Description
non performing assets and gives classification of non performing assets. It also gives narsimhan committee's recommendation for NPAs. It also explains the reasons for NPAs and gives guidelines of government and RBI for reduction of NPAs.
BANK MANAGAMENT
MANAGEMENT OF NON-PERFORMING ASSETS
Date
INTRODCUTION For banks good loans are the most profitable assets. Returns come in the form of loan interest, fee income and investments. The most costly risk is the inability of the borrower to repay the borrowed amount. Proper management and speedy disposal of NPAs is one of the most critical tasks of banks today. The problem of Non Performing Assets [NPAs] in banks and financial institutions has been a matter of grave concern not only for the banks but also for the real economy in general, as NPAs can choke further expansion of credit which would impede the economic growth of the country. Any bottleneck in the smooth flow of credit is bound to create adverse repercussions in the economy. NPAs are not therefore the concern of only lenders but also the public at large. 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 insurability 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. DEFINITION OF NON PERFORMING ASSETS An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A ‘non performing asset’ was defined as a credit facility in respect of which the interest and / or instalment of principal had remained ‘past due’ for a specified period of time. The specified period was reduced in a phased manner as under: Year ending March 31 Specified period 1993 Four Quarters 1994 Three Quarters 1995 Onwards Two quarters An amount due under any credit facility is treated as ‘past due’ when it has not been paid within 30 days from the due date. Due to the improvements in the payment and settlement systems, recovery climate, up gradation of technology in the banking sector, etc, it was decided to dispense with the ‘past due’ concept, with effect from 31st March, 2001.
Accordingly, as from that date, a NPA shall be an advance where, 1. Interest and/or instalment of principal remain overdue for a period of more than 180 days in respect of a term loan. 2. The account remains ‘out of order’ for a period of more than 180 days, in respect of an overdraft/cash credit. 3. Interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agriculture purposes. 4. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. With a view to move towards international best practices, it has been decided to adopt the ’90 days’ overdue norm for identification of NPAs, from 31st March, 2004. ‘Out of Order’ Status An account should be treated as ‘out of order’ if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for six months as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as ‘out of order’. ‘Overdue’ Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank. CLASSIFICATION OF NPAs Banks are required to classify NPAs further into the following three categories based on the period for which the asset has remained non-performing and the reliability of the dues: 1. Sub-standard Assets: A sub-standard asset is one which has remained NPA for a period less than or equal to 18 months. In such cases, the current net worth of the borrower, or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. Such assets will have well defined credit weakness that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the bank will sustain a loss. 2. Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding 18 months. It has all the weaknesses inherent to a sub-standard asset with the added characteristic that the collection or liquidation in full – on the basis of currently known facts – is highly questionable and improbable. 3. Loss Assets: A loss asset is one where a loss has been identified by the bank or, internal or external auditors but the amount has not been written off wholly
GUIDELINES FOR CLASSIFICATION OF NPAs Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. ? ? Accounts with temporary deficiencies: These should be classified based on the past recovery records. Accounts regularize near about the balance sheet date: These accounts should be handled with care and without scope for subjectivity. Where the account indicates inherent weakness based on available data, it should be deemed as an NPA. Asset classification should be borrower-wise and not facility-wise: If a single facility to a borrower is classified as NPA, others should also be classified the same way, as it is difficult to envisage only a solitary facility becoming a problem credit and not others. Advances under consortium arrangements: Classification here should be based on the recovery record of the individual member banks. Accounts where there is erosion in the value of the security: If there is a significant (i.e. the realizable value of the security is less than 50% of that assessed by the bank during acceptance) the account may be classified as NPA.
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NPA: SOME ASPECTS AND ISSUES ? The NPAs of banks in India are considered to be at higher levels than those in other countries. This issue has attracted attention of public as also of international financial institutions and has gained further prominence in the wake of transparency and disclosure measures initiated by RBI during recent years. ? The NPA Management Policy document of SBI lays down to contain net NPAs to less than 5% of bank's total loan assets in conformity with the international standard. It is, therefore necessary that as per guidelines provided in NPA Management Policy document, every effort is made at all levels to cut down the NPAs. All this requires greater efforts and teamwork. ? It is essential to keep a constant watch over the non-performing assets not just to keep it performing but also that once they become non-performing, effective measures are initiated to get full recovery and where this is not possible, the various means are to be initiated to get rid of the NPAs from the branch books. ? NPAs adversely affect the wealth condition of the branch advances as also the profitability of the branch. Some of the reasons for this are as under: a) Interest cannot be applied on the loan accounts classified as NPAs. b) The Branch 'has to pay interest to central office on outstanding classified as NPA. c) The Branch has to incur cost in supervision and follow up of such advances. d) Provision has to be made on NPAs at Bank level. ? Under Income Recognition, Assets Classification and provisioning, NPA may be Sub standard, Doubtful or loss assets.
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Once the assets are classified as NPA, the Branch Manager has to take all the necessary steps to get the dues recovered there-under to maintain the good health of advances and the higher profitability at the-Branch. This requires management of NPAs in such a Planned and scientific manner that the percentage of NPAs to the total advances will be minimum.
NARSIMHAN COMMITTEE’S RECOMMENDATIONS Committee on Financial System (CFS) Narsimhan committee which reported in 1991, meanwhile major changes have taken place in the domestic, economic and institutional science, indicating the movement towards global integration of financial services. Committee has presented second generation reforms. a. To strength the foundation of financial system. b. Related to this, streamlining procedures, upgrading technology and human resource development. c. Structural changes in the system. 1. It is recommended that an asset be classified as doubtful if it is in the sub standard category for 18 months in the first instance and eventually for 12 months as loss if it has been so identified but not written off. These norms, which should be regarded as the minimum, may be brought into force in a phased manner. 2. Corporations and FIs should avoid the practice of "ever greening" by making fresh advances to their troubled constituents only with a view to settling interest dues and avoiding classification of the loans in question as NPAs. The committee notes that the regulatory and supervisory authorities are paying particular attention to such breaches in the adherence to the spirit of the NPA definitions and are taking appropriate corrective action. 3. The committee believes that objective should be to reduce the average level of net NPAs for all banks to below 5% by the year 2000 and 3% by 2002. These targets cannot be achieved in the absence of measure to tackle the problem of backlog NPAs on one time basis and the implementation of strict prudential norms and management efficiency. 4. There is no denying the fact that any effort at financial restructuring in the form of having off NPAs portfolio from the books of the corporation or measures to initiate the impact of high level of NPAs must go hand with operational restructuring. Cleaning up the balance sheets of banks would thus make sense only if simultaneous steps are taken to prevent of limit the re emergence of new NPAs. 5. Direct credit has a proportionately higher share in NPA portfolio of corporations and has been one of the factors in erosion in the quality of asset portfolio. There is a continuing need of Financial Corporations to extend Credit to SSI sector, which is important segment of national economy but on commercial considerations and on basis of credit worthiness. Government feels reluctant to accept the recommendation for reducing the scope of directed credit under priority sector because tiny sector of industry and small businesses have problems with regard to obtaining credit and some remaining may be necessary for this sector. A poverty alleviation and employment
generation schemes. Given the special needs of these sectors, the current practice may continue. 6. With regard to income recognition in India, income stops occurring when interest/instalment of principal is not paid within 180 days. However, we should move towards international Practices in this regard and introduce the norm of 90 days in a phased manner by the 2002. 7. As an incentive to Bank is to make specific provision, the consideration be given to making such provisions tax deductible. 8. Banks should pay greater attention to asset liability management to avoid mismatch and to cover, among others, liquidity and interest rate risks. 9. It should be encouraged to adopt statistical risk management techniques like value at risk in respect of balance sheet term which are susceptible to market price fluctuation, forex rate volatility and interest rate changes. While the RBI and IDBI may initially, prescribe certain normative models for market risk management, the ultimate objective should be that of building up their models and RBI blacklisting them for their validity on a periodical basis. 10. There is a need for a greater use of computerized system than at present. Computerization has to be recognized as an indispensable tool for improvement in customer service, the institution and operation of better control systems, greater efficiency in information technology. 11. State Financial Corporations at present are over regulated and over administered. Supervision should be based on evolving prudential norms and regulations which should be adhered to rather than excessive control over administrative and other aspects of organisation and functioning. Internal audit and internal inspection systems should be strengthened. 12. The main issues with regard to operations of Bank’s are to ensure operational flexibility and measure of competition and adequate internal autonomy in matters of loan sanctioning and internal administration. REASONS FOR RISE IN NPAs The banking sector has been facing the serious problems of the rising NPAs. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks. The NPAs in PSB are growing due to external as well as internal factors. EXTERNAL FACTORS ? Ineffective recovery tribunal The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, their by reducing their profitability and liquidity. ? Wilful Defaults There are borrowers who are able to pay back loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans.
Natural calamities This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans. ? Industrial sickness Improper project handling , ineffective management , lack of adequate resources , lack of advance technology , day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity. ? Lack of demand Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the non recovered part as NPAs and has to make provision for it. ? Change on Govt. policies With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. E.g. the fallout of handloom sector is continuing as most of the weavers’ Cooperative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central govt to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs. INTERNAL FACTORS ? Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks since long. 1. Principles of safety 2. Principle of liquidity 3. Principles of profitability ? Inappropriate technology Due to inappropriate technology and management information system, market driven decisions on real time basis cannot be taken. Proper MIS and financial accounting system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerised. ? Improper swot analysis The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower.
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Banks should consider the borrowers own capital investment. It should collect credit information of the borrowers. Bank should analyse the profitability, viability, long term acceptability of the project while financing. Poor credit appraisal system Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs. Managerial deficiencies The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the marketability, acceptability, safety and transferability. Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to wilful defaulters can be collected by regular visits. Re loaning process Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle.
GUIDELINES OF GOVERNMENT AND RBI FOR REDUCTION OF NPAs 1. Compromise settlement schemes: The RBI/Government of India have been constantly goading the banks to take steps for arresting the incidence of fresh NPAs and have also been creating legal and regulatory environment to facilitate the recovery of existing NPAs of banks. More significant of them, we would like to recapitulate at this stage, ? The broad framework for compromise or negotiated settlement of NPAs advised by RBI in July 1995 continues to be in place. Banks are free to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements with the approval of their Boards, particularly for old and unresolved cases falling under the NPA category. The policy framework suggested by RBI provides for setting up of an independent Settlement Advisory Committees headed by a retired Judge of the High Court to scrutinise and recommend compromise proposals. ? Specific guidelines were issued in May 1999 to public sector banks for one time nondiscretionary and non discriminatory settlement of NPAs of small sector. The scheme was operative up to September 3, 2000. [Public sector banks recovered Rs. 668 crore through compromise settlement under this scheme]. ? Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5 crore and less as on 31 March 1997. [The above guidelines which were valid up to June 30, 2001helped the public sector banks to recover Rs. 2600 crore by September 2001]. 2. An OTS Scheme covering advances of Rs. 25000 and below continues to be in operation and guidelines in pursuance to the budget announcement of the Hon'ble
Finance Minister providing for OTS for advances up to Rs. 50,000 in respect of NPAs of small/marginal farmers are being drawn up. 3. Lok Adaltas: Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and "loss" category, with outstanding balance of Rs. 5 lakh for compromise settlement under Lok Adalats. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to decide on cases of NPAs of Rs. 10 lakhs and above. The public sector banks had recovered Rs. 40.38 crore as on September 30, 2001, through the forum of Lok Adalat. The progress through this channel is expected to pick up in the coming years particularly looking at the recent initiatives taken by some of the public sector banks and DRTs in Mumbai. 4. Debt Recovery Tribunals: The Recovery of Debts due to Banks and Financial Institutions (amendment) Act, passed in March 2000 has helped in strengthening the functioning of DRTs. Provisions for placement of more than one Recovery Officer, power to attach defendant's property/assets before judgement, penal provisions for disobedience of Tribunal's order or for breach of any terms of the order and appointment of receiver with powers of realization, management, protection and preservation of property are expected to provide necessary teeth to the DRTs and speed up the recovery of NPA sin the times to come. Though there are 22 DRTs set up at major centres in the country with Appellate Tribunals located in five centres viz. Allahabad, Mumbai, Delhi, Calcutta and Chennai, they could decide only 9814 cases for Rs. 6264.71 crore pertaining to public sector banks since inception of DRT mechanism and till September 30, 2001. The amount recovered in respect of these cases amounted to only Rs. 1864.30 crore. 5. Circulation of information on defaulters The RBI has put in place a system for periodical circulation of details of wilful defaults of borrowers of banks and financial institutions. This serves as a caution list while considering requests for new or additional credit limits from defaulting borrowing units and also from the directors/proprietors/partners of these entities. RBI also publishes a list of borrowers (with outstanding aggregating Rs. 1 crore and above) against whom suits have been filed by banks and FIs for recovery of their funds, as on 31st March every year. It is our experience that these measures had not contributed to any perceptible recoveries from the defaulting entities. However, they serve as negative basket of steps shutting off fresh loans to these defaulters. We strongly believe that a real breakthrough can come only if there is a change in the repayment psyche of the Indian borrowers. 6. Recovery action against large NPAs After a review of pendency in regard to NPAs by the Hon'ble Finance Minister, RBI had advised the public sector banks to examine all cases of wilful default of Rs 1crore
and above and file suits in such cases, and file criminal cases in regard to wilful defaults. Board of Directors are required to review NPA accounts of Rs. 1 crore and above with special reference to fixing of staff accountability. On their part RBI and the government are contemplating several supporting measures including legal reforms. 7. Corporate Debt Restructuring (CDR) Corporate Debt Restructuring mechanism has been institutionalised in 2001 to provide a timely and transparent system for restructuring of the corporate debts of Rs.20 crore and above with the banks and financial institutions. The CDR process would also enable viable corporate entities to restructure their dues outside the existing legal framework and reduce the incidence of fresh NPAs. The CDR structure has been headquartered in IDBI, Mumbai and a Standing Forum and Core Group for administering the mechanism had already been put in place. The experiment however has not taken off at the desired pace though more than six months have lapsed since introduction. As announced by the Hon'ble Finance Minister in the Union Budget2002-03, RBI has set up a high level Group under the Chairmanship of Shri VepaKamesam, Deputy Governor, RBI to review the implementation procedures of CDR mechanism and to make it more effective. The Group will review the operation of the CDR Scheme, identify the operational difficulties, if any, in the smooth implementation of the scheme and suggest measures to make the operation of the scheme more efficient. 8. Credit Information Bureau Institutionalisation of information sharing arrangements through the newly formed Credit Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalize the scheme of information dissemination on defaults to the financial system. The main recommendations of the Group include dissemination of information relating to suitfiled accounts regardless of the amount claimed in the suit or amount of credit granted by a credit institution as also such irregular accounts where the borrower has given consent for disclosure. This, I hope, would prevent those who take advantage of lack of system of information sharing amongst lending institutions to borrow large amounts against same assets and property, which had in no small measures contributed to the incremental NPAs of the bank. 9. Proposed guidelines on wilful defaults/diversion of funds RBI is examining the recommendation of Kohli Group on wilful defaulters. It is working out a proper definition covering such classes of defaulters so that credentials to this group of borrowers can be made effective and criminal prosecution can be made demonstrative against wilful defaulters.
10. Corporate Governance A Consultative Group under the chairmanship of Dr. A. Ganguly was set up by the Reserve Bank to review the supervisory role of Boards of Banks and financial institutions and to obtain feedback on the functioning of the Boards vis-à-vis compliance, transparency, disclosure, audit committees etc. and make recommendations for making the role of Board of Directors more effective with a view to minimising risks and overexposure. The group is finalising its recommendations shortly and may come out with guidelines for effective control and supervision by bank boards over credit management and NPA prevention measures. 11. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 The Act provides, inter alia for enforcement of security interest for realisation of dues without the intervention of courts or tribunals. The Security Interest (Enforcement) Rules, 2002 has also been notified by Government to enable Secured Creditors to authorise their officials to enforce the securities and recover the dues from the borrowers. As on June 30, 2004, 27 public sector banks had issued 61, 263 notices involving outstanding amount of Rs. 19,744 crore, and had recovered an amount of Rs. 1,748 crore from 24,092 cases. BANKWISE NPAs OF SCHEDULED COMMERCIAL BANKS-2006 Bank Name Gross NPA Gross Advances Gross NPA Ratio State Bank of India 1037575 26745825 3.9 Allahabad Bank 118383 3006122 3.9 Bank of Baroda 23904 6136043 3.9 Bank of India 247918 6666223 3.7 PNB 313829 7650114 4.1 Punjab & Sind Bank 94150 979992 9.6 ICICI 222258 14762531 1.5 HDFC 49651 3540258 1.4 Kotak Mahindra 3991 637292 0.6 IDBI Ltd. 111552 5632228 2 Dena Bank 94940 1474779 6.4 Bank of Ceylon 3279 6993 46.9 Societe Generale 531 27617 1.9 Yes Bank 240709 0
Source: Department of Banking Supervision, RBI
NPA of Public sector banks
Source: International journal of innovation, Management & Technology, Vol 2, No. 3 , June 2011
NPA IN ALLAHABAD BANK 2011 Net NPA (%) 0.79
2010 0.66
2009 0.72
For year 2011 sector wise NPA for Allahabad bank is as follows, Agriculture and allied activities 4.06% MSME 0.77% Services 4.29% Personal Loans 1.29% The Bank attached great importance on recovery of nonperforming assets. The Bank has recovered Rs 929.16 cr from non performing assets including written off debts during 201011 as against Rs 681.35 cr in 2009-’10.
Steps taken by Allahabad Bank to reduce NPA, ? All Regional Heads have been authorised by the board to issue notices and exercise rights and powers under the Act. Detailed guidelines on the provisions of act and rules along with formats of the notices have been issued to all regional heads from time to time. ? Region wise list of values have been approved by the Board as per the requirement under the rules. ? In case the borrowers fail to repay the dues within 60 days notice period, the Regional head have been advised to take all steps for taking possession of the secured assets and give wide publicity of the same through media, besides, publication of the possession notice in the newspaper in terms of the rules.
The recovery and up gradation efforts are executed through a separate Recovery and Rehabilitation Department. ? Credit monitoring system has been revamped. ? High value NPAs are reviewed individually. ? An incentive scheme has been launched to better the NPA recovery. ? Best use of new ordinance to recover Bank’s dues. Five-point short-term strategies ? All potential NPA accounts must be critically reviewed and monitored so as to sustain them as performing assets ? All potential performing asset accounts where up gradation or cash recovery is possible should be followed up vigorously ? Emphatic stress should be given on all compromise settled cases for recovery of dues as per agreed terms ? Execution of Decrees and recovery thereof should be ensured. ? All recovery proceedings before DRTs should be followed up for recovery of dues expeditiously NPA IN BANK OF BARODA 2011 Net NPA (%) 0.35
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2010 0.34
Percentage of NPAs to total advances in that sector 2011 Agriculture and allied activities 3.47% MSME 1.76% Services 1.22% Personal Loans 1.72%
2010 3.33% 1.06% 0.82% 3.68%
While the Indian banking industry continued to reel under the pressure of stressed asset quality, Bank of Baroda (BOB) could again restrict its Gross NPA to 1.36% and Net NPA to 0.35% during 2010-11, thanks to its robust systems of credit origination, credit monitoring and asset recovery. The Bank’s Incremental Delinquency Ratio too was contained at 1.09% during the year under review. BOB’s rigorous follow up of all NPA accounts and timely response to early warning signals resulted in Cash Recovery of Rs 455.49 crore. It could upgrade accounts to the tune of Rs 189.17 crore to standard category. Moreover, BOB recovered Rs 272.66 crore from the prudentially written off accounts. BOB’s NPA Coverage Ratio (including technical write-off) stood at the rich level of 85.0% in 201011 as against the regulatory requirement of 70.0%.
NPA IN STATE BANK OF INDIA 2011 Net NPA (%) 2.04
2010 1.7
Break up of NPAs
DISTRIBUTION OF OUTSTANDING ADVANCES OF PUBLIC SECTOR BANKS TO AGRICULTURE - 2010 (No. of Accounts in lakh and Amount in Rs. crore) Bank Group / Bank State Bank Group Total Agricultural Advances No.of Amount Accounts outstanding 110.10 117225 Direct Agricultural Advances No.of Amount Accounts outstanding 108.47 89018 Indirect Agricultural Advances No.of Amount Accounts outstanding 1.62 28208
DISTRIBUTION OF OUTSTANDING ADVANCES OF PUBLIC SECTOR BANKS TO MICRO CREDIT, STATE SPONSORED ORGANISATIONS, EDUCATION AND HOUSING – 2010 (No. of Accounts in lakh and Amount in Rs. crore)
Bank Group / Bank
Micro Credit(other than for agriculture & allied activities) No. of A/Cs Amount outstanding
State Sponsored Organisations for SC/ST No.of A/Cs Amount outstanding No.of A/Cs
Education
Housing
Amount outstanding
No.of A/Cs
Amount outstanding
State Bank Group
2.37
84
0.04
4
6.25
12774
16.71
71113
DISTRIBUTION OF OUTSTANDING DIRECT AND INDIRECT ADVANCES OF PUBLIC SECTOR BANKS TO SMALL ENTERPRISES - 2010 (No. of Accounts in lakh and Amount in ` crore) As on the last reporting Friday of March Total credit to Small Direct Credit to Small Indirect Credit to Small Enterprises including Enterprises Enterprises Bank Group manufacturing & / Bank services enterprises No. of Amount No. of Amount No. of Amount Accounts Outstanding Accounts Outstanding Accounts Outstanding State Bank Group 27.89 70894 27.89 70894 -
Summary of SBI NPAs since Mar 06 as a % of its total assets.(In Rs Crores)
11-Mar Gross Non-Performing Assets Net Non Performing Assets % of Net NonPerforming Assets to Net Advance Total Assets YOY increase in NPA Net NPA as a % of total assets Gross NPA as a % of total assets 25,326.29 12,346.90 10-Mar 19,534.89 10,870.17 09-Mar 15,714.00 9,677.42 08-Mar 12,837.34 7,424.33 07-Mar 9,998.22 5,257.72 06-Mar 9,628.14 4,911.41
1.63 12,24,693.81 13.59% 1.01% 2.07%
1.72 10,53,956.61 12.33% 1.03% 1.85%
1.79 9,65,042.96 30.35% 1.00% 1.63%
1.78 7,22,125.08 41.21% 1.03% 1.78%
1.56 5,66,806.13 7.05% 0.93% 1.76%
1.88 4,94,160.62 -8.18% 0.99% 1.95%
COMPOSITION OF NPAs OF State Bank Of India - 2002 TO 2011 (Amount in Rs. crore) Priority Sector Amount B. State Bank of India & its Associates 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Per cent share 47.01 47.49 47.07 47.39 54.95 57.15 58.49 47.26 50.11 55.32 As on March 31 Non-Priority Sector Amount Per cent share Public Sector Amount Per cent share 2.56 3.10 1.45 1.13 0.95 1.50 0.63 0.99 1.12 0.02 Total Amount
Bank Groups / Years
8977 8053 7136 7017 7250 7175 8902 8447 10940 15567
9628 8379 7803 7624 5819 5193 6222 9250 10646 12567
50.42 49.41 51.48 51.48 44.10 41.36 40.88 51.75 48.77 44.66
490 526 220 168 125 188 97 177 244 6
19095 16958 15159 14808 13193 12556 15220 17874 21831 28140
NPA IN HDFC Bank Ltd Particulars regarding nonperforming assets for the last three years Particulars Gross advances 2009 10023935 2010 12583060 2011 15998267
Gross NPA Gross NPA % Net NPA %
198392 1.98
181676 1.43% 0.3%
169434 1.05% 0.2%
Sector-wise NPAs Non-performing assets as percentage of total assets in that sector is set out below: Particulars Percentage of NPAs to Total Advances in that sector (%) March 31 2011 March 31 2010 0.54% 0.91% 0.67% 1.59% 0.55% 1.46% 3.86% 1.11%
Agriculture and allied activities Industry (Micro & small, Medium and Large) Services Personal Loans
ASSET QUALITY Asset quality continued to remain healthy with gross non-performing assets as on March 31, 2011 at 1.1% of gross advances as against 1.4% at the end of the previous year. The ratio of net non-performing assets to net advances as of March 31, 2011 was at 0.2%, down from 0.3% as at March 31, 2010. The Bank’s provisioning policies for specific loan loss provisions remained higher than regulatory requirements. The NPA coverage ratio based on specific provisions (not including write-offs, technical or otherwise) was at 82.5% as on March 31, 2011 while that on March 31, 2010 was 74.8%. Total restructured loans (including applications received and under process for restructuring) were at 0.4% of gross advances of which 0.1% were restructured loans classified as NPAs as on March 31, 2011.
NPA IN ICICI Bank Ltd Particulars regarding nonperforming assets for the last three years:Year ended March31, 2009 March31, 2010 March31, 2011 Gross NPA 98.03 96.27 101.14 Net NPA 46.19 39.01 24.58 Net customer % of net NPA to net Asset customer assets 2,358.24 1.96% 2,091.22 1.87% 2,628.16 0.94%
At March 31, 2011, the gross non-performing assets (net of write-offs, interest suspense and derivatives income reversal) were ` 101.14 billion compared to ` 96.27 billion at March 31, 2010. The increased level of non-performing assets was after taking into consideration the additions to gross NPA (` 4.11 billion) arising out of the amalgamation of Bank of Rajasthan with effect from close of business at August 12, 2010. Net non-performing assets were ` 24.58 billion at March 31, 2011 compared to ` 39.01 billion at March 31, 2010. The ratio of net non-performing assets to net customer assets decreased from 1.87% at March 31, 2010 to 0.94% at March 31, 2011. During fiscal 2011, we wrote-off NPAs, including retail NPAs, with an aggregate outstanding of ` 2.29 billion against ` 28.48 billion during fiscal 2010. Classification of Non-Performing Assets by Industry The following table sets forth, at March 31, 2010 and March 31, 2011, the composition of gross non-performing assets by industry sector. ( in billion, except percentages)March 20 10 March 31, 2011 March 31,2010 Amount % 64.73 67.2% 2.17 2.3 March 31, 2011 Amount % 66.35 65.6% 3.85 3.8
Retail finance Wholesale/retail
trade Food and beverages Services – finance Textiles Chemicals and fertilisers Metal and metal products Electronics and engineering Automobiles Paper and paper products Services – non finance Power Iron/steel and products Shipping Other Industries Total
1.62 2.43 1.90 2.47 0.68 0.69 0.59 0.03 0.38 0.14 1.43 0.01 17.00 96.27
1.7 2.5 2.0 2.6 0.7 0.7 0.6 0 0.0 0.4 0.1 1.5 0.0 17.7 100.0%
2.88 2.30 2.25 2.05 1.30 0.68 .55 0.46 0.38 0.18 0.17 0.06 17.68 101.14
2.9 2.3 2.2 2.0 1.3 0.7 0.5 0.5 0.4 0.2 0.2 0.1 17.3 100.0%
NPA IN AXIS BANK Net non-performing assets to net advances are set out below: 31 March, 2011 (%) 0.29 31 March, 2010 (%) 0.40
Net non performing assets as a percentage of net advances Non-performing assets as percentage of total assets in that sector is set out below: Sr. No. 1. 2. Sector Agriculture and allied activities Industry (Micro & Small, Medium and Large) Services* Personal loans 31 March, 2011 (%) 2.56 1.15
31 March, 2010 (%) 2.31 0.95
3. 4.
0.21 1.38
0.69 1.86
* includes nil (previous year 0.06%) NPAs in respect of commercial real estate and 0.11% (previous year 0.39%) in respect of trade segment Important Highlights Profit after tax up 34.76% to 3,388.49 crores Net Interest Income up 31.14% to 6,562.99 crores Deposits up 33.93% to 189,237.80 crores Advances up 36.48% to 142,407.83 crores Net NPA ratio as a percentage of net customer assets down to 0.26% from 0.36% Capital Adequacy Ratio stood at 12.65% as against the minimum regulatory norm of 9%
CONCLUSIONS ? Public sector banks in comparison to private sector banks are more adversely affected by NPA problem which is shown by higher net NPA ratio. This is partly due to prudential norms on public sector banks which have social responsibility to fund new projects for economy to grow. In this process public sector banks advance sub standard loans thereby making some part of loan unrecoverable resulting in higher NPA. Also, better IT systems used in private sector banks help them to gauge risk in a better manner and thus are able to avoid advancing of loans which may turn out to be non performing. Looking at the NPAs of given public and private sector banks, it can be clearly seen that major chunk of NPA for these banks is from agricultural sector and for public sector banks; it is an issue of concern. HDFC has been able to maintain its asset quality better as compared to other banks. Also its recoverability of bad loans is better which is partly due to the restructuring of loans in a much efficient manner. Allahabad bank is one public sector bank which has implemented number of steps to improve its quality of loans and to decrease NPA. Such steps are found missing in other banks.
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SUGGESTIONS ? Asset restructuring companies: The word asset reconstruction company is a typical Indian word - the global equivalent of which is asset management companies. The word "asset reconstruction" in India owes its origin to Narsimham I which envisaged the setting up of a central Asset Reconstruction Fund with money contributed by the Central Government, which was to be used by banks to shore up their balance sheets to clean up their non-performing loans. Advantages of ARC are: 1. Centralisation of bad loans in one or a few hands and therefore obviously more clout. 2. It is possible to give special legislative powers to a few AMCs rather than to each bank 3. Banks are left with cleaner balance sheets and do not have to deal with problem clients. Regular banking relations with the group are not affected. 4. Because it deals with a larger portfolio, it can mix up good assets with bad ones and make a sale which is palatable to buyers. 5. It is easier to do a capital-market based funding for an AMC than for the banks themselves. Banks should obey the RBI norms and provide facilities as per the norms, which are not being followed by the banks. While the customer must be given prompt services and the bank officer should not have any fear on mind to provide the facilities as per RBI norms to the units going sick.
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Effective and regular follow-up of the end use of the funds sanctioned is required to ascertain any embezzlement or diversion of funds. This process can be undertaken every quarter so that any account converting to NPA can be properly accounted for. Combining traditional wisdom with modern statistical tools like Value-at-risk analysis and Markov Chain Analysis should be employed to assess the borrowers. This is to be supplemented by information sharing among the bankers about the credit history of the borrower. In case of new borrowers, especially corporate borrowers, proper analysis of the cash flow statement of last five years is to be done carefully. A healthy Banker-Borrower relationship should be developed. Many instances have been reported about forceful recovery by the banks, which is against corporate ethics. Debt recovery will be much easier in a congenial environment. Countries such as Korea, China, Japan, Taiwan have a well functioning Asset reconstruction/Recovery mechanism wherein the bad assets are sold to an Asset Reconstruction Company (ARC) at an agreed upon price. In India, there is an absence of such mechanism and whatever exists, it is still in nascent stage. One problem that can be accorded is the pricing of such loans. Therefore, there is a need to develop a common prescription for pricing of distressed assets so that they can be easily and quickly disposed. The ARCs should have clear ‘financial acquisition policy’ and guidelines relating to proper diligence and valuation of NPA portfolio. Some tax incentives like capital gain tax exemption, carry forward the losses to set off the same with other income of the Qualified Institutional Borrowers (QIBs) should be granted so as to ensure their active participation by way of investing sizeable amount in distressed assets of banks and financial institutions. So far the Public Sector Banks have done well as far as lending to the priority sector is concerned. However, it is not enough to make lending to this sector mandatory; it must be made profitable by sharply reducing the transaction costs. This entails faster embracing of technology and minimizing documentation. Commercial Banks should be allowed to come up with their own measures to address the problem of NPAs. This may include waiving and reducing the principal and interest on such loans, or extending the loans, or settling the loan accounts. They should be fully authorized and they should be able to apply all the preferential policies granted to the asset management companies. Another way to manage the NPAs by the banks is Compromise Settlement Schemes or One Time Settlement Schemes. However, under such schemes the banks keep the actual amount recovered secret. Under these circumstances, it is necessary to bring more transparency in such deals so that any flaw could be removed.
Sources of data and information: 1. Annual reports of SBI, Bank of Baroda, Axis Bank, HDFC, Allahabad Bank 2. RBI circulars on NPA
doc_731797176.docx
non performing assets and gives classification of non performing assets. It also gives narsimhan committee's recommendation for NPAs. It also explains the reasons for NPAs and gives guidelines of government and RBI for reduction of NPAs.
BANK MANAGAMENT
MANAGEMENT OF NON-PERFORMING ASSETS
Date
INTRODCUTION For banks good loans are the most profitable assets. Returns come in the form of loan interest, fee income and investments. The most costly risk is the inability of the borrower to repay the borrowed amount. Proper management and speedy disposal of NPAs is one of the most critical tasks of banks today. The problem of Non Performing Assets [NPAs] in banks and financial institutions has been a matter of grave concern not only for the banks but also for the real economy in general, as NPAs can choke further expansion of credit which would impede the economic growth of the country. Any bottleneck in the smooth flow of credit is bound to create adverse repercussions in the economy. NPAs are not therefore the concern of only lenders but also the public at large. 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 insurability 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. DEFINITION OF NON PERFORMING ASSETS An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A ‘non performing asset’ was defined as a credit facility in respect of which the interest and / or instalment of principal had remained ‘past due’ for a specified period of time. The specified period was reduced in a phased manner as under: Year ending March 31 Specified period 1993 Four Quarters 1994 Three Quarters 1995 Onwards Two quarters An amount due under any credit facility is treated as ‘past due’ when it has not been paid within 30 days from the due date. Due to the improvements in the payment and settlement systems, recovery climate, up gradation of technology in the banking sector, etc, it was decided to dispense with the ‘past due’ concept, with effect from 31st March, 2001.
Accordingly, as from that date, a NPA shall be an advance where, 1. Interest and/or instalment of principal remain overdue for a period of more than 180 days in respect of a term loan. 2. The account remains ‘out of order’ for a period of more than 180 days, in respect of an overdraft/cash credit. 3. Interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agriculture purposes. 4. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. With a view to move towards international best practices, it has been decided to adopt the ’90 days’ overdue norm for identification of NPAs, from 31st March, 2004. ‘Out of Order’ Status An account should be treated as ‘out of order’ if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for six months as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as ‘out of order’. ‘Overdue’ Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank. CLASSIFICATION OF NPAs Banks are required to classify NPAs further into the following three categories based on the period for which the asset has remained non-performing and the reliability of the dues: 1. Sub-standard Assets: A sub-standard asset is one which has remained NPA for a period less than or equal to 18 months. In such cases, the current net worth of the borrower, or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. Such assets will have well defined credit weakness that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the bank will sustain a loss. 2. Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding 18 months. It has all the weaknesses inherent to a sub-standard asset with the added characteristic that the collection or liquidation in full – on the basis of currently known facts – is highly questionable and improbable. 3. Loss Assets: A loss asset is one where a loss has been identified by the bank or, internal or external auditors but the amount has not been written off wholly
GUIDELINES FOR CLASSIFICATION OF NPAs Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. ? ? Accounts with temporary deficiencies: These should be classified based on the past recovery records. Accounts regularize near about the balance sheet date: These accounts should be handled with care and without scope for subjectivity. Where the account indicates inherent weakness based on available data, it should be deemed as an NPA. Asset classification should be borrower-wise and not facility-wise: If a single facility to a borrower is classified as NPA, others should also be classified the same way, as it is difficult to envisage only a solitary facility becoming a problem credit and not others. Advances under consortium arrangements: Classification here should be based on the recovery record of the individual member banks. Accounts where there is erosion in the value of the security: If there is a significant (i.e. the realizable value of the security is less than 50% of that assessed by the bank during acceptance) the account may be classified as NPA.
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NPA: SOME ASPECTS AND ISSUES ? The NPAs of banks in India are considered to be at higher levels than those in other countries. This issue has attracted attention of public as also of international financial institutions and has gained further prominence in the wake of transparency and disclosure measures initiated by RBI during recent years. ? The NPA Management Policy document of SBI lays down to contain net NPAs to less than 5% of bank's total loan assets in conformity with the international standard. It is, therefore necessary that as per guidelines provided in NPA Management Policy document, every effort is made at all levels to cut down the NPAs. All this requires greater efforts and teamwork. ? It is essential to keep a constant watch over the non-performing assets not just to keep it performing but also that once they become non-performing, effective measures are initiated to get full recovery and where this is not possible, the various means are to be initiated to get rid of the NPAs from the branch books. ? NPAs adversely affect the wealth condition of the branch advances as also the profitability of the branch. Some of the reasons for this are as under: a) Interest cannot be applied on the loan accounts classified as NPAs. b) The Branch 'has to pay interest to central office on outstanding classified as NPA. c) The Branch has to incur cost in supervision and follow up of such advances. d) Provision has to be made on NPAs at Bank level. ? Under Income Recognition, Assets Classification and provisioning, NPA may be Sub standard, Doubtful or loss assets.
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Once the assets are classified as NPA, the Branch Manager has to take all the necessary steps to get the dues recovered there-under to maintain the good health of advances and the higher profitability at the-Branch. This requires management of NPAs in such a Planned and scientific manner that the percentage of NPAs to the total advances will be minimum.
NARSIMHAN COMMITTEE’S RECOMMENDATIONS Committee on Financial System (CFS) Narsimhan committee which reported in 1991, meanwhile major changes have taken place in the domestic, economic and institutional science, indicating the movement towards global integration of financial services. Committee has presented second generation reforms. a. To strength the foundation of financial system. b. Related to this, streamlining procedures, upgrading technology and human resource development. c. Structural changes in the system. 1. It is recommended that an asset be classified as doubtful if it is in the sub standard category for 18 months in the first instance and eventually for 12 months as loss if it has been so identified but not written off. These norms, which should be regarded as the minimum, may be brought into force in a phased manner. 2. Corporations and FIs should avoid the practice of "ever greening" by making fresh advances to their troubled constituents only with a view to settling interest dues and avoiding classification of the loans in question as NPAs. The committee notes that the regulatory and supervisory authorities are paying particular attention to such breaches in the adherence to the spirit of the NPA definitions and are taking appropriate corrective action. 3. The committee believes that objective should be to reduce the average level of net NPAs for all banks to below 5% by the year 2000 and 3% by 2002. These targets cannot be achieved in the absence of measure to tackle the problem of backlog NPAs on one time basis and the implementation of strict prudential norms and management efficiency. 4. There is no denying the fact that any effort at financial restructuring in the form of having off NPAs portfolio from the books of the corporation or measures to initiate the impact of high level of NPAs must go hand with operational restructuring. Cleaning up the balance sheets of banks would thus make sense only if simultaneous steps are taken to prevent of limit the re emergence of new NPAs. 5. Direct credit has a proportionately higher share in NPA portfolio of corporations and has been one of the factors in erosion in the quality of asset portfolio. There is a continuing need of Financial Corporations to extend Credit to SSI sector, which is important segment of national economy but on commercial considerations and on basis of credit worthiness. Government feels reluctant to accept the recommendation for reducing the scope of directed credit under priority sector because tiny sector of industry and small businesses have problems with regard to obtaining credit and some remaining may be necessary for this sector. A poverty alleviation and employment
generation schemes. Given the special needs of these sectors, the current practice may continue. 6. With regard to income recognition in India, income stops occurring when interest/instalment of principal is not paid within 180 days. However, we should move towards international Practices in this regard and introduce the norm of 90 days in a phased manner by the 2002. 7. As an incentive to Bank is to make specific provision, the consideration be given to making such provisions tax deductible. 8. Banks should pay greater attention to asset liability management to avoid mismatch and to cover, among others, liquidity and interest rate risks. 9. It should be encouraged to adopt statistical risk management techniques like value at risk in respect of balance sheet term which are susceptible to market price fluctuation, forex rate volatility and interest rate changes. While the RBI and IDBI may initially, prescribe certain normative models for market risk management, the ultimate objective should be that of building up their models and RBI blacklisting them for their validity on a periodical basis. 10. There is a need for a greater use of computerized system than at present. Computerization has to be recognized as an indispensable tool for improvement in customer service, the institution and operation of better control systems, greater efficiency in information technology. 11. State Financial Corporations at present are over regulated and over administered. Supervision should be based on evolving prudential norms and regulations which should be adhered to rather than excessive control over administrative and other aspects of organisation and functioning. Internal audit and internal inspection systems should be strengthened. 12. The main issues with regard to operations of Bank’s are to ensure operational flexibility and measure of competition and adequate internal autonomy in matters of loan sanctioning and internal administration. REASONS FOR RISE IN NPAs The banking sector has been facing the serious problems of the rising NPAs. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks. The NPAs in PSB are growing due to external as well as internal factors. EXTERNAL FACTORS ? Ineffective recovery tribunal The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, their by reducing their profitability and liquidity. ? Wilful Defaults There are borrowers who are able to pay back loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans.
Natural calamities This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans. ? Industrial sickness Improper project handling , ineffective management , lack of adequate resources , lack of advance technology , day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity. ? Lack of demand Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the non recovered part as NPAs and has to make provision for it. ? Change on Govt. policies With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. E.g. the fallout of handloom sector is continuing as most of the weavers’ Cooperative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central govt to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs. INTERNAL FACTORS ? Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks since long. 1. Principles of safety 2. Principle of liquidity 3. Principles of profitability ? Inappropriate technology Due to inappropriate technology and management information system, market driven decisions on real time basis cannot be taken. Proper MIS and financial accounting system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerised. ? Improper swot analysis The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower.
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Banks should consider the borrowers own capital investment. It should collect credit information of the borrowers. Bank should analyse the profitability, viability, long term acceptability of the project while financing. Poor credit appraisal system Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs. Managerial deficiencies The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the marketability, acceptability, safety and transferability. Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to wilful defaulters can be collected by regular visits. Re loaning process Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle.
GUIDELINES OF GOVERNMENT AND RBI FOR REDUCTION OF NPAs 1. Compromise settlement schemes: The RBI/Government of India have been constantly goading the banks to take steps for arresting the incidence of fresh NPAs and have also been creating legal and regulatory environment to facilitate the recovery of existing NPAs of banks. More significant of them, we would like to recapitulate at this stage, ? The broad framework for compromise or negotiated settlement of NPAs advised by RBI in July 1995 continues to be in place. Banks are free to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements with the approval of their Boards, particularly for old and unresolved cases falling under the NPA category. The policy framework suggested by RBI provides for setting up of an independent Settlement Advisory Committees headed by a retired Judge of the High Court to scrutinise and recommend compromise proposals. ? Specific guidelines were issued in May 1999 to public sector banks for one time nondiscretionary and non discriminatory settlement of NPAs of small sector. The scheme was operative up to September 3, 2000. [Public sector banks recovered Rs. 668 crore through compromise settlement under this scheme]. ? Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5 crore and less as on 31 March 1997. [The above guidelines which were valid up to June 30, 2001helped the public sector banks to recover Rs. 2600 crore by September 2001]. 2. An OTS Scheme covering advances of Rs. 25000 and below continues to be in operation and guidelines in pursuance to the budget announcement of the Hon'ble
Finance Minister providing for OTS for advances up to Rs. 50,000 in respect of NPAs of small/marginal farmers are being drawn up. 3. Lok Adaltas: Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and "loss" category, with outstanding balance of Rs. 5 lakh for compromise settlement under Lok Adalats. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to decide on cases of NPAs of Rs. 10 lakhs and above. The public sector banks had recovered Rs. 40.38 crore as on September 30, 2001, through the forum of Lok Adalat. The progress through this channel is expected to pick up in the coming years particularly looking at the recent initiatives taken by some of the public sector banks and DRTs in Mumbai. 4. Debt Recovery Tribunals: The Recovery of Debts due to Banks and Financial Institutions (amendment) Act, passed in March 2000 has helped in strengthening the functioning of DRTs. Provisions for placement of more than one Recovery Officer, power to attach defendant's property/assets before judgement, penal provisions for disobedience of Tribunal's order or for breach of any terms of the order and appointment of receiver with powers of realization, management, protection and preservation of property are expected to provide necessary teeth to the DRTs and speed up the recovery of NPA sin the times to come. Though there are 22 DRTs set up at major centres in the country with Appellate Tribunals located in five centres viz. Allahabad, Mumbai, Delhi, Calcutta and Chennai, they could decide only 9814 cases for Rs. 6264.71 crore pertaining to public sector banks since inception of DRT mechanism and till September 30, 2001. The amount recovered in respect of these cases amounted to only Rs. 1864.30 crore. 5. Circulation of information on defaulters The RBI has put in place a system for periodical circulation of details of wilful defaults of borrowers of banks and financial institutions. This serves as a caution list while considering requests for new or additional credit limits from defaulting borrowing units and also from the directors/proprietors/partners of these entities. RBI also publishes a list of borrowers (with outstanding aggregating Rs. 1 crore and above) against whom suits have been filed by banks and FIs for recovery of their funds, as on 31st March every year. It is our experience that these measures had not contributed to any perceptible recoveries from the defaulting entities. However, they serve as negative basket of steps shutting off fresh loans to these defaulters. We strongly believe that a real breakthrough can come only if there is a change in the repayment psyche of the Indian borrowers. 6. Recovery action against large NPAs After a review of pendency in regard to NPAs by the Hon'ble Finance Minister, RBI had advised the public sector banks to examine all cases of wilful default of Rs 1crore
and above and file suits in such cases, and file criminal cases in regard to wilful defaults. Board of Directors are required to review NPA accounts of Rs. 1 crore and above with special reference to fixing of staff accountability. On their part RBI and the government are contemplating several supporting measures including legal reforms. 7. Corporate Debt Restructuring (CDR) Corporate Debt Restructuring mechanism has been institutionalised in 2001 to provide a timely and transparent system for restructuring of the corporate debts of Rs.20 crore and above with the banks and financial institutions. The CDR process would also enable viable corporate entities to restructure their dues outside the existing legal framework and reduce the incidence of fresh NPAs. The CDR structure has been headquartered in IDBI, Mumbai and a Standing Forum and Core Group for administering the mechanism had already been put in place. The experiment however has not taken off at the desired pace though more than six months have lapsed since introduction. As announced by the Hon'ble Finance Minister in the Union Budget2002-03, RBI has set up a high level Group under the Chairmanship of Shri VepaKamesam, Deputy Governor, RBI to review the implementation procedures of CDR mechanism and to make it more effective. The Group will review the operation of the CDR Scheme, identify the operational difficulties, if any, in the smooth implementation of the scheme and suggest measures to make the operation of the scheme more efficient. 8. Credit Information Bureau Institutionalisation of information sharing arrangements through the newly formed Credit Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalize the scheme of information dissemination on defaults to the financial system. The main recommendations of the Group include dissemination of information relating to suitfiled accounts regardless of the amount claimed in the suit or amount of credit granted by a credit institution as also such irregular accounts where the borrower has given consent for disclosure. This, I hope, would prevent those who take advantage of lack of system of information sharing amongst lending institutions to borrow large amounts against same assets and property, which had in no small measures contributed to the incremental NPAs of the bank. 9. Proposed guidelines on wilful defaults/diversion of funds RBI is examining the recommendation of Kohli Group on wilful defaulters. It is working out a proper definition covering such classes of defaulters so that credentials to this group of borrowers can be made effective and criminal prosecution can be made demonstrative against wilful defaulters.
10. Corporate Governance A Consultative Group under the chairmanship of Dr. A. Ganguly was set up by the Reserve Bank to review the supervisory role of Boards of Banks and financial institutions and to obtain feedback on the functioning of the Boards vis-à-vis compliance, transparency, disclosure, audit committees etc. and make recommendations for making the role of Board of Directors more effective with a view to minimising risks and overexposure. The group is finalising its recommendations shortly and may come out with guidelines for effective control and supervision by bank boards over credit management and NPA prevention measures. 11. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 The Act provides, inter alia for enforcement of security interest for realisation of dues without the intervention of courts or tribunals. The Security Interest (Enforcement) Rules, 2002 has also been notified by Government to enable Secured Creditors to authorise their officials to enforce the securities and recover the dues from the borrowers. As on June 30, 2004, 27 public sector banks had issued 61, 263 notices involving outstanding amount of Rs. 19,744 crore, and had recovered an amount of Rs. 1,748 crore from 24,092 cases. BANKWISE NPAs OF SCHEDULED COMMERCIAL BANKS-2006 Bank Name Gross NPA Gross Advances Gross NPA Ratio State Bank of India 1037575 26745825 3.9 Allahabad Bank 118383 3006122 3.9 Bank of Baroda 23904 6136043 3.9 Bank of India 247918 6666223 3.7 PNB 313829 7650114 4.1 Punjab & Sind Bank 94150 979992 9.6 ICICI 222258 14762531 1.5 HDFC 49651 3540258 1.4 Kotak Mahindra 3991 637292 0.6 IDBI Ltd. 111552 5632228 2 Dena Bank 94940 1474779 6.4 Bank of Ceylon 3279 6993 46.9 Societe Generale 531 27617 1.9 Yes Bank 240709 0
Source: Department of Banking Supervision, RBI
NPA of Public sector banks
Source: International journal of innovation, Management & Technology, Vol 2, No. 3 , June 2011
NPA IN ALLAHABAD BANK 2011 Net NPA (%) 0.79
2010 0.66
2009 0.72
For year 2011 sector wise NPA for Allahabad bank is as follows, Agriculture and allied activities 4.06% MSME 0.77% Services 4.29% Personal Loans 1.29% The Bank attached great importance on recovery of nonperforming assets. The Bank has recovered Rs 929.16 cr from non performing assets including written off debts during 201011 as against Rs 681.35 cr in 2009-’10.
Steps taken by Allahabad Bank to reduce NPA, ? All Regional Heads have been authorised by the board to issue notices and exercise rights and powers under the Act. Detailed guidelines on the provisions of act and rules along with formats of the notices have been issued to all regional heads from time to time. ? Region wise list of values have been approved by the Board as per the requirement under the rules. ? In case the borrowers fail to repay the dues within 60 days notice period, the Regional head have been advised to take all steps for taking possession of the secured assets and give wide publicity of the same through media, besides, publication of the possession notice in the newspaper in terms of the rules.
The recovery and up gradation efforts are executed through a separate Recovery and Rehabilitation Department. ? Credit monitoring system has been revamped. ? High value NPAs are reviewed individually. ? An incentive scheme has been launched to better the NPA recovery. ? Best use of new ordinance to recover Bank’s dues. Five-point short-term strategies ? All potential NPA accounts must be critically reviewed and monitored so as to sustain them as performing assets ? All potential performing asset accounts where up gradation or cash recovery is possible should be followed up vigorously ? Emphatic stress should be given on all compromise settled cases for recovery of dues as per agreed terms ? Execution of Decrees and recovery thereof should be ensured. ? All recovery proceedings before DRTs should be followed up for recovery of dues expeditiously NPA IN BANK OF BARODA 2011 Net NPA (%) 0.35
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2010 0.34
Percentage of NPAs to total advances in that sector 2011 Agriculture and allied activities 3.47% MSME 1.76% Services 1.22% Personal Loans 1.72%
2010 3.33% 1.06% 0.82% 3.68%
While the Indian banking industry continued to reel under the pressure of stressed asset quality, Bank of Baroda (BOB) could again restrict its Gross NPA to 1.36% and Net NPA to 0.35% during 2010-11, thanks to its robust systems of credit origination, credit monitoring and asset recovery. The Bank’s Incremental Delinquency Ratio too was contained at 1.09% during the year under review. BOB’s rigorous follow up of all NPA accounts and timely response to early warning signals resulted in Cash Recovery of Rs 455.49 crore. It could upgrade accounts to the tune of Rs 189.17 crore to standard category. Moreover, BOB recovered Rs 272.66 crore from the prudentially written off accounts. BOB’s NPA Coverage Ratio (including technical write-off) stood at the rich level of 85.0% in 201011 as against the regulatory requirement of 70.0%.
NPA IN STATE BANK OF INDIA 2011 Net NPA (%) 2.04
2010 1.7
Break up of NPAs
DISTRIBUTION OF OUTSTANDING ADVANCES OF PUBLIC SECTOR BANKS TO AGRICULTURE - 2010 (No. of Accounts in lakh and Amount in Rs. crore) Bank Group / Bank State Bank Group Total Agricultural Advances No.of Amount Accounts outstanding 110.10 117225 Direct Agricultural Advances No.of Amount Accounts outstanding 108.47 89018 Indirect Agricultural Advances No.of Amount Accounts outstanding 1.62 28208
DISTRIBUTION OF OUTSTANDING ADVANCES OF PUBLIC SECTOR BANKS TO MICRO CREDIT, STATE SPONSORED ORGANISATIONS, EDUCATION AND HOUSING – 2010 (No. of Accounts in lakh and Amount in Rs. crore)
Bank Group / Bank
Micro Credit(other than for agriculture & allied activities) No. of A/Cs Amount outstanding
State Sponsored Organisations for SC/ST No.of A/Cs Amount outstanding No.of A/Cs
Education
Housing
Amount outstanding
No.of A/Cs
Amount outstanding
State Bank Group
2.37
84
0.04
4
6.25
12774
16.71
71113
DISTRIBUTION OF OUTSTANDING DIRECT AND INDIRECT ADVANCES OF PUBLIC SECTOR BANKS TO SMALL ENTERPRISES - 2010 (No. of Accounts in lakh and Amount in ` crore) As on the last reporting Friday of March Total credit to Small Direct Credit to Small Indirect Credit to Small Enterprises including Enterprises Enterprises Bank Group manufacturing & / Bank services enterprises No. of Amount No. of Amount No. of Amount Accounts Outstanding Accounts Outstanding Accounts Outstanding State Bank Group 27.89 70894 27.89 70894 -
Summary of SBI NPAs since Mar 06 as a % of its total assets.(In Rs Crores)
11-Mar Gross Non-Performing Assets Net Non Performing Assets % of Net NonPerforming Assets to Net Advance Total Assets YOY increase in NPA Net NPA as a % of total assets Gross NPA as a % of total assets 25,326.29 12,346.90 10-Mar 19,534.89 10,870.17 09-Mar 15,714.00 9,677.42 08-Mar 12,837.34 7,424.33 07-Mar 9,998.22 5,257.72 06-Mar 9,628.14 4,911.41
1.63 12,24,693.81 13.59% 1.01% 2.07%
1.72 10,53,956.61 12.33% 1.03% 1.85%
1.79 9,65,042.96 30.35% 1.00% 1.63%
1.78 7,22,125.08 41.21% 1.03% 1.78%
1.56 5,66,806.13 7.05% 0.93% 1.76%
1.88 4,94,160.62 -8.18% 0.99% 1.95%
COMPOSITION OF NPAs OF State Bank Of India - 2002 TO 2011 (Amount in Rs. crore) Priority Sector Amount B. State Bank of India & its Associates 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Per cent share 47.01 47.49 47.07 47.39 54.95 57.15 58.49 47.26 50.11 55.32 As on March 31 Non-Priority Sector Amount Per cent share Public Sector Amount Per cent share 2.56 3.10 1.45 1.13 0.95 1.50 0.63 0.99 1.12 0.02 Total Amount
Bank Groups / Years
8977 8053 7136 7017 7250 7175 8902 8447 10940 15567
9628 8379 7803 7624 5819 5193 6222 9250 10646 12567
50.42 49.41 51.48 51.48 44.10 41.36 40.88 51.75 48.77 44.66
490 526 220 168 125 188 97 177 244 6
19095 16958 15159 14808 13193 12556 15220 17874 21831 28140
NPA IN HDFC Bank Ltd Particulars regarding nonperforming assets for the last three years Particulars Gross advances 2009 10023935 2010 12583060 2011 15998267
Gross NPA Gross NPA % Net NPA %
198392 1.98
181676 1.43% 0.3%
169434 1.05% 0.2%
Sector-wise NPAs Non-performing assets as percentage of total assets in that sector is set out below: Particulars Percentage of NPAs to Total Advances in that sector (%) March 31 2011 March 31 2010 0.54% 0.91% 0.67% 1.59% 0.55% 1.46% 3.86% 1.11%
Agriculture and allied activities Industry (Micro & small, Medium and Large) Services Personal Loans
ASSET QUALITY Asset quality continued to remain healthy with gross non-performing assets as on March 31, 2011 at 1.1% of gross advances as against 1.4% at the end of the previous year. The ratio of net non-performing assets to net advances as of March 31, 2011 was at 0.2%, down from 0.3% as at March 31, 2010. The Bank’s provisioning policies for specific loan loss provisions remained higher than regulatory requirements. The NPA coverage ratio based on specific provisions (not including write-offs, technical or otherwise) was at 82.5% as on March 31, 2011 while that on March 31, 2010 was 74.8%. Total restructured loans (including applications received and under process for restructuring) were at 0.4% of gross advances of which 0.1% were restructured loans classified as NPAs as on March 31, 2011.
NPA IN ICICI Bank Ltd Particulars regarding nonperforming assets for the last three years:Year ended March31, 2009 March31, 2010 March31, 2011 Gross NPA 98.03 96.27 101.14 Net NPA 46.19 39.01 24.58 Net customer % of net NPA to net Asset customer assets 2,358.24 1.96% 2,091.22 1.87% 2,628.16 0.94%
At March 31, 2011, the gross non-performing assets (net of write-offs, interest suspense and derivatives income reversal) were ` 101.14 billion compared to ` 96.27 billion at March 31, 2010. The increased level of non-performing assets was after taking into consideration the additions to gross NPA (` 4.11 billion) arising out of the amalgamation of Bank of Rajasthan with effect from close of business at August 12, 2010. Net non-performing assets were ` 24.58 billion at March 31, 2011 compared to ` 39.01 billion at March 31, 2010. The ratio of net non-performing assets to net customer assets decreased from 1.87% at March 31, 2010 to 0.94% at March 31, 2011. During fiscal 2011, we wrote-off NPAs, including retail NPAs, with an aggregate outstanding of ` 2.29 billion against ` 28.48 billion during fiscal 2010. Classification of Non-Performing Assets by Industry The following table sets forth, at March 31, 2010 and March 31, 2011, the composition of gross non-performing assets by industry sector. ( in billion, except percentages)March 20 10 March 31, 2011 March 31,2010 Amount % 64.73 67.2% 2.17 2.3 March 31, 2011 Amount % 66.35 65.6% 3.85 3.8
Retail finance Wholesale/retail
trade Food and beverages Services – finance Textiles Chemicals and fertilisers Metal and metal products Electronics and engineering Automobiles Paper and paper products Services – non finance Power Iron/steel and products Shipping Other Industries Total
1.62 2.43 1.90 2.47 0.68 0.69 0.59 0.03 0.38 0.14 1.43 0.01 17.00 96.27
1.7 2.5 2.0 2.6 0.7 0.7 0.6 0 0.0 0.4 0.1 1.5 0.0 17.7 100.0%
2.88 2.30 2.25 2.05 1.30 0.68 .55 0.46 0.38 0.18 0.17 0.06 17.68 101.14
2.9 2.3 2.2 2.0 1.3 0.7 0.5 0.5 0.4 0.2 0.2 0.1 17.3 100.0%
NPA IN AXIS BANK Net non-performing assets to net advances are set out below: 31 March, 2011 (%) 0.29 31 March, 2010 (%) 0.40
Net non performing assets as a percentage of net advances Non-performing assets as percentage of total assets in that sector is set out below: Sr. No. 1. 2. Sector Agriculture and allied activities Industry (Micro & Small, Medium and Large) Services* Personal loans 31 March, 2011 (%) 2.56 1.15
31 March, 2010 (%) 2.31 0.95
3. 4.
0.21 1.38
0.69 1.86
* includes nil (previous year 0.06%) NPAs in respect of commercial real estate and 0.11% (previous year 0.39%) in respect of trade segment Important Highlights Profit after tax up 34.76% to 3,388.49 crores Net Interest Income up 31.14% to 6,562.99 crores Deposits up 33.93% to 189,237.80 crores Advances up 36.48% to 142,407.83 crores Net NPA ratio as a percentage of net customer assets down to 0.26% from 0.36% Capital Adequacy Ratio stood at 12.65% as against the minimum regulatory norm of 9%
CONCLUSIONS ? Public sector banks in comparison to private sector banks are more adversely affected by NPA problem which is shown by higher net NPA ratio. This is partly due to prudential norms on public sector banks which have social responsibility to fund new projects for economy to grow. In this process public sector banks advance sub standard loans thereby making some part of loan unrecoverable resulting in higher NPA. Also, better IT systems used in private sector banks help them to gauge risk in a better manner and thus are able to avoid advancing of loans which may turn out to be non performing. Looking at the NPAs of given public and private sector banks, it can be clearly seen that major chunk of NPA for these banks is from agricultural sector and for public sector banks; it is an issue of concern. HDFC has been able to maintain its asset quality better as compared to other banks. Also its recoverability of bad loans is better which is partly due to the restructuring of loans in a much efficient manner. Allahabad bank is one public sector bank which has implemented number of steps to improve its quality of loans and to decrease NPA. Such steps are found missing in other banks.
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SUGGESTIONS ? Asset restructuring companies: The word asset reconstruction company is a typical Indian word - the global equivalent of which is asset management companies. The word "asset reconstruction" in India owes its origin to Narsimham I which envisaged the setting up of a central Asset Reconstruction Fund with money contributed by the Central Government, which was to be used by banks to shore up their balance sheets to clean up their non-performing loans. Advantages of ARC are: 1. Centralisation of bad loans in one or a few hands and therefore obviously more clout. 2. It is possible to give special legislative powers to a few AMCs rather than to each bank 3. Banks are left with cleaner balance sheets and do not have to deal with problem clients. Regular banking relations with the group are not affected. 4. Because it deals with a larger portfolio, it can mix up good assets with bad ones and make a sale which is palatable to buyers. 5. It is easier to do a capital-market based funding for an AMC than for the banks themselves. Banks should obey the RBI norms and provide facilities as per the norms, which are not being followed by the banks. While the customer must be given prompt services and the bank officer should not have any fear on mind to provide the facilities as per RBI norms to the units going sick.
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Effective and regular follow-up of the end use of the funds sanctioned is required to ascertain any embezzlement or diversion of funds. This process can be undertaken every quarter so that any account converting to NPA can be properly accounted for. Combining traditional wisdom with modern statistical tools like Value-at-risk analysis and Markov Chain Analysis should be employed to assess the borrowers. This is to be supplemented by information sharing among the bankers about the credit history of the borrower. In case of new borrowers, especially corporate borrowers, proper analysis of the cash flow statement of last five years is to be done carefully. A healthy Banker-Borrower relationship should be developed. Many instances have been reported about forceful recovery by the banks, which is against corporate ethics. Debt recovery will be much easier in a congenial environment. Countries such as Korea, China, Japan, Taiwan have a well functioning Asset reconstruction/Recovery mechanism wherein the bad assets are sold to an Asset Reconstruction Company (ARC) at an agreed upon price. In India, there is an absence of such mechanism and whatever exists, it is still in nascent stage. One problem that can be accorded is the pricing of such loans. Therefore, there is a need to develop a common prescription for pricing of distressed assets so that they can be easily and quickly disposed. The ARCs should have clear ‘financial acquisition policy’ and guidelines relating to proper diligence and valuation of NPA portfolio. Some tax incentives like capital gain tax exemption, carry forward the losses to set off the same with other income of the Qualified Institutional Borrowers (QIBs) should be granted so as to ensure their active participation by way of investing sizeable amount in distressed assets of banks and financial institutions. So far the Public Sector Banks have done well as far as lending to the priority sector is concerned. However, it is not enough to make lending to this sector mandatory; it must be made profitable by sharply reducing the transaction costs. This entails faster embracing of technology and minimizing documentation. Commercial Banks should be allowed to come up with their own measures to address the problem of NPAs. This may include waiving and reducing the principal and interest on such loans, or extending the loans, or settling the loan accounts. They should be fully authorized and they should be able to apply all the preferential policies granted to the asset management companies. Another way to manage the NPAs by the banks is Compromise Settlement Schemes or One Time Settlement Schemes. However, under such schemes the banks keep the actual amount recovered secret. Under these circumstances, it is necessary to bring more transparency in such deals so that any flaw could be removed.
Sources of data and information: 1. Annual reports of SBI, Bank of Baroda, Axis Bank, HDFC, Allahabad Bank 2. RBI circulars on NPA
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