fear of breaching the minimum level of capital adequacy looms large for some of these banks. Some of them have gone to the public with initial and subsequent offer of equity shares and have improved their Tier I capital. No doubt the banks' profits are higher as a result of increased levels of credit in a buoyant economy. Some have raised their Tier II capital through bond issuance. Net NPAs of these banks have been decreasing. However, sooner or later the NPA bubble may burst and mar the balance sheets of these banks unless they prevent further slippage to NPAs by means of better credit monitoring. With the increase in retail credit, and the scope for further increase, banks must improve their credit monitoring systems and practices. It is common knowledge that an account does not become an NPA overnight. There will be advance-warning signals that prudent bankers should heed and act upon. On Basel II, India's central bank, the Reserve Bank of India (RBI), has advised that the foreign banks operating in India, and domestic banks with a presence outside India, are to migrate to the standardized approach for credit risk and the basic indicator approach for operational risk with effect from 31 March 2008. All other scheduled commercial banks were encouraged to migrate to these approaches under Basel II in alignment with them but in any case not later than 31 March 2009. The Basel Committee on Banking Supervision (BCBS) had undertaken the Fifth Quantitative Impact Study (QIS-5) to assess the impact of adoption of the revised Framework. Eleven Indian banks, accounting for about 50% of market share (by assets), participated in the QIS-5 exercise. It transpired from an empirical analysis that the combined capital adequacy ratio of these banks is expected to come down by about 100 basis points when these banks apply Basel II norms. If the capital adequacy breaches the minimum level, besides the RBI stepping in with various measures of prompt corrective action, a spate of problems would arise for the banks in the international market. Those banks will not be able to increase their asset base etc.
Banks can improve their capital adequacy in three ways: by increasing the Tier I capital through a public issue or private placement of equity shares, by increasing Tier II capital by issuing bonds/preference shares and, thirdly, by improving their net worth by increased profits.
Effective Management of non performing assets
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Profits can be increased by procuring more low and no-cost deposits, by increasing advances, by improving income from other sources and by reducing costs. With better credit appraisal and monitoring, the bank can decrease its amount of NPAs. Fewer NPAs result in less provisioning requirements and improved profits. Provisions can be reduced if slippages to NPAs are arrested. When recoveries are made in NPAs and provisions made are reversed, profits improve.
Objectives:
? ? ? ? Study the Indian banking system Area of operations of different types of banks Analyse growth over the years Provide a better understanding of the banking system
Methodology
Sample and population:
The banking sector comprising of nationalized banks, foreign banks and other commercial banks have been covered in their entirety.
Justification for methodology:
Performance indicators like profitability ratios, return on assets, number of branches, number of employees, capital and reserves and surplus, number of branches, deposits and advances, cost of funds etc. measure the performance of banks from all possible angles to capture the various aspects of banking.
Literature Review
Problems being addressed
Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability and endurability
Effective Management of non performing assets
P a g e |2
of the affected banks. The positive results of the chain of measures affected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary period have been neutralized by the ill effects of this surging threat. Despite various correctional steps administered to solve and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. The severity of the problem is however acutely suffered by Nationalised Banks, followed by the SBI group, and the all India Financial Institutions.
Central focus of the study
? ? ? ? ? To understand the meaning & nature of NPAs. To study the various economic reforms wrt to NPA’s To examine the causes for NPAs in banks in India. To study the NPA’s and their management in other countries. To suggest innovative ideas for effective management of NPAs in India.
Sample:
The study is a comprehensive one covering all the nationalised banks, foreign banks and other scheduled commercial banks.
NPA Management Systems in Practice
Several institutional mechanisms have been developed in India to deal with NPAs such as tightening of legal provisions; the passing of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002; introduction of debt recovery tribunals (DRTs); lok adalats (public courts); corporate debt restructuring (CDR) mechanism for large advances to corporate borrowers; etc. However, effective management of NPAs requires appropriate internal checks and balances and effective use of computerization in these banks. Most of the public sector banks in India have brought at least 90% of their branches under the core banking solution. With the existing levels of infrastructure available, the public sector banks can monitor credit and manage NPAs better than they do now.
Effective Management of non performing assets
P a g e |3
Most banks have introduced or updated their know your customer (KYC) profiles. Credit rating exercises are generally done by the branches or controlling offices at the time of sanction or review/renewal of existing credit facilities - generally once a year. As far as credit monitoring is concerned, besides regulation of drawing power with the periodical stock statements submitted by the borrower and periodical inspection of stocks by a supervisory official of the branch, banks have reporting systems for accounts with working capital credits of Rs10m and over, by way of continuous surveillance system (CSS) reports and quarterly information systems (QIS). Although these reports are system generated, they receive scant attention either at the branch or at the controlling office. Sometimes these reports are handwritten. There is no proper check of stock statements, QIS or the CSS and the inspection is done in a haphazard manner. Operations in the account need to be checked by the branch officials to ensure that the account shows healthy fluctuations and there is no diversion of funds. Reserve Bank of India has asked banks to introduce Watch/Special Watch category accounts to segregate accounts, which show signs of sickness. An account has to pass through this stage
Effective Management of non performing assets
P a g e |4
before it is classified as NPA. But, in practice, this does not often happen. This can lead to surprises at the end of the year for controlling offices, statutory auditors and the RBI, who then point out that an account has become an NPA, that provision needs to be made and a memorandum of change in provision given by the auditor or the central bank. It often transpires that the account had not passed through the Watch category stage. It is possible that the branch management either overlooked it, or thought that the statutory auditor would also overlook it. The branch management fights last minute duels with the auditor or RBI justifying lower provision. The controller, namely the RBI, does not agree and ultimately provision is made for a higher amount as insisted by the RBI. In the interest of corporate governance and proper disclosure, it is necessary that the systems are more transparent and reflect the true state of affairs. Banks now have a monthly NPA recovery management information system (MIS), which gives the NPA level at the beginning and end of the month, and includes other additions, cash recoveries and upgrades during the month. This MIS is not system-generated but prepared manually. Budgets are given for branches for cash recovery and the position is monitored at the end of the month. Identification of staff lapses and accountability when an account becomes bad is still a relative term with PSBs. There is still no foolproof system at PSBs for identification of staff lapses. But how can you prevent an account becoming an NPA when it throws early warning signals and how can you manage an NPA better?
Net NPA ratio
1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 1.32 1.43 0.92 0.97 0.77 1.09 0.73 0.78 1.01 1.00
2006-07
2007-08
2006-07
2007-08
2006-07
2007-08
2006-07
2007-08
2006-07
2007-08
Net NPA ratio
All Banks SBI & its Associates Nationalised Banks Other SCBs Foreign Banks
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Prevent Slippage and Manage NPAs
Non-performing assets (NPAs) have been a great worry for India's public sector banks. Increasing provisions for NPAs every year have been a drain on the profitability of these banks, but there are methods of preventing NPAs. The various ways of achieving better information management and credit monitoring are mentioned below.
Basic borrower data
The job begins with the know-your-customer (KYC) and credit appraisal stage itself. The banks must first get the basic data on the borrower and this includes details such as name and address of the business unit, name and addresses of business partners, directors, guarantor, details of any authorized advance, credit rating score, details of credit facilities, and other relevant documentation. This should be prepared by the credit officer and approved by the branch head. A monthly MIS to be generated for the branch.
Daily account activity
Details of any unusual transactions or large value transactions in the account, if there is no activity in the account for more than seven days. This should be a daily MIS for the branch management. Unusual transactions would be checks favoring any new customer not already disclosed by the borrower at the time of proposal, checks for round amounts etc. Large value transactions would vary according to the size of the company and the limit or line of credit sanctioned.
Continuous surveillance every quarter
This would have details such as name of the account. Limits sanctioned, drawing power as at the end of the month and outstanding, details of arrival of drawing power - should show clearly value of unpaid stocks not reckoned for drawing power, details of debits over a particular amount in the account with purpose, details of insurance held for securities and expiry date, details of production in the quarter vis-a-vis projections. There should also be surveillance of any shortfall, and all pertinent details, such as whether reasons for it were discussed with the borrower, sales and profit during the quarter vis-a-vis projection, how it compares with the same period for the previous year, or whether the unit would achieve the projected sale for the year based on the performance so far. An analysis of quarterly results of the company should be made. The continuous surveillance statement must be seen and verified by the credit officer and the branch
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head and would be available as a tool for ascertaining staff lapses in case the account goes bad. If the account had thrown signals and the statement also reflected the same and despite that if prompt action is not taken to prevent slippage it becomes easier to identify staff lapses in monitoring.
Daily statement of check returns both inward and outward
This must be verified everyday by the credit officer and the branch manager. It must have a column for their comments where they must record the details of discussion with the borrower about the reasons for the frequent return of check.
Overdue term loans
A daily statement to be generated, indicating name of the account, limit sanctioned, drawing power, outstanding, date and amount of instalment/interest due, date of last inspection of the unit by branch official and name.
A weekly and monthly summary of overdue term loans
This should indicate in addition to the above the details of outstandings in other borrower accounts of the same party and overdues, if any, in such accounts. The monthly statement beyond a cut-off limit should be available to the controlling office simultaneously. The monthly statements should also generate simultaneously a pre programmed politely worded reminder letter to the borrower.
Loan concentration statements
A monthly statement should be generated to show portfolio concentrations by industry, geography and borrower segments. This would just have under each head the name of the borrower, limits sanctioned and outstanding as at the end of every month.
Weekly statement of overdue bills purchased and discounted
This must give the bills outstanding beyond due date for usance bills and 21 days for demand bills. This must have information on name and address of the drawee, whether demand or usance and if usance the tenor, whether a satisfactory credit report has been obtained on the drawee and if not who authorized the purchase or discount without the credit report, whether bills purchased on the drawee have been delayed before or returned earlier. The system should generate a
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reminder to the bank for all bills outstanding beyond seven days from the due date with a copy to the customer for his follow up. The system should reject purchase bills on drawees whose bills have been returned more than once. Monthly statement of overdue bills purchased and discounted should have an additional column for fate of goods covered by the respective consignments and whether this was discussed with the borrower. Similar statements as above have to be generated for foreign bills purchased and discounted - weekly and monthly separately for letter of credit (LC) bills and non-LC bills.
Monthly statement of insurance for securities due for renewal
A letter to the borrower to provide necessary funds for debit and a letter to the insurance company asking for renewal premium should be generated on the first day of every month. This has to be pursued by the credit officer till renewal.
Limits due for renewal
A monthly statement should be generated for the credit officer. It should also be seen by the branch head. A quarterly statement of lapsed limits should be generated with the above details with an extra column for the date of visit by the credit officer and the branch head to the unit for discussions on renewal of limits.
Watch category statement
Accounts with funds overdue of Rs1m (approximately US$25,430) and above are to be included on this statement to be generated on the 15th and 30th of every month. From all the above data a watch category statement is to be generated at the end of every fortnight to the branch head who has to add his comments the same day and a monthly statement should be available to the controlling office on the first working day of every month. The fortnightly statement for the branch and the monthly statement for the controlling office should have the following details: name and address of the unit, date of first sanction and by whom, date of renewal, details of limits sanctioned, drawing power, outstanding, extent of irregularity, reasons for irregularity, when the unit was last inspected, whether the unit is working, whether the documents are in order and when the account is expected to be regularized, what the branch proposes to do to regularize the account and the amount of penal interest recovered. If the account remains overdue for more than six months and remains in watch category for more than nine months with persisting overdues the account is to be transferred to assets recovery or reconstruction department for further course of action.
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Assets classification and downgrade statement
This should be generated once every three months - where a downgrade or slippage is likely, but the loans are assessed as acceptable to the bank, the credit officer should send a mitigation report to the branch head as to why the credit is still acceptable to the bank. It should detail the risks and the mitigants for the same. This would be a monthly statement for the credit officer and the branch head.
Assets recovery/reconstruction
The assets recovery/reconstruction department gets the account for its follow up in the 10th month from the date it fell overdue. Immediately on receipt of the account this department should start the recovery proceedings. The first step would be to visit the unit for a discussion to explore the possibility of resurrecting the unit from its illness and retransfer the account to the branch. The credit officer of the branch or its branch head should also accompany the assets reconstruction department people for the discussion. This branch should actively involve itself in the recovery efforts of the assets reconstruction department because they know the borrower better. The visiting official should record his findings. On the ninth month from the date it became overdue the statement should indicate whether efforts for a one-time settlement with the unit was made. At the end of 12 months the assets reconstruction department should explore the possibility of selling the account to any assets reconstruction corporation for a price. If that is not possible at the end of 18 months they should initiate legal steps if their efforts for an OTS or for revival or for sale to an ARC had failed. If the unit is found to be a willful defaulter then a report should be generated for the RBI. The name and address of the unit and the directors and partners should be blacklisted and any unit in which they are interested which also has received finance from the bank should also be put on the watch category list for an in-depth analysis.
Statement of recoveries
A monthly statement of recoveries made in NPA accounts indicating total NPAs as at the beginning of the month, cash recoveries made during the month, slippage during the month, up gradation during the month, NPA level as at the end of the month to be generated for the branch head. Accounts falling under corporate debt restructuring mechanism should be handled only by the branch and not transferred to the assets reconstruction branch.
Conclusion
Nearly 90% of the operations of the banks in India are now computerized. KYC norms are in place. The banks have introduced credit rating models acquired from credit rating agencies like
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the CRISIL. Although the banks do not price their credit products based on the conclusions derived from the credit rating models but have their own archaic rating exercise for pricing, the contents and conclusions derived from the credit rating models would be very useful for credit monitoring. CBS is available at almost all the medium, large and very large branches where 90% of a bank's total credit is concentrated. With existing computer systems, the banks can put in place the above systems.
References
www.rbi.org.in www.sbi.co.inhttp://finance.indiamart.com/investment_in_india/banks.html www.iibf.org.in www.economics.about.com/cs/finance/a/india_banking.htm www.banknetindia.com www.iba.org.in www.mckinsey.com www.researchandmarkets.com Annual reports of various banks
Author’s CV
Biswadeep Ghosh is currently pursuing his MBA in finance from SIBM, Pune. He is an Engineering graduate from Cochin University. He has over 3 years experience in IT software sector. The author is interested in learning about the workings of the capital markets, and possesses a keen interest in macro economics.
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