A Project Report on “Non Performing Asset Management of Indian Banks”
in partial fulfillment of the requirements of Master of Management Studies Conducted by University of Mumbai through Rizvi Institute of Management Studies & Research
under the guidance of Prof. Vishal Singhi
Submitted by Abid Husein Saleh MMS Finance Roll No 10 Batch: 2011 – 2013.
Table of Figures
Figure 2.01 Figure 3.01 Figure 3.02 Figure 3.03 Figure 3.04 Basel III Standard Provision Requirement for Doubtful Assets Comparison of NPA of Banking sector Gross Non-Performing Assets As Percentage of Gross Advances Net Non-Performing Assets As Percentage Of Net Advances
9 15 18 24 24
Table of Charts
Chart 3.01 Chart 3.02 Chart 3.03 Chart 3.04 Chart 3.05 Chart 3.06 Chart 3.07 Chart 3.08 Chart 3.09 Chart 3.10 Chart 3.11 Chart 3.12 Chart 3.13 Growth Rate of NPA vis-à-vis Advances Gross NPAs as percentage of Gross Advances Trend in important Ratios Relating to NPAs Bank Group-wise Ratios Relating to NPAs Restructured Advances as per cent of Gross Advances of SCBs Restructured Advances as per cent of Gross Advances: Bank Group-wise Classification of Loan Assets – Bank Group-wise Gross NPA Ratio (Priority Sector) Bank Group-wise Gross NPA Ratio (Non-Priority Sector) Bank Group-wise Percentage Composition of NPAs of SCBs Restructured Standard Advances to Gross Total Advances Trend in number and value of cases under CDR Industry-wise break-up of value under CDR - June 2012
17 19 19 20 20 21 22 23 23 24 27 28 28
Acknowledgement
At the outset, I wish to convey my sincere my sincere thanks to Rizvi Institute of Management Studies and Research and all my teachers for their valuable help.
Further I find words inadequate to express my deep sense of gratitude and humble regards to Prof. Vishal Singhi for his guidance and encouragement during the project work which would not have been possible without his help and affectionate attitude.
I would also like to thank our director Dr. Kalim Khan for giving me extensive support in completion of the project and all the people who helped and assisted me wherever and whenever I needed their help by giving their precious time and valuable suggestions to me.
Last but not least I would like to give my sincere regards to all my friends for their kind cooperation towards completion of my project.
Abid Husein Saleh MMS-Finance Roll No-10
Executive Summary
A healthy banking system is essential for any economy striving to achieve growth and remain stable in competitive global business environment. Indian banks are favorable on growth, asset quality and profitability. RBI and Government have made some notable changes in policies and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations of commercial banks. In terms of quality of assets and capital adequacy, these banks have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. PSBs need to strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organizational performance ethic & strengthen human capital.
Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak
corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless industry utilities and service bureaus. One of the major drawbacks of SCBs is its NPAs.
The best indicator for the health of the banking industry in a country is its level of Nonperforming assets (NPAs). NPAs are one of the major concerns for banks in India. It reflects the performance of banks. Reduced NPAs generally gives the impression that banks have strengthened their credit appraisal processes over the years and growth in NPAs involves the necessity of provisions, which bring down the overall profitability of banks.
The Indian banking sector is facing a serious problem of NPA. The magnitude of NPA is comparatively higher in public sectors banks. To improve the efficiency and profitability of banks the NPA need to be reduced and controlled. This paper deals with understanding the concept of NPAs, its magnitude and major causes for an account becoming non-performing and strategies for managing NPA in Indian banks.
Over the few years Indian banking, attempts to integrate with the global banking has been facing lots of hurdles in its way due to certain inherent weakness, despite its high sounding claims and
lofty achievements. In a developing country, banking is seen as an important instrument of development, while with the demanding Non-Performing Assets (NPAs), banks have become burden on the economy. Non-Performing Assets are not merely non remunerative, but they add cost to the credit Management. The fear of Non-Performing Assets permeates the psychology of bank managers in entertaining new projects for credit expansion. Non-Performing Assets is not a dilemma facing exclusively the bankers; it is in fact an all pervasive national scourge swaying the entire Indian economy. Non-Performing Asset is a sore throat of the Indian economy as a whole.
Non-Performing Assets have affected the profitability, liquidity and competitive functioning of banks and developmental of financial institutions and finally the psychology of the bankers in respect of their disposition towards credit delivery and credit expansion. NPAs do not generate any income for the banks, but at the same time banks are required to make provisions for such NPAs from their current profits. Apart from internal and external complexities, increases in NPAs directly affects banks profitability sometimes even their existence. Published statistics revealed before five years that for every Rs of 100 in NPA the bank is losing Rs. 30 per annum. The quality of loan assets is the most important factor for the basic viability of the banking system. The overdue advances of banks in India are mounting and in consequence, the NPAs in their portfolio are on the rise, impinging on the banks viability.
Lower level of Non-Performing assets helps the bank in consolidating their position and gives credence to efficiency of the management. Pre – credit and post – credit appraisals are to be done by the bank more objectively. Close monitoring of borrower accounts, site visits, factory visits, etc. are to be done regularly. Rehabilitation of viable sick units is essential. Consultancy and technical services must be provided to the borrower units wherever necessary. It is necessary for the bank to adopt proper credit monitoring mechanism, with periodical inspection of the units along with regular flow of information from them pertaining to their financial liquidity, annual accounts, stock reports, etc. besides comparative risk analysis and compliance of terms and conditions of sanction.
TABLE OF CONTENTS
CHAPTER NO. 1
TOPIC HISTORY OF BANKING SYSTEM IN INDIA 1.1 Pre Nationalization Phase 1.2 Nationalization 1.3 Liberalization 1.4 Post 2004 Changes INTERNATIONAL REGULATORY FRAMEWORK FOR BANKS 2.1 CAMELS Framework 2.2 Bank for International Settlements (BIS)
PAGE NO. 1 2 3 4
2
5 6
3
ASSET CLASSIFICATION 3.1 Categories of NPAs 3.2 Guidelines for Classification of Assets 3.3 Provisioning Norms 3.4 Restructuring of Advances CAUSES AND CONSEQUENCES OF NPA’S IN BANKS 4.1 Reasons for Growing NPAs 4.2 Impact of rising NPAs STRATEGIES FOR OVERCOMING NPAS 5.1 Preventive Management 5.2 Curative Management 10 11 14 25
4
31 33
5
35 39 45 47
6 7
CONCLUSION BIBLIOGRAPHY
Non Performing Assets Management of Indian Banks 1.0 HISTORY OF INDIAN BANKING
Abid Husein Saleh
India has always been land of great economist and banking system in India is as old as its history itself. From past to present Banking System in India has taken many forms. The phases in the Indian Banking Sector can be divided in 4 parts: o Pre Nationalization o Nationalization o Liberalization o Post 2000 Changes
1.1 PRE NATIONALIZATION PHASE According to Kautalya?s Arthshastra, the minimum interest on capital was set at 15% per annum. Taking clue from Arthshastra, the Sahukari system evolved in India. Sahukars were a kind of private bankers. In this system borrowers were known to Sahukars. Lending was done with very little documentation, having exorbitant interest rates, which were compounded at short interval. Lending process often involved hypothecation or mortgage of properties. Due to lack of education, documents were tampered and peasants more often than not, have to surrender their properties to the corrupt Sahukars.
With coming up of Britishers in India, commercial banks got established. The first bank to be established was the Central Bank in 17861. After that came the Hindustan Bank and Bengal Bank. The East India Company came up with some of its own banks. They include Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843). Though these Banks worked as independent units but together they were called as Presidency Bank. These three banks were later amalgamated in 1920 to form Imperial Bank of India. Shareholders of this bank were mainly Europeans.
When Swadeshi movement was on its peak, many Banks with Indian management got established. These included the Punjab National Bank in 1894 with headquarters in Lahore. Bank of Baroda, Canada Bank, Indian Bank, Bank of India, Central Bank of India, and Bank of 1|Page Rizvi Institute of Management Studies & Research
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Mysore were set up. Apart from these banks many small, city level banks were also set up. With no regulation to guide these banks, many banks met with failures. With economy under siege of Britishers, growth of these banks was slow.
1.2 NATIONALIZATION Government intervention with banks began in 1930?s. The RBI act was passed in 1934 and Reserve Bank of India was established in 1935. RBI acted as the central bank of India, issuing banking notes and acting as supervisory body for all bank and exchange related activities. Before 1967 Indian banking sector used to consist of schedule commercial banks on which government had very little influence. They were free to decide about their credit policies and used to provide customized banking services to their client. It was an era of class banking. Many sectors, like agriculture were profit was less, was neglected by these banks. For a balanced growth of country, government felt need for having control over the policies of the commercial banks.
On December 1967 social control of banking sector took underway. This was done to align the banking policy to the need of economic policy. On 22nd December 1967 National Credit Council was set up to discuss and asses the credit priorities of the country. To promote export, Export credit (interest subsidy) scheme was introduced in 1968. To tighten its control over the banking sector, government established the Banking commission in January 1969. This commission was to look after: o Banking costs o Legislations affecting banking o Indigenous banking o Bank procedures o Non-banking financial intermediaries.
The most important turn in the history of Indian Banking industry came on 19th, July 1969 to when the 14 major schedule commercial banks with deposits over 50 crore were nationalized. With this, the era of mass banking emerged. In 1970 the SLR rate was increased from 25% to 28% and penalty for non-compliance of CRR and SLR was introduced which gave teeth to RBI 2|Page Rizvi Institute of Management Studies & Research
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to control the commercial banks. Six more banks were nationalized on 15th April 1980 to further control the heights of the economy. By the end of 1990’s nearly 80% of the banking sector was under the control of government. The planned economic development required huge development expenditures. This expenditure was met by automatic monetization of fiscal deficit and subjecting the banking sector to large preemption – both in terms of the statutory holding of Government securities (statutory liquidity ratio, or SLR) and administrative direction of credit to preferred sectors. Focus of development was on sectors like agriculture, small scale industry, retail trade, small businesses and transport. A part of the successes of green revolution could be attributed to these public banks.
There was other side of the nationalization too. Mass banking resulted in deterioration of customer banker relationship. There was no healthy competition among the banks. A complex structure of administered interest rates prevailed, guided more by social priorities, necessitating cross-subsidization to sustain commercial viability of institutions. These not only distorted the interest rate mechanism but also adversely affected financial market development. There were all signs of `financial repressions? in the system.
1.3 LIBERALIZATION Country faced a major humiliation, when it was forced to pledge its gold reserves for avoiding the balance of payment crisis. Narasimha committee was formed to give recommendation on banking sector reforms. On the basis of its report in 1991 CRR and SLR rates were reduced. The SLR has been gradually reduced from a peak of 38.5% to 25%. The CRR was reduced from a peak of 15% during 1989 to 1992 to 4.5% in June 2003. However it has been revised to 6%. The interest rate was deregulated. There were some institutional reforms too. Board for Financial Supervision (BFS) 3, was formed in 1994, to exercise the powers of supervision and inspection in relation to the banking companies, financial institutions and non-banking companies. It was constituted to form an armslength relationship between regulation and supervision. On similar lines, a Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) prescribes policies relating to the regulation and supervision of all types of payment and Settlement systems, set standards for 3|Page Rizvi Institute of Management Studies & Research
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existing and future systems, authorize the payment and settlement systems and determine criteria for membership to these systems.
Banking sector was open to the private players in 1993. Private investors have been allowed to invest upto 49% in public sector banks. Diversification of ownership, while retaining public sector character of these banks has led to greater market accountability and improved efficiency without loss of public confidence and safety. Since 1993, 12 private banks have been set up. With increase in FDI limit in the banking sector to 74% it attracted many foreign investors. Major shareholdings in ICICI and HDFC banks are of foreign investors only. With large amount of foreign investment and foreign management coming to India, the structure of banking system took a major turn. These private banks started giving services of international standards. Suddenly Indian cities landscape was filled with ATMs.
1.4 POST 2000 CHANGES To overcome the competitions from the private players the public sector bank started getting structural changes. State Bank of India, the biggest public sector bank undertook business process re-engineering. The business process reengineering (BPR) team was constituted in June 2003 with McKinsey & Company as consultants. The BPR's basic goal was to create an operating architecture that would facilitate service delivery of international standards. The project objectives were defined as "increasing customer satisfaction and convenience, freeing up time for branch manager and branch staff to focus on sales and marketing, simplifying process for employees, enhancing SBI's competitiveness in the market, increasing the profitability through higher market share and improved process efficiency..." After consultation the loan granting process of SBI was centralized. Moreover the branches of the SBI were redesigned and decorated to give its customer a better banking experience.
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2.0 INTERNATIONAL REGULATORY FRAMEWORKS FOR BANKS
2.1 CAMELS Framework CAMELS is a framework for composite evaluation of banks (and financial intermediaries, in general). The acronym stands for: Capital Adequacy This is a measure of financial strength, in particular its ability to cushion operational and Abnormal losses. It is calculated based on the asset structure of the bank, and the risk Weights that have been assigned by the regulator for each asset class. o Asset Quality This depends on factors such as concentration of loans in the portfolio, related party Exposure and provisions made for loan loss. o Management Management of the bank obviously influences the other parameters. Operating cost per Unit of money lent and earnings per employee are parameters used. o Earnings This can be measured through ratios like return on assets, return on equity and interest spread. o Liquidity In order to meet obligations as they come, the bank needs an effective asset-liability Management system that balances gaps in the maturity profile of assets and liabilities. However, if the bank provides too much liquidity, then it will suffer in terms of profitability. This can be measured by the Loans to Deposit ratio, separately for short term, medium Term and long term. o Sensitivity to Market Risk Longer the maturity of debt investments, more prone it is to valuation losses, if interest rates go up. More sensitive the portfolio is to market risk, the more risky the bank is. The CAMELS framework was first used by the regulators in the United States. Based on this they rated the banks on a scale of 5 – the strongest was rated as 1and the weakest was rated as 5.
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Non Performing Assets Management of Indian Banks 2.2 BANK FOR INTERNATIONAL SETTLEMENTS (BIS)
Abid Husein Saleh
Established on 17 May 1930, the BIS is the world's oldest international financial organization It has its head office in Basel, Switzerland and two representative offices: in the Hong Kong Special Administrative Region of the People's Republic of China and in Mexico City. BIS fosters co-operation among central banks and other agencies in pursuit of monetary and financial stability. It fulfills this mandate by acting as: o Forum to promote discussion and policy analysis among central banks and within the International financial community o Center for economic and monetary research o Prime counterparty for central banks in their financial transactions o Agent or trustee in connection with international financial operations
Every two months, the BIS hosts in Basel, meetings of Governors and senior officials of Member central banks. The meetings provide an opportunity for participants to discuss the world economy and financial markets, and to exchange views on topical issues of central bank interest or concern. The Basel Committee on Banking Supervision comprises representatives from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. BIS also organizes frequent meetings of experts on monetary and financial stability issues, as well as on more technical issues such as legal matters, reserve management, IT systems, internal audit and technical cooperation. BIS is a hub for sharing statistical information among central banks. It publishes statistics on global banking, securities, foreign exchange and derivatives markets. Through seminars and workshops organized by its Financial Stability Institute (FSI), the BIS disseminate knowledge among its various stake-holders. 6|Page Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
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The role of BIS has been changing in line with the times. Initially, it handled the payments that Germany had to make consequent to the First World War. Following the Second World War and until the early 1970s, it focused on implementing and defending the Bretton Woods system. In the 1970s and 1980s, it had to manage the cross-border capital flows following the oil crises and the international debt crisis. The economic problems highlighted the need for effective supervision of internationally active banks. This culminated in the Basel Capital Accord on international convergence of capital measurement and capital standards, in 1988.
Basel Accords The Basel Accord of 1988 (Basel I) focused almost entirely on credit risk. It defined capital, and a structure of risk weights for banks. Minimum requirement of capital was fixed at 8% of riskweighted assets. The G-10 countries agreed to apply the common minimum capital standards to their banking industries by end of 1992. The standards have evolved over time. In 1996, market risk was incorporated in the framework. In June 2004, a revised international capital framework was introduced through Basel II. The following year, an important extension was made through a paper on the application of Basel II to trading activities and the treatment of double default effects. In July 2006, a comprehensive document was brought out, which integrated all applicable provisions from the 1988 Accord, Basel II and the various applicable amendments.
The Basel II framework is based on three pillars: The First Pillar – Minimum Capital Requirements Three tiers of capital have been defined: Tier 1 Capital includes only permanent shareholders’ equity (issued and fully paid ordinary shares and perpetual non-cumulative preference shares) and disclosed reserves (share premium, retained earnings, general reserves, and legal reserves) Tier 2 Capital includes undisclosed reserves, revaluation reserves, and general provisions and loan-loss reserves, hybrid (debt / equity) capital instruments and subordinated Term debt. A limit of 50% of Tier 1 is applicable for subordinated term debt. Tier 3 Capital is represented by short-term subordinated debt covering market risk. This is limited to 250% of Tier 1 capital that is required to support market risk. 7|Page Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks The Second Pillar – Supervisory Review Process Four key principles have been enunciated:
Abid Husein Saleh
Principle 1: Banks should have a process for assessing their overall capital adequacy In relation to their risk profile and a strategy for maintaining their capital levels. Principle 2: Supervisors should review and evaluate the bank’s internal capital Adequacy assessments and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. Appropriate corrective action is to be taken, if required. Principle 3: Supervisors should expect banks to operate above the minimum regulatory Capital ratios and should have the ability to require banks to hold capital in excess of the minimum. Principle 4: Supervisors should seek to intervene at an early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of a particular bank and should require rapid remedial action if capital is not maintained Or restored. The Third Pillar – Market Discipline This is meant to complement the other two pillars. Market discipline is to be encouraged by developing a set of disclosure requirements that will allow market participants to Assess key pieces of information on the scope of application, capital, risk exposures, Risk assessment processes and overall capital adequacy of the institution. The banks disclosures need to be consistent with how senior management and the Board of Directors access and manage the risks of the bank. The capital adequacy requirement was maintained at 8%. However, the whole approach is considered to be more nuanced than Basel I. The stresses caused to institutions and the markets during the economic upheaval in the last couple of years, created a need for further strengthening of the framework. At its 12 September 2010 meeting, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements. These capital reforms, together with the introduction of a global liquidity standard, deliver on the core of the global financial reform agenda (Basel III).
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Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Basel III is a comprehensive set of reform measures to strengthen the regulation, supervision and risk management of the banking sector. These measures aim to: o Improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source o Improve risk management and governance o Strengthen banks' transparency and disclosures. o Bank-level, or micro-prudential regulation, which will help raise the resilience of individual banking institutions to periods of stress. o Macro-prudential, system wide risks that can build up across the banking sector as well as the pro-cyclical amplification of these risks over time. These two approaches to supervision are complementary as greater resilience at the individual bank level reduces the risk of system wide shocks. The Committee's package of reforms will increase the minimum common equity requirement from 2% to 4.5%. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%. This reinforces the stronger definition of capital agreed by Governors and Heads of Supervision in July and the higher capital requirements for trading, derivative and securitization activities to be introduced at the end of 2011.
Figure 2.01 Basel III Standard
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Non Performing Assets Management of Indian Banks 3.0 ASSET CLASSIFICATION
Abid Husein Saleh
3.1 Categories of NPAs Banks are required to classify nonperforming assets further into the following three categories based on the period for which the asset has remained nonperforming and the realisability of the dues: o Substandard Assets o Doubtful Assets o Loss Assets
Substandard Assets With effect from 31 March 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of the borrower guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.
Doubtful Assets With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable.
Loss Assets A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. 10 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks 3.2 Guidelines for Classification of Assets
Abid Husein Saleh
o Broadly speaking, classification of assets into above categories should be done taking into account the degree of well-defined credit weaknesses and the extent of dependence on collateral security for realization of dues. o 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. The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cutoff point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines. o Availability of security / net worth of borrower/ guarantor the availability of security or net worth of borrower/ guarantor should not be taken into account for the purpose of treating an advance as NPA or otherwise, except to the extent provided as income recognition is based on record of recovery. o Accounts with temporary deficiencies the classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc. In the matter of classification of accounts with such deficiencies banks may follow the following guidelines:
i) Banks should ensure that drawings in the working capital accounts are covered by the adequacy of current assets, since current assets are first appropriated in times of distress. Drawing power is required to be arrived at based on the stock statement which is current. 11 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
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However, considering the difficulties of large borrowers, stock statements relied upon by the banks for determining drawing power should not be older than three months. The Outstanding in the account based on drawing power calculated from stock statements. A working capital borrowal account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower's financial position is satisfactory.
ii) Regular and ad hoc credit limits need to be reviewed/ regularized not later than three months from the due date/date of ad hoc sanction. In case of constraints such as nonavailability of financial statements and other data from the borrowers, the branch should furnish evidence to show that renewal/ review of credit limits is already on and would be completed soon. In any case, delay beyond six months is not considered desirable as a general discipline. Hence, an account where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be treated as NPA. o Upgradation of loan accounts classified as NPAs If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as non-performing and may be classified as ‘standard’ accounts. With regard to upgradation of a restructured/ rescheduled account which is classified as NPA. o Advances under Consortium Arrangements Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the other member banks and therefore, be treated as NPA. The banks participating in the consortium should, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books. 12 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
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o Accounts where there is erosion in the value of security/frauds committed by borrowers In respect of accounts where there are potential threats for recovery on account of erosion in the value of security or non-availability of security and existence of other factors such as frauds committed by borrowers it will not be prudent that such accounts should go through various stages of asset classification. In cases of such serious credit impairment the asset should be straightaway classified as doubtful or loss asset as appropriate:
i. Erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets.
ii. If the realizable value of the security, as assessed by the bank/ approved valuers/ RBI is less than 10 per cent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset. It may be either written off or fully provided for by the bank.
Advances against Term Deposits, NSCs, KVP/IVP, etc.
Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs, provided adequate margin is available in the accounts. Advances against gold ornaments, government securities and all other securities are not covered by this exemption.
Agricultural Advances i. A loan granted for short duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for two crop seasons. A loan granted for long duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for one crop season. For the purpose of these guidelines, “long duration” crops would be crops with crop season longer than one year and crops, which are not “long duration” crops would be treated as “short duration” crops. The crop season for each crop, which means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers’ Committee in each
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Non Performing Assets Management of Indian Banks
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State. Depending upon the duration of crops raised by an agriculturist, the above NPA norms would also be made applicable to agricultural term loans availed of by him.
In such cases of conversion or re-schedulement, the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as NPA. The asset classification of these loans would thereafter be governed by the revised terms & conditions and would be treated as NPA if interest and/or installment of principal remain overdue for two crop seasons for short duration crops and for one crop season for long duration crops. For the purpose of these guidelines, "long duration" crops would be crops with crop season longer than one year and crops, which are not 'long duration" would be treated as "short duration" crops.
ii. While fixing the repayment schedule in case of rural housing advances granted to agriculturists under Indira Awas Yojana and Golden Jubilee Rural Housing Finance Scheme, banks should ensure that the interest/installment payable on such advances are linked to crop cycles.
3.3 Provisioning Norms
General o The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines. o In conformity with the prudential norms, provisions should be made on the nonperforming assets on the basis of classification of assets into prescribed categories as detailed in paragraphs 4 supra. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realization of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against substandard assets, doubtful assets and loss assets as below:
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Non Performing Assets Management of Indian Banks Loss Assets
Abid Husein Saleh
o Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for.
Doubtful Assets o 100 percent of the extent to which the advance is not covered by the realizable value of the security to which the bank has a valid recourse and the realizable value is estimated on a realistic basis. o In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful:
Period for which the advance has remained in ‘doubtful’ category Up to one year One to three years More than three years
Provision requirement (%)
25 40 100
Table 3.01 Provision Requirement for Doubtful Assets
Additional Provisions for NPAs at Higher than Prescribed Rates The regulatory norms for provisioning represent the minimum requirement. A bank may voluntarily make specific provisions for advances at rates which are higher than the rates prescribed under existing regulations, to provide for estimated actual loss in collectible amount, provided such higher rates are approved by the Board of Directors and consistently adopted from year to year. Such additional provisions are not to be considered as floating provisions. The additional provisions for NPAs, like the minimum regulatory provision on NPAs, may be netted off from gross NPAs to arrive at the net NPAs.
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Non Performing Assets Management of Indian Banks Provisions on Leased Assets i) Substandard Assets
Abid Husein Saleh
o 15 percent of the sum of the net investment in the lease and the unrealized portion of finance income net of finance charge component. The terms ‘net investment in the lease’, ‘finance income’ and ‘finance charge’ are as defined in ‘AS 19 Leases’ issued by the ICAI. o Unsecured lease exposures, as defined in paragraph 5.4 above, which are identified as ‘substandard’ would attract additional provision of 10 per cent, i.e., a total of 25 per cent.
ii) Doubtful Assets o 100 percent of the extent to which, the finance is not secured by the realizable value of the leased asset. Realizable value is to be estimated on a realistic basis. In addition to the above provision, provision at the following rates should be made on the sum of the net investment in the lease and the unrealized portion of finance income net of finance charge component of the secured portion, depending upon the period for which asset has been doubtful.
iii) Loss Assets o The entire asset should be written off. If for any reason, an asset is allowed to remain in books, 100 percent of the sum of the net investment in the lease and the unrealized portion of finance income net of finance charge component should be provided for.
16 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks Non-Performing Assets
Abid Husein Saleh
Gross NPA ratio at system-level increased, mainly on account of the deterioration in asset quality of public sector banks During 2011-12, the deteriorating asset quality of the banking sector emerged as a major concern, with gross NPAs of banks registering a sharp increase. The spurt in NPAs could be attributed to the slowdown prevailing in the domestic economy as well as inadequate appraisal and monitoring of credit proposals.
The deterioration in asset quality was more pronounced in the case of public sector banks. During 2011-12, the gross NPAs of public sector banks increased at a higher rate as compared with the growth rate of NPAs at a system-level.
Chart 3.1 Growth Rate of NPA vis-à-vis Advances
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Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Item
Public sector banks 746 746 928 478 23 1,172 2.4 3.3 360 591 1.2 1.7
Nationalised banks*
SBI Group
Private sector banks 182 182 98 73 19 187 2.5 2.1 44 44 0.6 0.5
Old private sector banks 36 36 27 20 1 42 1.9 1.8 9 13 0.5 0.6
New private sector banks 145 145 71 52 18 145 2.7 2.2 34 30 0.6 0.5
Foreign banks
Scheduled commercial banks 979 979 1,071 585 43 1,423 2.5 3.1 417 649 1.1 1.4
Gross NPAs Closing balance for 2010-11 Opening balance for 2011-12 Addition during 2011-12 Recovered during 2011-12 Written off during 2011-12 Closing balance for 2011-12 Gross NPAs as per cent of Gross Advances 2010-11 2011-12 Net NPAs Closing balance for 2010-11 Closing balance for 2011-12 Net NPAs as per cent of Net Advances 2010-11 2011-12
442 442 586 325 13 690 2.1 2.8 212 389 1.0 1.6
303 303 341 152 10 482 3.4 4.6 147 202 1.7 2.0
50 50 45 32 62 2.5 2.6 12 14 0.6 0.6
Table 3.02 Comparison of NPA of Banking sector
Slippage Ratio Deteriorated though Recovery Ratio witnessed an Improvement In addition to an increase in gross NPAs at the system-level, fresh accretion of NPAs, as captured by the slippage ratio5 also increased during 2011-12 compared with the previous year. However, on a positive note, the recovery ratio6 of the banking sector witnessed an improvement during the year. During 2011-12, the written-off ratio7 was significantly lower as compared with the previous year
At the bank group level, the accretion to NPAs as captured by the slippage ratio was higher in the case of public sector banks and foreign banks. However, their recovery performance was also better than private sector banks. Among various bank groups, new private sector banks relied more on writing off NPAs as a measure to contain their NPAs level.
18 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Chart 3.02 Gross NPAs as percentage of Gross Advances
Chart 3.03 Trend in important Ratios Relating to NPAs
Restructured Standard Advances Increased Significantly In recent years, restructuring of advances has been one of the important channels used by banks to contain the deterioration in asset quality caused by burgeoning NPAs. Consequent to the slowdown in domestic economy, banks, especially public sector banks actively resorted to restructuring their advances under the special dispensation scheme of the Reserve Bank announced during 2008. The scheme enabled banks to retain the status of standard accounts even after restructuring. The steep increase in gross NPAs during 2011-12 was accompanied by a considerable pick-up in the growth of restructured advances. This was mainly due to the steep increase in restructured advances by public sector banks, particularly nationalized banks
During 2011-12, total amount of NPAs recovered through the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), Debt Recovery Tribunals (DRTs) and Lok Adalats registered a decline compared with the previous year. Of the total amount recovered through these channels, recoveries under the SARFAESI Act constituted almost 70 per cent. 19 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Banks approach the DRTs in case they fail to recover total amount of their bad loans through the SARFAESI Act. At present, there are 33 DRTs and five Debt Recovery Appellate Tribunals across the country. NPAs recovered through DRTs constituted almost 28 per cent of total NPAs recovered through these three channels
As at end-June 2012, banks subscribed to almost 70 per cent of total security receipts issued by 14 securitization/reconstruction companies. These companies, which function under the SARFAESI Act, acquire NPAs from banks, which help the banking sector to improve the quality of their balance sheets.
Chart 3.04 Bank Group-wise Ratios Relating to NPAs
Chart 3.05 Restructured Advances as per cent of Gross Advances of SCBs
Provisioning Coverage Ratio Declined Though total provisioning increased at a higher rate, in sync with the higher growth of NPAs, the provisioning coverage ratio (PCR) dipped compared with the previous year. This was mainly due to the decline in the PCR of public sector banks.
20 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks Net NPAs Increased Significantly
Abid Husein Saleh
In sync with the acceleration in growth of gross NPAs as well as a lower provisioning coverage, net NPAs registered higher growth. Net NPA ratio was on a higher side for public sector banks, as compared with private sector and foreign banks.
Chart 3.06 Restructured Advances as per cent of Gross Advances: Bank Group-wise
NPAs became stickier, with proportion of substandard as well as doubtful assets in gross advances registering an increase Apart from an increase in NPAs, the deterioration in asset quality was also evident in the form of rising sub-standard/doubtful assets as a percentage of gross advances. Increase in these two categories of NPAs as percentage of gross advances indicated that NPAs became stickier.
21 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Chart 3.07 Classification of Loan Assets – Bank Group-wise
Sector-wise Analysis of Non-performing Assets
Deterioration in Asset quality of Public Sector banks was spread across priority and nonpriority sectors Bank group-wise analysis of the ratio of gross NPAs to gross advances indicated that for public sector banks, this ratio increased for both the priority and non-priority sectors. In addition, the gross NPAs to gross advances ratio (priority sector) was significantly higher for public sector banks than other bank groups.
Nearly half of the total NPAs were attributed to priority sectors During 2011-12, total priority sector NPAs increased at a significantly higher rate than the growth rate of credit to the priority sector. However, the share of the priority sector in total NPAs declined compared with the previous year. Among bank groups, proportion of priority sector in total NPAs was higher for public sector banks. 22 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Chart 3.08 Gross NPA Ratio (Priority Sector) Bank Group-wise
Chart 3.09 Gross NPA Ratio (Non-Priority Sector) Bank Group-wise
Share of Agricultural sector in total NPAs registered an increase The sectoral classification of NPAs revealed that, during 2011-12, the share of agriculture in total NPAs increased marginally. However, despite the subdued industrial performance, the share of micro and small enterprises in total NPAs of the banking sector came down as compared with the previous year.
Liquidity During 2011-12, the liquidity of banks was adversely affected by many structural and frictional factors, which include, inter alia, deceleration in deposits growth rate, growing mismatch in maturity profile of assets and liabilities as well as exposure to long-run infrastructure projects. The percentage of liquid assets (cash and balances with the Reserve Bank in excess of CRR requirements, and investments and advances with maturity up to one year) in total assets can be taken as a rough measure of banks’ liquidity condition. This ratio deteriorated marginally during 2011-12.
23 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Chart 4.10 Percentage Composition of NPAs of SCBs
Name of the Bank 2008-09 2009-10 2010-11 Scheduled Commercial Banks 2.25 2.39 2.5 Public Sector Banks 1.97 2.19 2.4 Private Sector Banks 2.89 2.74 2.5 Foreign Banks in India 3.8 4.26 2.5 Table 3.03 Gross Non-Performing Assets As Percentage of Gross Advances
2011-12 3.1 3.3 2.1 2.6
Name of the Bank 2008-09 2009-10 2010-11 2011-12 Scheduled Commercial Banks 1.05 1.11 1.1 1.4 Public Sector Banks 0.94 1.09 1.2 1.7 Private Sector Banks 1.29 1.01 0.6 0.5 Foreign Banks in India 1.81 1.82 0.6 0.6 Table 3.04 Net Non-Performing Assets As Percentage Of Net Advances
24 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Advances in each of the four asset categories (i.e., standard, substandard, doubtful and loss) of the PSBs during 1993 to 1998 are given in the above table; the proportion of standard assets of PSBs has increased from 82.2 per cent in end-March 1997 to 97.99 per cent in endMarch 2009 and there was a slight decrease in the year 2010. The substandard assets remained constant in the year 1997 and 1998 but from the year 1999 there was a continuous decrease in the ratio till the year 2005, later on for the three years i.e. 2006, 2007 and 2008it remained stable then decreased in the year 2009 but increased in the year 2010. The doubtful assets trend moved quite opposite to the standard assets trend throught the study in case of loss assets also the trend was same like doubtful assets trend only i.e. there was a continuous decrease in the ratio till the 2009 except in the year 1999 and there was a slight increase in the year 2010 as in the case of substandard assets and doubtful assets. It is also observed in the above table that throught the study period except in the year 2010 out of the three categories of assets that form NPAs the doubtful assets had a major share in contributing to gross NPAs whereas in the year 2010 the major portion of Gross NPAs was occupied by substandard assets followed by doubtful assets and loss assets.
3.4 Restructuring of Advances Restructuring is an accepted practice worldwide through which lenders nurture problematic, but viable borrowal accounts. It is a legitimate strategy adopted by lenders and borrowers especially during times of distress to preserve the economic value of the viable loan accounts. Restructuring has been followed in India for many years and the guidelines in this regard have evolved over a period taking into account international best practices, status of development of financial markets and changing economic conditions. The extant restructuring guidelines cover three broad categories (i) large corporate advances with multiple/consortium banking under Corporate Debt Restructuring (CDR), (ii) SME Debt restructuring mechanism and (iii) Restructuring of other advances. This system has fulfilled its objective to a large extent. These guidelines on restructuring have evolved in the context of international experience
It is a fact that restructuring of advances across the banking sector has increased during the current financial year as also during the last financial year. This is a matter of concern. As regards restructuring under CDR mechanism, this has also been in line with increase in non-CDR 25 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
restructuring. According to data furnished by CDR Cell, there has been a spurt in the number of cases referred to CDR Cell from the year 2011-12 onwards. As against 49 cases involving 226.2 billion referred during 2010-11, 87 cases involving 678.9 billion were referred during 2011-12. During the period April - August of the current year, there are 59 cases involving 306.4 billion being referred to CDR. The reasons for rise in restructuring may be attributed to the effects of global recession coupled with internal factors like domestic slowdown, which have played a significant role in the deterioration in asset quality.
Aggressive lending by banks in the past, banks not exercising oversight on diversification into non-core areas by companies, banks not enforcing discipline on companies regarding unhedged forex exposures and delay in disbursements are areas on which banks ought to exercise much better control. Delay in administrative clearances is an equally important reason for pressure on asset quality which needs correction. The spurt in restructuring of advances is a matter of concern, though it may not have systemic dimension. The Reserve Bank is closely monitoring the position. Some course correction at the level of all stake holders may definitely improve the situation.
With a view to reviewing existing guidelines on restructuring of advances and suggest revisions taking into account the best international practices and accounting standards, the Reserve Bank had constituted a Working Group (WG) under the chairmanship of Shri B. Mahapatra,
Executive Director, Reserve Bank of India. The WG has examined the issues and its major recommendations can be summarized as below: o The regulatory forbearance available on asset classification on restructuring presently needs to be withdrawn after two years. o During the interregnum, provision on standard restructured accounts which get the asset classification benefit on restructuring be increased from the present 2 per cent to 5 per cent, in a phased manner in case of existing accounts (stock) and immediately in case of newly restructured accounts (flow).
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Non Performing Assets Management of Indian Banks
Abid Husein Saleh
o In view of the importance of infrastructure sector, asset classification benefit on restructuring may however be allowed for a longer period in cases where restructuring is due to change in date of commencement of commercial operation of infrastructure projects. o A cap of say 10 per cent, to be prescribed on amount of restructured debt which can be converted into preference equity shares. o RBI may prescribe the broad benchmarks for viability parameters based on those used by CDR Cell and banks may adopt them with suitable adjustments if any for specific sectors. o Compulsory promoters stake in the restructured accounts to be increased by way of higher sacrifice and personal guarantee. o Right of recompense may be made mandatory in all cases. o Disclosure requirements to be made comprehensive but to exclude standard restructured accounts which have shown consistent satisfactory performance.
Second Quarter Review of Monetary Policy 2012-13 on October 30, 2012 has announced an increase in the provision for restructured standard accounts from the existing 2.0 per cent to 2.75 per cent in line with a major recommendation of the WG. It has also been announced that draft guidelines on the subject taking into account the recommendations of the WG as also the comments received in this regard will be issued by end-January 2013.
Chart 3.11 Restructured Standard Advances to Gross Total Advances
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Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Chart 3.12 Trend in number and value of cases under CDR
Chart 3.13 Industry-wise break-up of value under CDR - June 2012
28 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
4.0 CAUSES AND CONSEQUENCES OF NPA’S IN BANKS
One of the reasons for the accumulation of large portfolio of NPAs with banks is often lending is not linked to productive investment and the recovery of credit is not linked to product scale. The borrowers are mainly farmers and small scale industries owner whose financial condition are generally weak. The volume of bank credit tacked in sick industries is the evidence of this malady. Sometimes it is found that advice given by BIFR and directions given by the courts to banks that they should provide loans to sick industries. This type of practice is aggravating NPAs situation. Another, faulty lending policy and making compulsion lending to priority sector by banks. There are many other causes which are also responsible for accumulation of NPAs. Many of these causes are related to faulty credit management like defective credit in recovery mechanism, lack of professionalism in the work force, time lag between sanctions and disbursement of loan, unscientific repayment schedule, mis-utilision of loans by user, untimely communication to the borrowers regarding their due date, lack of sponge legal mechanism, political at local levels and waive-off policy of loan by government (1991 & 2008) etc. have also been contributing to mounting NPAs in SCBs in India. If the level of NPAs is not controlled timely they will
Reduce the earning capacity of assets and badly affect the ROA. o Higher provisioning requirement on mounting NPAs adversely affect capital adequacy ratio and banks profitability. o Cost of Capital will increase due to high NPAs and require economic value added. (EVA=Net Operation Profit after Tax-Cost of Capital) o NPAs causes to decrease the value of share sometimes even below their book value in the capital market. o Affect the market competitiveness o Cause reduction in availability of funds for further credit expansion due to the unproductiveness of the existing portfolio. 29 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks o NPAs affect the risk facing ability of banks.
Abid Husein Saleh
o On the whole it effect the credibly of the banks and banks will be in difficult position in raising fresh capital from the market for future financial needs.
OCCURRENCE OF NPA Present level of NPAs was considered as a very big problem for the banks and needs immediate steps to be taken to check it. As far as causes of NPAs are concerned, it may be different in case of priority sector and non-priority sector. The factors responsible for NPAs may be classified into two broad categories internal as well as external. o Priority Sector Advances: Willful default induced by officially announced loan waiver scheme vitiates the payment culture. People feel that loans given to them will be waived off with the passage of time by one political party or the other. Genuine viability problem of borrowing unit and willful default caused by other factors are graded as next in importance. Weak monitoring and absence of effective supervision of loan accounts on their part also leads to this problem. Lack of technical and managerial expertise on the part of borrowers is the next important factor. Moreover, wrong identification of beneficiary and weakness in credit appraisal systems are the other important reasons of this problem. Banks do not have much discretion in granting of loans to priority sector because targets are fixed under directed priority sector lending irrespective of recovery potential. Other factors like non-availability of reliable data related to market and industry and delay in disbursement of credit.
o Intravenous Causes in non- priority Sector Advances: Due to lack of networking banks do not have any information sharing system by which they can know the information regarding Borrowers, his credit worthiness and past record. Credit appraisal system of the banks is also weak which leads to improper assessment of returns from the activities being financed, repaying capacities and risk bearing ability of the borrower and resultantly the NPAs. Slow disposal of recovery cases is major factor contributing towards accumulation of NPAs in non- priority sector advances. Once NPAs occurs, recovery through legal measures is a very lengthy and tedious process. 30 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
There are some other external factor such as inadequate infrastructural facilities like supply of power and other essential inputs, and withdrawal of policies like product reservation and price preference etc., which make the units unviable in this competitive environment. Total advances of commercial banks has increased from 558679 crore in 2001 to 2507885 crore in 2008. It also depicts that percentage of NPA’s of advances has declined from 11.44 % to 2.3 % in the same period. In case of doubtful assets these were maximum in year 2005 (63.80%). Loss assets were maximum in 2006 (13.50%). But later on it gain momentum and showed increase. Increasing of loss assets or NPA’s is not good indicator for the development of a country or an economy.
The Non-Performing Assets (NPAs) of the Indian banking sector have been incessantly rising in the past six months. Historically, in 1997, NPAs were 15.8% of loans for the banking sector, which nosedived to 2.4% in 2008. This figure stands at 2.94% of loans in 2012. In absolute figures, NPAs have doubled from 2009 to 2012 and assets under reconstruction had trebled during the same period. India’s biggest lender, State Bank of India, is experiencing an NPA level of 4.99% of total loans. According to a recently published Credit Suisse Group AG report, 10 large industrial houses account for 13% of total assets financed by the Banking system, which means that bank lending is getting increasingly skewed. Further, of the total reconstructed assets, 8.24% belong to the large manufacturing sector, 3.99% are from the services sector while 1.45% are from the agricultural sector.
4.1 Reasons for growing NPAs
Economic Slowdown: The global economy is still in the throes of an economic crisis that is looming large both in the US and Europe. There is a general slackening of domestic economic activity in India both in manufacturing and the services sectors. A sluggish economy will have a direct impact on the balance sheets and profitability of many firms who have availed of loans from the banking industry. Over a period of time, some of the hard hit firms will be compelled to default on their loans. There is a groundswell of expert opinion in India that NPAs are more an outcome of economic factors rather than any internal systemic failures. 31 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
High Interest rates: It is a known fact that interest rates have been revised upwards, 10 times in the past two years with a view to curb inflation. High interest rate increases the cost of funds to the credit users and has a debilitating effect especially on the repayment capacity of small and medium enterprises. Banks need to maintain their Net Interest Margin and hence pass on any interest rate hike to the borrowers. A high rate of inflation dilutes the quality of assets of the banking sector. Weak supply demand scenario, high borrowing or leveraging and intense competition contribute to loan defaults.
New Reporting System: Indian banks are to report NPAs from April 2012 in a computer recognized / identified format. It is stated that almost 90% of all banks' loan portfolio is under the computerized system of NPA reporting or system based reporting. The discretion of bank managers in classifying assets according to their local judgment is eliminated. This change in reporting pattern makes identification of NPAs a machine driven objective activity. However, credit risk analysis does have a subjective and judgmental element to it.
Aviation Sector: The Indian banking system has a total exposure of around Rs. 40,000 crores to the ailing aviation sector. SBI alone has an exposure of 5,000 crores to the aviation industry. It is common knowledge that many airlines are either in the red or marginally profitable. According to an RBI report, nearly three-fourths of the top Banks’ loans to the aviation sector are either impaired or restructured. Kingfisher airlines and Air India have been the significant aviation borrowers whose performance is below par.
Relaxed Lending Standards: Inappropriate personality-morale profile assessment of the prospective and current customers is one of the reasons for rising defaults on loans.
Aggressive Selling of unsecured Loans: The increase in bad loans can also be attributed to aggressive unsecured lending by banks. Rise in non-performing loans in case of ICICI was due to change in its retail loan portfolio mix towards non-collateralized loans. The net nonperforming loans in the collateralized retail portfolio were 1.59% of net collateralized retail loans and net non-performing loans in the non-collateralized retail portfolio (including overdraft financing against automobiles) were about 10.08% of net non-collateralized retail loans. 32 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Legal Issues: There have been instances when banks have extended loans to doubtful debtors. Loopholes in the legal system and insufficient internal control mechanisms have intensified this problem.
Market Failure: Another reason for the rise in NPAs is said to be the global financial meltdown and its impact on India.
4.2 Impact of Rising NPAs The health of a bank is reflected not only by the size of its balance sheet but also the return on its assets. NPAs generate no interest income for the bank; the bank is required by law to provide for future loan losses arising from its bad assets (at a coverage of 70%), out of current profits. Banks can no longer account the interest on NPA loans as income unless and until it is actually paid by the borrower. This not only affects profitability but also liquidity because now, the bank has fewer funds to lend out or recycle. High NPAs degrade a bank’s credit rating, lowering its credibility as well as its ability to raise fresh capital. Today, the incidence of high NPAs in the Indian banking industry points to a deteriorating credit market. As per law, every bank must maintain a Capital Adequacy Ratio (CAR), which is the ratio of total capital to risk weighted assets, of 9% (10% for new Private Banks) or higher. As NPAs go up, so do the aggregated risk weighted assets, forcing the bank to allocate further capital in order to maintain the ratio. Today, commercial banks in India are struggling to meet CAR norms
Impact of NPA on the Operations of banks Profitability NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA does not affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of
33 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
reduction in profitability is low ROI (return on investment), which adversely affect current earning of bank. Liquidity Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shortest period of time which lead to additional cost to the company. Difficulty in operating the functions of bank is another cause of NPA due to lack of money. Involvement of Management Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now days, banks have special employees to deal and handle NPAs, which is additional cost to the bank. Credit Loss If a bank is facing problem of NPA, then it adversely affects the value of bank in terms of market for credit. It will lose its goodwill and brand image and credit which have negative impact to the people who are putting in their money in the banks. The efficiency of any of the bank cannot be obtained only from the balance sheet size but also it is calculated by assets return level in the bank. For banks the NPAs will not create interest income but simultaneously banks are very much necessary in order to provide terms for NPAs with their profits that are existing in current. Being the NPAs have harmful impact on the arrival on assets are in this methods.
o
Banks interest income can fall down and accounted on the basis of receipt.
o Profitability of Banks is caused harmfully due to offering of doubtful debts and ensuing contain it as terrible debts.
o o o o o
ROI (Return on investments) is decreased. The adequacy ratios of capital are termed as NPAs and are following into its estimation. Maximizes the capital price. Variance of liability and assets will expand. EVA (The economic value addition) by banks get trouble for the reason that EVA is similar to the profit of net functioning less capital cost and it margins funds recycling.
34 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks 5.0 STRATEGIES FOR OVERCOMING NPAS
Abid Husein Saleh
Various steps have been taken by the government and RBI to recover and reduce NPAs. These strategies are necessary to control NPAs. 5.1 Preventive management and 5.2 Curative management 5.1 Preventive Management: Preventive measures are to prevent the asset from becoming a non performing asset. Banks has to concentrate on the following to minimize the level of NPAs.
1. Early Warning Signals The origin of the flourishing NPAs lies in the quality of managing credit assessment, risk management by the banks concerned. Banks should have adequate preventive measures, fixing presanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks should continuously monitor loans to identify accounts that have potential to become nonperforming. It is important in any early warning system, to be sensitive to signals of credit deterioration. A host of early warning signals are used by different banks for identification of potential NPAs. Most banks in India have laid down a series of operational, financial, transactional indicators that could serve to identify emerging problems in credit exposures at an early stage. Further, it is revealed that the indicators which may trigger early warning system depend not only on default in payment of installment and interest but also other factors such as deterioration in operating and financial performance of the borrower, weakening industry characteristics, regulatory changes, and general economic conditions. Early warning signals can be classified into five broad categories viz.
(a) Financial (b) Operational (c) Banking (d) Management and (e) External factors 35 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Financial related warning signals generally emanate from the borrowers’ balance sheet, income expenditure statement, statement of cash flows, statement of receivables etc. Following common warning signals are captured by some of the banks having relatively developed EWS.
2. Financial warning signals • Persistent irregularity in the account • Default in repayment obligation • Devolvement of LC/invocation of guarantees • Deterioration in liquidity/working capital position • Substantial increase in long term debts in relation to equity • Declining sales • Operating losses/net losses • Rising sales and falling profits • Disproportionate increase in overheads relative to sales • Rising level of bad debt losses Operational warning signals • Low activity level in plant • Disorderly diversification/frequent changes in plan • Nonpayment of wages/power bills • Loss of critical customer/s • Frequent labor problems • Evidence of aged inventory/large level of inventory
3. Management related warning signals • Lack of co-operation from key personnel • Change in management, ownership, or key personnel • Desire to take undue risks • Family disputes • Poor financial controls • Fudging of financial statements • Diversion of funds
36 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks 4. Banking related Signals • Declining bank balances/declining operations in the account • Opening of account with other bank • Return of outward bills/dishonored cheques • Sales transactions not routed through the account • Frequent requests for loan • Economic recession • Emergence of new competition • Emergence of new technology • Changes in government / regulatory policies • Natural calamities
Abid Husein Saleh
Know your client profile (KYC): Most banks in India have a system of preparing know your client’ (KYC) profile/credit report. As a part of `KYC’ system, visits are made on clients and their places of business/units. The frequency of such visits depends on the nature and needs of relationship. Credit Assessment and Risk Management Mechanism: Credit assessment and Risk management mechanism are ever lasting solution to the problem of NPAs. Managing credit risk is a much more forward-looking approach and is mainly concerned with managing the quality of credit portfolio before default takes place. The documentation of credit policy and credit audit immediately after the sanction is necessary to upgrade the quality of credit appraisal in banks. In a situation of liquidity overhang the enthusiasm of the banking system is to increase lending with compromise on asset quality, raising concern about adverse selection and potential danger of addition to the NPAs stock. It is necessary that the banking system is equipped with prudential norms to minimize if not completely avoid the problem of credit risk and develop an effective internal credit risk models for the purpose of credit risk management. Organizational restructuring: With regard to internal factors leading to NPAs the onus for containing the same rest with the bank themselves. These will necessities organizational restructuring improvement in the managerial efficiency, skill up gradation for proper assessment of credit worthiness and a Change in the attitude of the banks towards legal action, which is traditionally viewed as a measure of the last resort. Reduce Dependence on Interest: The Indian banks are largely 37 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
depending upon lending and investments. The banks in the developed countries do not depend upon this income whereas 86 percent of income of Indian banks is accounted from interest and the rest of the income is fee based. The banker can earn sufficient net margin by investing in safer securities though not at high rate of interest. It facilitates for limiting of high level of NPAs gradually. It is possible that average yield on loans and advances net default provisions and services costs do not exceed the average yield on safety securities because of the absence of risk and service cost.
5. Watch-list/Special Mention Category The grading of the bank’s risk assets is an important internal control tool. It serves the need of the Management to identify and monitor potential risks of a loan asset. The purpose of identification of potential NPAs is to ensure that appropriate preventive / corrective steps could be initiated by the bank to protect against the loan asset becoming non-performing. Most of the banks have a system to put certain borrowable accounts under watch list or special mention category if performing advances operating under adverse business or economic conditions are exhibiting certain distress signals. These accounts generally exhibit weaknesses which are correctable but warrant banks’ closer attention. The categorization of such accounts in watch list or special mention category provides early warning signals enabling Relationship Manager or Credit Officer to anticipate credit deterioration and take necessary preventive steps to avoid their slippage into non performing advances
6. Willful Defaulters RBI has issued revised guidelines in respect of detection of willful default and diversion and siphoning of funds. As per these guidelines a willful default occurs when a borrower defaults in meeting its obligations to the lender when it has capacity to honor the obligations or when funds have been utilized for purposes other than those for which finance was granted. The list of willful defaulters is required to be submitted to SEBI and RBI to prevent their access to capital markets. Sharing of information of this nature helps banks in their due diligence exercise and helps in avoiding financing unscrupulous elements. RBI has advised lenders to initiate legal measures including criminal actions, wherever required, and undertake a proactive approach in change in management, where appropriate. 38 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks 5.2 Curative Management
Abid Husein Saleh
The curative measures are designed to maximize recoveries so that banks funds locked up in NPAs are released for recycling. The Central government and RBI have taken steps for controlling incidence of fresh NPAs and creating legal and regulatory environment to facilitate the recovery of existing NPAs of banks. They are:
1. One Time Settlement Schemes This scheme covers all sectors sub – standard assets, doubtful or loss assets as on 31st March 2000. All cases on which the banks have initiated action under the SRFAESI Act and also cases pending before Courts/DRTs/BIFR, subject to consent decree being obtained from the Courts/DRTs/BIFR are covered. However cases of willful default, fraud and malfeasance are not Covered. As per the OTS scheme, for NPAs up to Rs. 10crores, the minimum amount that should be recovered should be 100% of the outstanding balance in the account.
2. Lok Adalats Lok Adalat institutions help banks to settle disputes involving account in “doubtful” and “loss” category, with outstanding balance of Rs. 5 lakh for compromise settlement under Lok Adalat. Debt recovery tribunals have been empowered to organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh and above. This mechanism has proved to be quite effective for speedy justice and recovery of small loans. The progress through this channel is expected to pick up in the coming years.
3. Debt Recovery Tribunals (DRTs) The Debt Recovery Tribunals have been established by the Government of India under an Act of Parliament (Act 51 of 1993) for expeditious adjudication and recovery of debts due to banks and financial institutions. The Debt Recovery Tribunal is also the appellate authority for appeals filed against the proceedings initiated by secured creditors under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. The recovery of debts due to banks and financial institution passed in March 2000 has helped in strengthening the function of DRTs. Provision for placement of more than one recovery officer, power to attach defendant’s property/assets before judgment, penal provision for disobedience of tribunal’s order 39 | P a g e Rizvi Institute of Management Studies & Research
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or for breach of any terms of order and appointment of receiver with power of realization, management, protection and preservation of property are expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs in the times to come. DRTs which have been set up by the Government to facilitate speedy recovery by banks/DFIs, have not been able make much impact on loan recovery due to variety of reasons like inadequate number, lack of infrastructure, under staffing and frequent adjournment of cases. It is essential that DRT mechanism is strengthened and vested with a proper enforcement mechanism to enforce their orders. Non observation of any order passed by the tribunal should amount to contempt of court, the DRT should have right to initiate contempt proceedings. The DRT should empowered to sell asset of the debtor companies and forward the proceed to the winding – up court for distribution Among the lenders.
4. Securitization and SARFAESI Act Securitization is a relatively new concept that is taking roots in India of late. It is still in its infancy with only a few market players. Securitization is considered an effective tool for improvement of capital adequacy. It is also seen as a tool for transferring the reinvestment risk, apart from credit risk helping the banks to maintain proper match between assets and liabilities. Securitization can also help in reducing the risk arising out of credit exposure norms and the imbalances of credit exposure, which can help in the maintenance of healthy assets. The SARFAESI Act intends to promote Securitization, pool together NPAs of banks to realize them and make enforcement of Security Interest Transfer. The SARFAESI Act-2002 is seen as a booster, initially, for banks in tackling the menace of NPAs without having to approach the courts. With certain loopholes still remaining in the act, the experiences of banks were that the Act in its present form would not serve the envisaged objective of optimum recovery of NPAs, particularly with the hard-core NPA borrowers dragging the banks into endless litigation to delay the recovery process. The Supreme Court decision in regard to certain proviso of the SARFAESI Act also vindicated this view. This section deals with the features of Securitization and its Resourcefulness in tackling NPAS and about the SARFAESI Act, its resourcefulness and limitations in tackling the NPA borrowers and the implication of the recent Supreme Court judgment. With the steady sophistication of the Indian Financial Services Sector, the structured finance market is also growing significantly, of which Securitization occupies a prominent place. 40 | P a g e Rizvi Institute of Management Studies & Research
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With Basel II norms imminently being implemented by 2008, banks are required to pool up huge capital to offset the credit risk and operational risk components. Securitization, therefore, is seen to be an effective and vibrant tool for capital formation for banks in future.
5. Asset Reconstruction Company (ARC) This empowerment encouraged the three major players in Indian banking system, namely, State Bank of India (SBI), ICICI Bank Limited (ICICI) and IDBI Bank Limited (IDBI) to come together to set-up the first ARC. Arcil was incorporated as a public limited company on February 11, 2002 and obtained its certificate of commencement of business on May 7, 2003. In pursuance of Section 3 of the Securitization Act 2002, it holds a certificate of registration dated August 29, 2003, issued by the Reserve Bank of India (RBI) and operates under powers conferred under the Securitization Act, 2002. Arcil is also a "financial institution" within the meaning of Section 2 (h) of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (the "DRT Act"). Arcil is the first ARC in the country to commence business of resolution of non-performing assets (NPAs) upon acquisition from Indian banks and financial institutions. As the first ARC, Arcil has played a pioneering role in setting standards for the industry in India.
A) Unlocking capital for the banking system and the economy The primary objective of Arcil is to expedite recovery of the amounts locked in NPAs of lenders and thereby recycling capital. Arcil thus, provides relief to the banking system by managing NPAs and help them concentrate on core banking activities thereby enhancing shareholders value. B) Creating a vibrant market for distressed debt assets / securities in India offering a trading platform for Lenders
Arcil has made successful efforts in funneling investment from both from domestic and international players for funding these acquisitions of distressed assets, followed by showcasing them to prospective buyers. This has initiated creation of a secondary market of distressed assets in the country besides hastening their resolution. The efforts of Arcil would lead the countries distressed debt market to international standards C. To evolve and create significant capacity in the system for quicker resolution of NPAs by deploying the assets optimally With a view to 41 | P a g e Rizvi Institute of Management Studies & Research
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achieving high delivery capabilities for resolution, Arcil has put in place a structure aimed at outsourcing the various sub-functions of resolution to specialized agencies, wherever applicable under the provision of the Securitization Act, 2002. Arcil has also encourage, groomed and developed many such agencies to enhance its capacity in line with the growth of its activity.
6. Corporate Debt Restructuring (CDR) Corporate Debt Restructuring (CDR) framework is to ensure timely and transparent mechanism for restructuring of the corporate debts of viable entities facing problems, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned. In particular, the framework will aim at preserving viable corporate that are affected by certain internal and external factors and minimize the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme.
CDR system in the country will have a three-tier structure: A. CDR Standing Forum B. CDR Empowered Group C. CDR Cell
A. CDR Standing Forum: The CDR Standing Forum would be the representative general body of all financial institutions and banks participating in CDR system. All financial institutions and banks should participate in the system in their own interest. CDR Standing Forum will be a self-empowered body, which will lay down policies and guidelines, guide and monitor the progress of corporate debt restructuring.
B. CDR Empowered Group: The CDR Empowered Group would be mandated to look into each case of debt restructuring, examine the viability and rehabilitation potential of the Company and approve the restructuring package within a specified time frame of 90 days, or at best 180 days of reference to the Empowered Group.
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Non Performing Assets Management of Indian Banks C. CDR Cell
Abid Husein Saleh
The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR Cell in all their functions. The CDR Cell will make the initial scrutiny of the proposals received from borrowers / lenders, by calling for proposed rehabilitation plan and other information and put up the matter before the CDR Empowered Group, within one month to decide whether rehabilitation is prima facie feasible, if so, the CDR Cell will proceed to prepare detailed Rehabilitation Plan with the help of lenders and if necessary, experts to be engaged from outside. If not found prima facie feasible, the lenders may start action for recovery of their dues.
7. The Mechanism of the CDR CDR will be a Non-statutory mechanism. CDR mechanism will be a voluntary system based on debtor-creditor agreement and inter-creditor agreement. The scheme will not apply to accounts involving only one financial institution or one bank. The CDR mechanism will cover only multiple banking accounts / syndication / consortium accounts with outstanding exposure of Rs.20 crore and above by banks and institutions. The CDR system will be applicable only to standard and sub-standard accounts. However, as an interim measure, permission for corporate debt restructuring will be made available by RBI on the basis of specific recommendation of CDR "Core-Group", if a minimum of 75 per cent (by value) of the lenders constituting banks and FIs consent for CDR, irrespective of differences in asset classification status in banks/ financial institutions. There would be no requirement of the account / company being sick NPA or being in default for a specified period before reference to the CDR Group. This approach would provide the necessary flexibility and facilitate timely intervention for debt restructuring. Prescribing any milestone(s) may not be necessary, since the debt restructuring exercise is being triggered by banks and financial institutions or with their consent. In no case, the requests of any corporate indulging in willful default or misfeasance will be considered for restructuring under CDR.
8. Circulation of Information of Defaulters The RBI has put in place a system for periodical circulation of details of willful defaulters of banks and financial institutions. The RBI also publishes a list of borrowers (with outstanding Aggregate rupees one crore and above) against whom banks and financial institutions in 43 | P a g e Rizvi Institute of Management Studies & Research
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recovery of funds have filed suits as on 31st March every year. It will serve as a caution list while considering a request for new or additional credit limits from defaulting borrowing units and also from the directors, proprietors and partners of these entities.
9. Recovery Action against Large NPAs Among the various channels of recovery available to banks for dealing with bad loans, the SARFAESI Act and the Debt Recovery Tribunals (DRTs) have been the most effective in terms of amount recovered. The amount recovered as percentage of amount involved was the highest under the DRTs, followed by SARFAESI Act. The RBI has directed the PSBs to examine all cases of willful default of Rs. One crore and above and file criminal cases against willful defaulters. The board of directors are requested to review NPAs accounts of one crore and above with special reference to fix staff accountability in individually. The gross NPAs of the banks is gradually declined from Rs. 70861 crores in 2001 - 02 to Rs. 50552 crores in 2006 – 07, later the gross NPA are increased, it reached to Rs. 84747 crores in the year 2009-10. On the other hand the recovery percentage of NPA s increased, 17%by DRTs and 14.7% by SARFAESI Act from the year 2003-04 to 81% by DRTs and 33% by SARFAESI Act in 2008-09. Following the gross NPAs the recovery percentage decreased to 32% by DRTs and 30% by SARFAESI Act in the year 2009-10. The increase in level of NPAs and diminishing percentage of recoveries are due to Indian banks have largely followed a lagged cyclical pattern with regard to credit growth. This underlined the pro-cyclical behavior of the banking system, wherein asset quality can get compromised during periods of high credit growth and this can result in the creation of nonperforming assets for banks in the later years.
10. Credit Information Bureau The institutionalization of information sharing arrangement is now possible through the newly formed Credit Information Bureau of India Limited (CIBIL) it was set up in January 2001, by SBI, HDFC, and two foreign technology partners. This will prevent those who take advantage of lack of system of information sharing amongst leading institutions to borrow large amount against same assets and property, which has in no measures contributed to the incremental of NPAs of banks.
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Non Performing Assets Management of Indian Banks 6.0 CONCLUSION
Abid Husein Saleh
The problem of NPAs has been a major issue for the banking industry. The RBI which is the apex body for controlling level of non-performing assets have been giving guidelines and getting norms for the banks in order to control the incidents of faults. Reduction of NPAs in banking sector should be treated as national priority item to make the Indian Banking system more strong, vibrant and geared to meet the challenges of globalization. The use of technology like Core Banking Solutions will bring change Indian Banking to manage their non-performing assets.
Non-Performing Assets have been a big worry for the banks in India. It is just not a problem for the banks; they are bad for the economy too. The money locked up in Non-Performing Assets is not available for productive use and hence they have an adverse effect on banks’ profitability. If the bank could reduce the cost of Non-Performing Assets, cost will reduce and the profit and return on equity and assets will increase. It is not possible to eliminate totally the NonPerforming Assets in the banking business but can only be minimized. It is always wise to follow the proper policy appraisal, supervision and follow up of advances to avoid creation of NonPerforming Assets. The banks should take steps for reducing present non-performing assets, but necessary precaution should also be taken to avoid future Non Performing Assets. The banking industry is facing yet another period of change, perhaps greater than the one experienced in the immediate past and there is no doubt that Indian Bank has to manage its function successfully and skillfully during the present era, replete with significant economic, competitive and technological challenges in order to improve its deposits, advances, profitability and to reduce the Non-Performing Assets. To review a loan application the bank uses “5-Cs”which is as follows.
5-Cs A safety and soundness examiner also reviews a bank’s lending activity by rating the quality of a sample of loans made by the bank. When a bank reviews a loan application, it uses the “5-Cs” to assess the quality of the applicant. The 5-Cs stands for:
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o Capacity - measures the borrower’s ability to pay, including borrower’s payment source and amount of income related to debt. o Collateral - what are the bank’s options if the loan is not paid? What asset can be turned over to the bank, what is its market value, and can it be sold easily? A valuable asset might be a house or a car. o Condition - this refers to the borrower’s circumstances. For example, if a furniture storeowner is asking for a loan, the banker would be interested in how many chairs and sofas the store is expected to sell in the area over the next five years. o Capital - the applicant’s assets (house, car, and savings) minus liabilities (home mortgage, credit card balance) represent capital. If liabilities outweigh assets, the borrower might have difficulty repaying a loan if his regular source of income unexpectedly decreases. o Character - measures the borrower’s willingness to pay, including The borrower’s payment history, credit report and Information from other lenders.
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Non Performing Assets Management of Indian Banks BIBLIOGRAPHY
Abid Husein Saleh
Websites o Official website of Reserve bank of India www.rbi.org.in o Official website of Credit Information Bureau www.cibil.com o Official website of Corporate Debt Restructuring www.cdrindia.org
Reports o Reserve Bank of India: "Report on Trend and Progress of Banking in India" (Various Reports 2004-2012) o RBI Norms for NPA o Anand Sinha :’Indian Banking :Journey into the future ’RBI Monthly Bulletin , February 2012 o K.C.Chakrabarty:’Indian Banking Sector: Towards the next orbit’, RBI Monthly Bulletin, March 2012
Books Referred o Managing Non-performing Assets in Banks By S.N. Bidani o Banker's Handbook on N.P.A. Management By Banambar Sahoo o Non-performing Assets in Commercial Banks By Dr. Vibha Jain
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doc_295059922.pdf
in partial fulfillment of the requirements of Master of Management Studies Conducted by University of Mumbai through Rizvi Institute of Management Studies & Research
under the guidance of Prof. Vishal Singhi
Submitted by Abid Husein Saleh MMS Finance Roll No 10 Batch: 2011 – 2013.
Table of Figures
Figure 2.01 Figure 3.01 Figure 3.02 Figure 3.03 Figure 3.04 Basel III Standard Provision Requirement for Doubtful Assets Comparison of NPA of Banking sector Gross Non-Performing Assets As Percentage of Gross Advances Net Non-Performing Assets As Percentage Of Net Advances
9 15 18 24 24
Table of Charts
Chart 3.01 Chart 3.02 Chart 3.03 Chart 3.04 Chart 3.05 Chart 3.06 Chart 3.07 Chart 3.08 Chart 3.09 Chart 3.10 Chart 3.11 Chart 3.12 Chart 3.13 Growth Rate of NPA vis-à-vis Advances Gross NPAs as percentage of Gross Advances Trend in important Ratios Relating to NPAs Bank Group-wise Ratios Relating to NPAs Restructured Advances as per cent of Gross Advances of SCBs Restructured Advances as per cent of Gross Advances: Bank Group-wise Classification of Loan Assets – Bank Group-wise Gross NPA Ratio (Priority Sector) Bank Group-wise Gross NPA Ratio (Non-Priority Sector) Bank Group-wise Percentage Composition of NPAs of SCBs Restructured Standard Advances to Gross Total Advances Trend in number and value of cases under CDR Industry-wise break-up of value under CDR - June 2012
17 19 19 20 20 21 22 23 23 24 27 28 28
Acknowledgement
At the outset, I wish to convey my sincere my sincere thanks to Rizvi Institute of Management Studies and Research and all my teachers for their valuable help.
Further I find words inadequate to express my deep sense of gratitude and humble regards to Prof. Vishal Singhi for his guidance and encouragement during the project work which would not have been possible without his help and affectionate attitude.
I would also like to thank our director Dr. Kalim Khan for giving me extensive support in completion of the project and all the people who helped and assisted me wherever and whenever I needed their help by giving their precious time and valuable suggestions to me.
Last but not least I would like to give my sincere regards to all my friends for their kind cooperation towards completion of my project.
Abid Husein Saleh MMS-Finance Roll No-10
Executive Summary
A healthy banking system is essential for any economy striving to achieve growth and remain stable in competitive global business environment. Indian banks are favorable on growth, asset quality and profitability. RBI and Government have made some notable changes in policies and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations of commercial banks. In terms of quality of assets and capital adequacy, these banks have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. PSBs need to strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organizational performance ethic & strengthen human capital.
Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak
corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless industry utilities and service bureaus. One of the major drawbacks of SCBs is its NPAs.
The best indicator for the health of the banking industry in a country is its level of Nonperforming assets (NPAs). NPAs are one of the major concerns for banks in India. It reflects the performance of banks. Reduced NPAs generally gives the impression that banks have strengthened their credit appraisal processes over the years and growth in NPAs involves the necessity of provisions, which bring down the overall profitability of banks.
The Indian banking sector is facing a serious problem of NPA. The magnitude of NPA is comparatively higher in public sectors banks. To improve the efficiency and profitability of banks the NPA need to be reduced and controlled. This paper deals with understanding the concept of NPAs, its magnitude and major causes for an account becoming non-performing and strategies for managing NPA in Indian banks.
Over the few years Indian banking, attempts to integrate with the global banking has been facing lots of hurdles in its way due to certain inherent weakness, despite its high sounding claims and
lofty achievements. In a developing country, banking is seen as an important instrument of development, while with the demanding Non-Performing Assets (NPAs), banks have become burden on the economy. Non-Performing Assets are not merely non remunerative, but they add cost to the credit Management. The fear of Non-Performing Assets permeates the psychology of bank managers in entertaining new projects for credit expansion. Non-Performing Assets is not a dilemma facing exclusively the bankers; it is in fact an all pervasive national scourge swaying the entire Indian economy. Non-Performing Asset is a sore throat of the Indian economy as a whole.
Non-Performing Assets have affected the profitability, liquidity and competitive functioning of banks and developmental of financial institutions and finally the psychology of the bankers in respect of their disposition towards credit delivery and credit expansion. NPAs do not generate any income for the banks, but at the same time banks are required to make provisions for such NPAs from their current profits. Apart from internal and external complexities, increases in NPAs directly affects banks profitability sometimes even their existence. Published statistics revealed before five years that for every Rs of 100 in NPA the bank is losing Rs. 30 per annum. The quality of loan assets is the most important factor for the basic viability of the banking system. The overdue advances of banks in India are mounting and in consequence, the NPAs in their portfolio are on the rise, impinging on the banks viability.
Lower level of Non-Performing assets helps the bank in consolidating their position and gives credence to efficiency of the management. Pre – credit and post – credit appraisals are to be done by the bank more objectively. Close monitoring of borrower accounts, site visits, factory visits, etc. are to be done regularly. Rehabilitation of viable sick units is essential. Consultancy and technical services must be provided to the borrower units wherever necessary. It is necessary for the bank to adopt proper credit monitoring mechanism, with periodical inspection of the units along with regular flow of information from them pertaining to their financial liquidity, annual accounts, stock reports, etc. besides comparative risk analysis and compliance of terms and conditions of sanction.
TABLE OF CONTENTS
CHAPTER NO. 1
TOPIC HISTORY OF BANKING SYSTEM IN INDIA 1.1 Pre Nationalization Phase 1.2 Nationalization 1.3 Liberalization 1.4 Post 2004 Changes INTERNATIONAL REGULATORY FRAMEWORK FOR BANKS 2.1 CAMELS Framework 2.2 Bank for International Settlements (BIS)
PAGE NO. 1 2 3 4
2
5 6
3
ASSET CLASSIFICATION 3.1 Categories of NPAs 3.2 Guidelines for Classification of Assets 3.3 Provisioning Norms 3.4 Restructuring of Advances CAUSES AND CONSEQUENCES OF NPA’S IN BANKS 4.1 Reasons for Growing NPAs 4.2 Impact of rising NPAs STRATEGIES FOR OVERCOMING NPAS 5.1 Preventive Management 5.2 Curative Management 10 11 14 25
4
31 33
5
35 39 45 47
6 7
CONCLUSION BIBLIOGRAPHY
Non Performing Assets Management of Indian Banks 1.0 HISTORY OF INDIAN BANKING
Abid Husein Saleh
India has always been land of great economist and banking system in India is as old as its history itself. From past to present Banking System in India has taken many forms. The phases in the Indian Banking Sector can be divided in 4 parts: o Pre Nationalization o Nationalization o Liberalization o Post 2000 Changes
1.1 PRE NATIONALIZATION PHASE According to Kautalya?s Arthshastra, the minimum interest on capital was set at 15% per annum. Taking clue from Arthshastra, the Sahukari system evolved in India. Sahukars were a kind of private bankers. In this system borrowers were known to Sahukars. Lending was done with very little documentation, having exorbitant interest rates, which were compounded at short interval. Lending process often involved hypothecation or mortgage of properties. Due to lack of education, documents were tampered and peasants more often than not, have to surrender their properties to the corrupt Sahukars.
With coming up of Britishers in India, commercial banks got established. The first bank to be established was the Central Bank in 17861. After that came the Hindustan Bank and Bengal Bank. The East India Company came up with some of its own banks. They include Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843). Though these Banks worked as independent units but together they were called as Presidency Bank. These three banks were later amalgamated in 1920 to form Imperial Bank of India. Shareholders of this bank were mainly Europeans.
When Swadeshi movement was on its peak, many Banks with Indian management got established. These included the Punjab National Bank in 1894 with headquarters in Lahore. Bank of Baroda, Canada Bank, Indian Bank, Bank of India, Central Bank of India, and Bank of 1|Page Rizvi Institute of Management Studies & Research
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Mysore were set up. Apart from these banks many small, city level banks were also set up. With no regulation to guide these banks, many banks met with failures. With economy under siege of Britishers, growth of these banks was slow.
1.2 NATIONALIZATION Government intervention with banks began in 1930?s. The RBI act was passed in 1934 and Reserve Bank of India was established in 1935. RBI acted as the central bank of India, issuing banking notes and acting as supervisory body for all bank and exchange related activities. Before 1967 Indian banking sector used to consist of schedule commercial banks on which government had very little influence. They were free to decide about their credit policies and used to provide customized banking services to their client. It was an era of class banking. Many sectors, like agriculture were profit was less, was neglected by these banks. For a balanced growth of country, government felt need for having control over the policies of the commercial banks.
On December 1967 social control of banking sector took underway. This was done to align the banking policy to the need of economic policy. On 22nd December 1967 National Credit Council was set up to discuss and asses the credit priorities of the country. To promote export, Export credit (interest subsidy) scheme was introduced in 1968. To tighten its control over the banking sector, government established the Banking commission in January 1969. This commission was to look after: o Banking costs o Legislations affecting banking o Indigenous banking o Bank procedures o Non-banking financial intermediaries.
The most important turn in the history of Indian Banking industry came on 19th, July 1969 to when the 14 major schedule commercial banks with deposits over 50 crore were nationalized. With this, the era of mass banking emerged. In 1970 the SLR rate was increased from 25% to 28% and penalty for non-compliance of CRR and SLR was introduced which gave teeth to RBI 2|Page Rizvi Institute of Management Studies & Research
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to control the commercial banks. Six more banks were nationalized on 15th April 1980 to further control the heights of the economy. By the end of 1990’s nearly 80% of the banking sector was under the control of government. The planned economic development required huge development expenditures. This expenditure was met by automatic monetization of fiscal deficit and subjecting the banking sector to large preemption – both in terms of the statutory holding of Government securities (statutory liquidity ratio, or SLR) and administrative direction of credit to preferred sectors. Focus of development was on sectors like agriculture, small scale industry, retail trade, small businesses and transport. A part of the successes of green revolution could be attributed to these public banks.
There was other side of the nationalization too. Mass banking resulted in deterioration of customer banker relationship. There was no healthy competition among the banks. A complex structure of administered interest rates prevailed, guided more by social priorities, necessitating cross-subsidization to sustain commercial viability of institutions. These not only distorted the interest rate mechanism but also adversely affected financial market development. There were all signs of `financial repressions? in the system.
1.3 LIBERALIZATION Country faced a major humiliation, when it was forced to pledge its gold reserves for avoiding the balance of payment crisis. Narasimha committee was formed to give recommendation on banking sector reforms. On the basis of its report in 1991 CRR and SLR rates were reduced. The SLR has been gradually reduced from a peak of 38.5% to 25%. The CRR was reduced from a peak of 15% during 1989 to 1992 to 4.5% in June 2003. However it has been revised to 6%. The interest rate was deregulated. There were some institutional reforms too. Board for Financial Supervision (BFS) 3, was formed in 1994, to exercise the powers of supervision and inspection in relation to the banking companies, financial institutions and non-banking companies. It was constituted to form an armslength relationship between regulation and supervision. On similar lines, a Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) prescribes policies relating to the regulation and supervision of all types of payment and Settlement systems, set standards for 3|Page Rizvi Institute of Management Studies & Research
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existing and future systems, authorize the payment and settlement systems and determine criteria for membership to these systems.
Banking sector was open to the private players in 1993. Private investors have been allowed to invest upto 49% in public sector banks. Diversification of ownership, while retaining public sector character of these banks has led to greater market accountability and improved efficiency without loss of public confidence and safety. Since 1993, 12 private banks have been set up. With increase in FDI limit in the banking sector to 74% it attracted many foreign investors. Major shareholdings in ICICI and HDFC banks are of foreign investors only. With large amount of foreign investment and foreign management coming to India, the structure of banking system took a major turn. These private banks started giving services of international standards. Suddenly Indian cities landscape was filled with ATMs.
1.4 POST 2000 CHANGES To overcome the competitions from the private players the public sector bank started getting structural changes. State Bank of India, the biggest public sector bank undertook business process re-engineering. The business process reengineering (BPR) team was constituted in June 2003 with McKinsey & Company as consultants. The BPR's basic goal was to create an operating architecture that would facilitate service delivery of international standards. The project objectives were defined as "increasing customer satisfaction and convenience, freeing up time for branch manager and branch staff to focus on sales and marketing, simplifying process for employees, enhancing SBI's competitiveness in the market, increasing the profitability through higher market share and improved process efficiency..." After consultation the loan granting process of SBI was centralized. Moreover the branches of the SBI were redesigned and decorated to give its customer a better banking experience.
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2.0 INTERNATIONAL REGULATORY FRAMEWORKS FOR BANKS
2.1 CAMELS Framework CAMELS is a framework for composite evaluation of banks (and financial intermediaries, in general). The acronym stands for: Capital Adequacy This is a measure of financial strength, in particular its ability to cushion operational and Abnormal losses. It is calculated based on the asset structure of the bank, and the risk Weights that have been assigned by the regulator for each asset class. o Asset Quality This depends on factors such as concentration of loans in the portfolio, related party Exposure and provisions made for loan loss. o Management Management of the bank obviously influences the other parameters. Operating cost per Unit of money lent and earnings per employee are parameters used. o Earnings This can be measured through ratios like return on assets, return on equity and interest spread. o Liquidity In order to meet obligations as they come, the bank needs an effective asset-liability Management system that balances gaps in the maturity profile of assets and liabilities. However, if the bank provides too much liquidity, then it will suffer in terms of profitability. This can be measured by the Loans to Deposit ratio, separately for short term, medium Term and long term. o Sensitivity to Market Risk Longer the maturity of debt investments, more prone it is to valuation losses, if interest rates go up. More sensitive the portfolio is to market risk, the more risky the bank is. The CAMELS framework was first used by the regulators in the United States. Based on this they rated the banks on a scale of 5 – the strongest was rated as 1and the weakest was rated as 5.
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Non Performing Assets Management of Indian Banks 2.2 BANK FOR INTERNATIONAL SETTLEMENTS (BIS)
Abid Husein Saleh
Established on 17 May 1930, the BIS is the world's oldest international financial organization It has its head office in Basel, Switzerland and two representative offices: in the Hong Kong Special Administrative Region of the People's Republic of China and in Mexico City. BIS fosters co-operation among central banks and other agencies in pursuit of monetary and financial stability. It fulfills this mandate by acting as: o Forum to promote discussion and policy analysis among central banks and within the International financial community o Center for economic and monetary research o Prime counterparty for central banks in their financial transactions o Agent or trustee in connection with international financial operations
Every two months, the BIS hosts in Basel, meetings of Governors and senior officials of Member central banks. The meetings provide an opportunity for participants to discuss the world economy and financial markets, and to exchange views on topical issues of central bank interest or concern. The Basel Committee on Banking Supervision comprises representatives from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. BIS also organizes frequent meetings of experts on monetary and financial stability issues, as well as on more technical issues such as legal matters, reserve management, IT systems, internal audit and technical cooperation. BIS is a hub for sharing statistical information among central banks. It publishes statistics on global banking, securities, foreign exchange and derivatives markets. Through seminars and workshops organized by its Financial Stability Institute (FSI), the BIS disseminate knowledge among its various stake-holders. 6|Page Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
The role of BIS has been changing in line with the times. Initially, it handled the payments that Germany had to make consequent to the First World War. Following the Second World War and until the early 1970s, it focused on implementing and defending the Bretton Woods system. In the 1970s and 1980s, it had to manage the cross-border capital flows following the oil crises and the international debt crisis. The economic problems highlighted the need for effective supervision of internationally active banks. This culminated in the Basel Capital Accord on international convergence of capital measurement and capital standards, in 1988.
Basel Accords The Basel Accord of 1988 (Basel I) focused almost entirely on credit risk. It defined capital, and a structure of risk weights for banks. Minimum requirement of capital was fixed at 8% of riskweighted assets. The G-10 countries agreed to apply the common minimum capital standards to their banking industries by end of 1992. The standards have evolved over time. In 1996, market risk was incorporated in the framework. In June 2004, a revised international capital framework was introduced through Basel II. The following year, an important extension was made through a paper on the application of Basel II to trading activities and the treatment of double default effects. In July 2006, a comprehensive document was brought out, which integrated all applicable provisions from the 1988 Accord, Basel II and the various applicable amendments.
The Basel II framework is based on three pillars: The First Pillar – Minimum Capital Requirements Three tiers of capital have been defined: Tier 1 Capital includes only permanent shareholders’ equity (issued and fully paid ordinary shares and perpetual non-cumulative preference shares) and disclosed reserves (share premium, retained earnings, general reserves, and legal reserves) Tier 2 Capital includes undisclosed reserves, revaluation reserves, and general provisions and loan-loss reserves, hybrid (debt / equity) capital instruments and subordinated Term debt. A limit of 50% of Tier 1 is applicable for subordinated term debt. Tier 3 Capital is represented by short-term subordinated debt covering market risk. This is limited to 250% of Tier 1 capital that is required to support market risk. 7|Page Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks The Second Pillar – Supervisory Review Process Four key principles have been enunciated:
Abid Husein Saleh
Principle 1: Banks should have a process for assessing their overall capital adequacy In relation to their risk profile and a strategy for maintaining their capital levels. Principle 2: Supervisors should review and evaluate the bank’s internal capital Adequacy assessments and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. Appropriate corrective action is to be taken, if required. Principle 3: Supervisors should expect banks to operate above the minimum regulatory Capital ratios and should have the ability to require banks to hold capital in excess of the minimum. Principle 4: Supervisors should seek to intervene at an early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of a particular bank and should require rapid remedial action if capital is not maintained Or restored. The Third Pillar – Market Discipline This is meant to complement the other two pillars. Market discipline is to be encouraged by developing a set of disclosure requirements that will allow market participants to Assess key pieces of information on the scope of application, capital, risk exposures, Risk assessment processes and overall capital adequacy of the institution. The banks disclosures need to be consistent with how senior management and the Board of Directors access and manage the risks of the bank. The capital adequacy requirement was maintained at 8%. However, the whole approach is considered to be more nuanced than Basel I. The stresses caused to institutions and the markets during the economic upheaval in the last couple of years, created a need for further strengthening of the framework. At its 12 September 2010 meeting, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements. These capital reforms, together with the introduction of a global liquidity standard, deliver on the core of the global financial reform agenda (Basel III).
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Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Basel III is a comprehensive set of reform measures to strengthen the regulation, supervision and risk management of the banking sector. These measures aim to: o Improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source o Improve risk management and governance o Strengthen banks' transparency and disclosures. o Bank-level, or micro-prudential regulation, which will help raise the resilience of individual banking institutions to periods of stress. o Macro-prudential, system wide risks that can build up across the banking sector as well as the pro-cyclical amplification of these risks over time. These two approaches to supervision are complementary as greater resilience at the individual bank level reduces the risk of system wide shocks. The Committee's package of reforms will increase the minimum common equity requirement from 2% to 4.5%. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%. This reinforces the stronger definition of capital agreed by Governors and Heads of Supervision in July and the higher capital requirements for trading, derivative and securitization activities to be introduced at the end of 2011.
Figure 2.01 Basel III Standard
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Non Performing Assets Management of Indian Banks 3.0 ASSET CLASSIFICATION
Abid Husein Saleh
3.1 Categories of NPAs Banks are required to classify nonperforming assets further into the following three categories based on the period for which the asset has remained nonperforming and the realisability of the dues: o Substandard Assets o Doubtful Assets o Loss Assets
Substandard Assets With effect from 31 March 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of the borrower guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.
Doubtful Assets With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable.
Loss Assets A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. 10 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks 3.2 Guidelines for Classification of Assets
Abid Husein Saleh
o Broadly speaking, classification of assets into above categories should be done taking into account the degree of well-defined credit weaknesses and the extent of dependence on collateral security for realization of dues. o 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. The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cutoff point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines. o Availability of security / net worth of borrower/ guarantor the availability of security or net worth of borrower/ guarantor should not be taken into account for the purpose of treating an advance as NPA or otherwise, except to the extent provided as income recognition is based on record of recovery. o Accounts with temporary deficiencies the classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc. In the matter of classification of accounts with such deficiencies banks may follow the following guidelines:
i) Banks should ensure that drawings in the working capital accounts are covered by the adequacy of current assets, since current assets are first appropriated in times of distress. Drawing power is required to be arrived at based on the stock statement which is current. 11 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
However, considering the difficulties of large borrowers, stock statements relied upon by the banks for determining drawing power should not be older than three months. The Outstanding in the account based on drawing power calculated from stock statements. A working capital borrowal account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower's financial position is satisfactory.
ii) Regular and ad hoc credit limits need to be reviewed/ regularized not later than three months from the due date/date of ad hoc sanction. In case of constraints such as nonavailability of financial statements and other data from the borrowers, the branch should furnish evidence to show that renewal/ review of credit limits is already on and would be completed soon. In any case, delay beyond six months is not considered desirable as a general discipline. Hence, an account where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be treated as NPA. o Upgradation of loan accounts classified as NPAs If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as non-performing and may be classified as ‘standard’ accounts. With regard to upgradation of a restructured/ rescheduled account which is classified as NPA. o Advances under Consortium Arrangements Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the other member banks and therefore, be treated as NPA. The banks participating in the consortium should, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books. 12 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
o Accounts where there is erosion in the value of security/frauds committed by borrowers In respect of accounts where there are potential threats for recovery on account of erosion in the value of security or non-availability of security and existence of other factors such as frauds committed by borrowers it will not be prudent that such accounts should go through various stages of asset classification. In cases of such serious credit impairment the asset should be straightaway classified as doubtful or loss asset as appropriate:
i. Erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets.
ii. If the realizable value of the security, as assessed by the bank/ approved valuers/ RBI is less than 10 per cent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset. It may be either written off or fully provided for by the bank.
Advances against Term Deposits, NSCs, KVP/IVP, etc.
Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs, provided adequate margin is available in the accounts. Advances against gold ornaments, government securities and all other securities are not covered by this exemption.
Agricultural Advances i. A loan granted for short duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for two crop seasons. A loan granted for long duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for one crop season. For the purpose of these guidelines, “long duration” crops would be crops with crop season longer than one year and crops, which are not “long duration” crops would be treated as “short duration” crops. The crop season for each crop, which means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers’ Committee in each
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Non Performing Assets Management of Indian Banks
Abid Husein Saleh
State. Depending upon the duration of crops raised by an agriculturist, the above NPA norms would also be made applicable to agricultural term loans availed of by him.
In such cases of conversion or re-schedulement, the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as NPA. The asset classification of these loans would thereafter be governed by the revised terms & conditions and would be treated as NPA if interest and/or installment of principal remain overdue for two crop seasons for short duration crops and for one crop season for long duration crops. For the purpose of these guidelines, "long duration" crops would be crops with crop season longer than one year and crops, which are not 'long duration" would be treated as "short duration" crops.
ii. While fixing the repayment schedule in case of rural housing advances granted to agriculturists under Indira Awas Yojana and Golden Jubilee Rural Housing Finance Scheme, banks should ensure that the interest/installment payable on such advances are linked to crop cycles.
3.3 Provisioning Norms
General o The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines. o In conformity with the prudential norms, provisions should be made on the nonperforming assets on the basis of classification of assets into prescribed categories as detailed in paragraphs 4 supra. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realization of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against substandard assets, doubtful assets and loss assets as below:
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Non Performing Assets Management of Indian Banks Loss Assets
Abid Husein Saleh
o Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for.
Doubtful Assets o 100 percent of the extent to which the advance is not covered by the realizable value of the security to which the bank has a valid recourse and the realizable value is estimated on a realistic basis. o In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful:
Period for which the advance has remained in ‘doubtful’ category Up to one year One to three years More than three years
Provision requirement (%)
25 40 100
Table 3.01 Provision Requirement for Doubtful Assets
Additional Provisions for NPAs at Higher than Prescribed Rates The regulatory norms for provisioning represent the minimum requirement. A bank may voluntarily make specific provisions for advances at rates which are higher than the rates prescribed under existing regulations, to provide for estimated actual loss in collectible amount, provided such higher rates are approved by the Board of Directors and consistently adopted from year to year. Such additional provisions are not to be considered as floating provisions. The additional provisions for NPAs, like the minimum regulatory provision on NPAs, may be netted off from gross NPAs to arrive at the net NPAs.
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Non Performing Assets Management of Indian Banks Provisions on Leased Assets i) Substandard Assets
Abid Husein Saleh
o 15 percent of the sum of the net investment in the lease and the unrealized portion of finance income net of finance charge component. The terms ‘net investment in the lease’, ‘finance income’ and ‘finance charge’ are as defined in ‘AS 19 Leases’ issued by the ICAI. o Unsecured lease exposures, as defined in paragraph 5.4 above, which are identified as ‘substandard’ would attract additional provision of 10 per cent, i.e., a total of 25 per cent.
ii) Doubtful Assets o 100 percent of the extent to which, the finance is not secured by the realizable value of the leased asset. Realizable value is to be estimated on a realistic basis. In addition to the above provision, provision at the following rates should be made on the sum of the net investment in the lease and the unrealized portion of finance income net of finance charge component of the secured portion, depending upon the period for which asset has been doubtful.
iii) Loss Assets o The entire asset should be written off. If for any reason, an asset is allowed to remain in books, 100 percent of the sum of the net investment in the lease and the unrealized portion of finance income net of finance charge component should be provided for.
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Non Performing Assets Management of Indian Banks Non-Performing Assets
Abid Husein Saleh
Gross NPA ratio at system-level increased, mainly on account of the deterioration in asset quality of public sector banks During 2011-12, the deteriorating asset quality of the banking sector emerged as a major concern, with gross NPAs of banks registering a sharp increase. The spurt in NPAs could be attributed to the slowdown prevailing in the domestic economy as well as inadequate appraisal and monitoring of credit proposals.
The deterioration in asset quality was more pronounced in the case of public sector banks. During 2011-12, the gross NPAs of public sector banks increased at a higher rate as compared with the growth rate of NPAs at a system-level.
Chart 3.1 Growth Rate of NPA vis-à-vis Advances
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Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Item
Public sector banks 746 746 928 478 23 1,172 2.4 3.3 360 591 1.2 1.7
Nationalised banks*
SBI Group
Private sector banks 182 182 98 73 19 187 2.5 2.1 44 44 0.6 0.5
Old private sector banks 36 36 27 20 1 42 1.9 1.8 9 13 0.5 0.6
New private sector banks 145 145 71 52 18 145 2.7 2.2 34 30 0.6 0.5
Foreign banks
Scheduled commercial banks 979 979 1,071 585 43 1,423 2.5 3.1 417 649 1.1 1.4
Gross NPAs Closing balance for 2010-11 Opening balance for 2011-12 Addition during 2011-12 Recovered during 2011-12 Written off during 2011-12 Closing balance for 2011-12 Gross NPAs as per cent of Gross Advances 2010-11 2011-12 Net NPAs Closing balance for 2010-11 Closing balance for 2011-12 Net NPAs as per cent of Net Advances 2010-11 2011-12
442 442 586 325 13 690 2.1 2.8 212 389 1.0 1.6
303 303 341 152 10 482 3.4 4.6 147 202 1.7 2.0
50 50 45 32 62 2.5 2.6 12 14 0.6 0.6
Table 3.02 Comparison of NPA of Banking sector
Slippage Ratio Deteriorated though Recovery Ratio witnessed an Improvement In addition to an increase in gross NPAs at the system-level, fresh accretion of NPAs, as captured by the slippage ratio5 also increased during 2011-12 compared with the previous year. However, on a positive note, the recovery ratio6 of the banking sector witnessed an improvement during the year. During 2011-12, the written-off ratio7 was significantly lower as compared with the previous year
At the bank group level, the accretion to NPAs as captured by the slippage ratio was higher in the case of public sector banks and foreign banks. However, their recovery performance was also better than private sector banks. Among various bank groups, new private sector banks relied more on writing off NPAs as a measure to contain their NPAs level.
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Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Chart 3.02 Gross NPAs as percentage of Gross Advances
Chart 3.03 Trend in important Ratios Relating to NPAs
Restructured Standard Advances Increased Significantly In recent years, restructuring of advances has been one of the important channels used by banks to contain the deterioration in asset quality caused by burgeoning NPAs. Consequent to the slowdown in domestic economy, banks, especially public sector banks actively resorted to restructuring their advances under the special dispensation scheme of the Reserve Bank announced during 2008. The scheme enabled banks to retain the status of standard accounts even after restructuring. The steep increase in gross NPAs during 2011-12 was accompanied by a considerable pick-up in the growth of restructured advances. This was mainly due to the steep increase in restructured advances by public sector banks, particularly nationalized banks
During 2011-12, total amount of NPAs recovered through the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), Debt Recovery Tribunals (DRTs) and Lok Adalats registered a decline compared with the previous year. Of the total amount recovered through these channels, recoveries under the SARFAESI Act constituted almost 70 per cent. 19 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Banks approach the DRTs in case they fail to recover total amount of their bad loans through the SARFAESI Act. At present, there are 33 DRTs and five Debt Recovery Appellate Tribunals across the country. NPAs recovered through DRTs constituted almost 28 per cent of total NPAs recovered through these three channels
As at end-June 2012, banks subscribed to almost 70 per cent of total security receipts issued by 14 securitization/reconstruction companies. These companies, which function under the SARFAESI Act, acquire NPAs from banks, which help the banking sector to improve the quality of their balance sheets.
Chart 3.04 Bank Group-wise Ratios Relating to NPAs
Chart 3.05 Restructured Advances as per cent of Gross Advances of SCBs
Provisioning Coverage Ratio Declined Though total provisioning increased at a higher rate, in sync with the higher growth of NPAs, the provisioning coverage ratio (PCR) dipped compared with the previous year. This was mainly due to the decline in the PCR of public sector banks.
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Non Performing Assets Management of Indian Banks Net NPAs Increased Significantly
Abid Husein Saleh
In sync with the acceleration in growth of gross NPAs as well as a lower provisioning coverage, net NPAs registered higher growth. Net NPA ratio was on a higher side for public sector banks, as compared with private sector and foreign banks.
Chart 3.06 Restructured Advances as per cent of Gross Advances: Bank Group-wise
NPAs became stickier, with proportion of substandard as well as doubtful assets in gross advances registering an increase Apart from an increase in NPAs, the deterioration in asset quality was also evident in the form of rising sub-standard/doubtful assets as a percentage of gross advances. Increase in these two categories of NPAs as percentage of gross advances indicated that NPAs became stickier.
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Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Chart 3.07 Classification of Loan Assets – Bank Group-wise
Sector-wise Analysis of Non-performing Assets
Deterioration in Asset quality of Public Sector banks was spread across priority and nonpriority sectors Bank group-wise analysis of the ratio of gross NPAs to gross advances indicated that for public sector banks, this ratio increased for both the priority and non-priority sectors. In addition, the gross NPAs to gross advances ratio (priority sector) was significantly higher for public sector banks than other bank groups.
Nearly half of the total NPAs were attributed to priority sectors During 2011-12, total priority sector NPAs increased at a significantly higher rate than the growth rate of credit to the priority sector. However, the share of the priority sector in total NPAs declined compared with the previous year. Among bank groups, proportion of priority sector in total NPAs was higher for public sector banks. 22 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Chart 3.08 Gross NPA Ratio (Priority Sector) Bank Group-wise
Chart 3.09 Gross NPA Ratio (Non-Priority Sector) Bank Group-wise
Share of Agricultural sector in total NPAs registered an increase The sectoral classification of NPAs revealed that, during 2011-12, the share of agriculture in total NPAs increased marginally. However, despite the subdued industrial performance, the share of micro and small enterprises in total NPAs of the banking sector came down as compared with the previous year.
Liquidity During 2011-12, the liquidity of banks was adversely affected by many structural and frictional factors, which include, inter alia, deceleration in deposits growth rate, growing mismatch in maturity profile of assets and liabilities as well as exposure to long-run infrastructure projects. The percentage of liquid assets (cash and balances with the Reserve Bank in excess of CRR requirements, and investments and advances with maturity up to one year) in total assets can be taken as a rough measure of banks’ liquidity condition. This ratio deteriorated marginally during 2011-12.
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Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Chart 4.10 Percentage Composition of NPAs of SCBs
Name of the Bank 2008-09 2009-10 2010-11 Scheduled Commercial Banks 2.25 2.39 2.5 Public Sector Banks 1.97 2.19 2.4 Private Sector Banks 2.89 2.74 2.5 Foreign Banks in India 3.8 4.26 2.5 Table 3.03 Gross Non-Performing Assets As Percentage of Gross Advances
2011-12 3.1 3.3 2.1 2.6
Name of the Bank 2008-09 2009-10 2010-11 2011-12 Scheduled Commercial Banks 1.05 1.11 1.1 1.4 Public Sector Banks 0.94 1.09 1.2 1.7 Private Sector Banks 1.29 1.01 0.6 0.5 Foreign Banks in India 1.81 1.82 0.6 0.6 Table 3.04 Net Non-Performing Assets As Percentage Of Net Advances
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Non Performing Assets Management of Indian Banks
Abid Husein Saleh
Advances in each of the four asset categories (i.e., standard, substandard, doubtful and loss) of the PSBs during 1993 to 1998 are given in the above table; the proportion of standard assets of PSBs has increased from 82.2 per cent in end-March 1997 to 97.99 per cent in endMarch 2009 and there was a slight decrease in the year 2010. The substandard assets remained constant in the year 1997 and 1998 but from the year 1999 there was a continuous decrease in the ratio till the year 2005, later on for the three years i.e. 2006, 2007 and 2008it remained stable then decreased in the year 2009 but increased in the year 2010. The doubtful assets trend moved quite opposite to the standard assets trend throught the study in case of loss assets also the trend was same like doubtful assets trend only i.e. there was a continuous decrease in the ratio till the 2009 except in the year 1999 and there was a slight increase in the year 2010 as in the case of substandard assets and doubtful assets. It is also observed in the above table that throught the study period except in the year 2010 out of the three categories of assets that form NPAs the doubtful assets had a major share in contributing to gross NPAs whereas in the year 2010 the major portion of Gross NPAs was occupied by substandard assets followed by doubtful assets and loss assets.
3.4 Restructuring of Advances Restructuring is an accepted practice worldwide through which lenders nurture problematic, but viable borrowal accounts. It is a legitimate strategy adopted by lenders and borrowers especially during times of distress to preserve the economic value of the viable loan accounts. Restructuring has been followed in India for many years and the guidelines in this regard have evolved over a period taking into account international best practices, status of development of financial markets and changing economic conditions. The extant restructuring guidelines cover three broad categories (i) large corporate advances with multiple/consortium banking under Corporate Debt Restructuring (CDR), (ii) SME Debt restructuring mechanism and (iii) Restructuring of other advances. This system has fulfilled its objective to a large extent. These guidelines on restructuring have evolved in the context of international experience
It is a fact that restructuring of advances across the banking sector has increased during the current financial year as also during the last financial year. This is a matter of concern. As regards restructuring under CDR mechanism, this has also been in line with increase in non-CDR 25 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
restructuring. According to data furnished by CDR Cell, there has been a spurt in the number of cases referred to CDR Cell from the year 2011-12 onwards. As against 49 cases involving 226.2 billion referred during 2010-11, 87 cases involving 678.9 billion were referred during 2011-12. During the period April - August of the current year, there are 59 cases involving 306.4 billion being referred to CDR. The reasons for rise in restructuring may be attributed to the effects of global recession coupled with internal factors like domestic slowdown, which have played a significant role in the deterioration in asset quality.
Aggressive lending by banks in the past, banks not exercising oversight on diversification into non-core areas by companies, banks not enforcing discipline on companies regarding unhedged forex exposures and delay in disbursements are areas on which banks ought to exercise much better control. Delay in administrative clearances is an equally important reason for pressure on asset quality which needs correction. The spurt in restructuring of advances is a matter of concern, though it may not have systemic dimension. The Reserve Bank is closely monitoring the position. Some course correction at the level of all stake holders may definitely improve the situation.
With a view to reviewing existing guidelines on restructuring of advances and suggest revisions taking into account the best international practices and accounting standards, the Reserve Bank had constituted a Working Group (WG) under the chairmanship of Shri B. Mahapatra,
Executive Director, Reserve Bank of India. The WG has examined the issues and its major recommendations can be summarized as below: o The regulatory forbearance available on asset classification on restructuring presently needs to be withdrawn after two years. o During the interregnum, provision on standard restructured accounts which get the asset classification benefit on restructuring be increased from the present 2 per cent to 5 per cent, in a phased manner in case of existing accounts (stock) and immediately in case of newly restructured accounts (flow).
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o In view of the importance of infrastructure sector, asset classification benefit on restructuring may however be allowed for a longer period in cases where restructuring is due to change in date of commencement of commercial operation of infrastructure projects. o A cap of say 10 per cent, to be prescribed on amount of restructured debt which can be converted into preference equity shares. o RBI may prescribe the broad benchmarks for viability parameters based on those used by CDR Cell and banks may adopt them with suitable adjustments if any for specific sectors. o Compulsory promoters stake in the restructured accounts to be increased by way of higher sacrifice and personal guarantee. o Right of recompense may be made mandatory in all cases. o Disclosure requirements to be made comprehensive but to exclude standard restructured accounts which have shown consistent satisfactory performance.
Second Quarter Review of Monetary Policy 2012-13 on October 30, 2012 has announced an increase in the provision for restructured standard accounts from the existing 2.0 per cent to 2.75 per cent in line with a major recommendation of the WG. It has also been announced that draft guidelines on the subject taking into account the recommendations of the WG as also the comments received in this regard will be issued by end-January 2013.
Chart 3.11 Restructured Standard Advances to Gross Total Advances
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Non Performing Assets Management of Indian Banks
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Chart 3.12 Trend in number and value of cases under CDR
Chart 3.13 Industry-wise break-up of value under CDR - June 2012
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Non Performing Assets Management of Indian Banks
Abid Husein Saleh
4.0 CAUSES AND CONSEQUENCES OF NPA’S IN BANKS
One of the reasons for the accumulation of large portfolio of NPAs with banks is often lending is not linked to productive investment and the recovery of credit is not linked to product scale. The borrowers are mainly farmers and small scale industries owner whose financial condition are generally weak. The volume of bank credit tacked in sick industries is the evidence of this malady. Sometimes it is found that advice given by BIFR and directions given by the courts to banks that they should provide loans to sick industries. This type of practice is aggravating NPAs situation. Another, faulty lending policy and making compulsion lending to priority sector by banks. There are many other causes which are also responsible for accumulation of NPAs. Many of these causes are related to faulty credit management like defective credit in recovery mechanism, lack of professionalism in the work force, time lag between sanctions and disbursement of loan, unscientific repayment schedule, mis-utilision of loans by user, untimely communication to the borrowers regarding their due date, lack of sponge legal mechanism, political at local levels and waive-off policy of loan by government (1991 & 2008) etc. have also been contributing to mounting NPAs in SCBs in India. If the level of NPAs is not controlled timely they will
Reduce the earning capacity of assets and badly affect the ROA. o Higher provisioning requirement on mounting NPAs adversely affect capital adequacy ratio and banks profitability. o Cost of Capital will increase due to high NPAs and require economic value added. (EVA=Net Operation Profit after Tax-Cost of Capital) o NPAs causes to decrease the value of share sometimes even below their book value in the capital market. o Affect the market competitiveness o Cause reduction in availability of funds for further credit expansion due to the unproductiveness of the existing portfolio. 29 | P a g e Rizvi Institute of Management Studies & ResearchNon Performing Assets Management of Indian Banks o NPAs affect the risk facing ability of banks.
Abid Husein Saleh
o On the whole it effect the credibly of the banks and banks will be in difficult position in raising fresh capital from the market for future financial needs.
OCCURRENCE OF NPA Present level of NPAs was considered as a very big problem for the banks and needs immediate steps to be taken to check it. As far as causes of NPAs are concerned, it may be different in case of priority sector and non-priority sector. The factors responsible for NPAs may be classified into two broad categories internal as well as external. o Priority Sector Advances: Willful default induced by officially announced loan waiver scheme vitiates the payment culture. People feel that loans given to them will be waived off with the passage of time by one political party or the other. Genuine viability problem of borrowing unit and willful default caused by other factors are graded as next in importance. Weak monitoring and absence of effective supervision of loan accounts on their part also leads to this problem. Lack of technical and managerial expertise on the part of borrowers is the next important factor. Moreover, wrong identification of beneficiary and weakness in credit appraisal systems are the other important reasons of this problem. Banks do not have much discretion in granting of loans to priority sector because targets are fixed under directed priority sector lending irrespective of recovery potential. Other factors like non-availability of reliable data related to market and industry and delay in disbursement of credit.
o Intravenous Causes in non- priority Sector Advances: Due to lack of networking banks do not have any information sharing system by which they can know the information regarding Borrowers, his credit worthiness and past record. Credit appraisal system of the banks is also weak which leads to improper assessment of returns from the activities being financed, repaying capacities and risk bearing ability of the borrower and resultantly the NPAs. Slow disposal of recovery cases is major factor contributing towards accumulation of NPAs in non- priority sector advances. Once NPAs occurs, recovery through legal measures is a very lengthy and tedious process. 30 | P a g e Rizvi Institute of Management Studies & Research
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There are some other external factor such as inadequate infrastructural facilities like supply of power and other essential inputs, and withdrawal of policies like product reservation and price preference etc., which make the units unviable in this competitive environment. Total advances of commercial banks has increased from 558679 crore in 2001 to 2507885 crore in 2008. It also depicts that percentage of NPA’s of advances has declined from 11.44 % to 2.3 % in the same period. In case of doubtful assets these were maximum in year 2005 (63.80%). Loss assets were maximum in 2006 (13.50%). But later on it gain momentum and showed increase. Increasing of loss assets or NPA’s is not good indicator for the development of a country or an economy.
The Non-Performing Assets (NPAs) of the Indian banking sector have been incessantly rising in the past six months. Historically, in 1997, NPAs were 15.8% of loans for the banking sector, which nosedived to 2.4% in 2008. This figure stands at 2.94% of loans in 2012. In absolute figures, NPAs have doubled from 2009 to 2012 and assets under reconstruction had trebled during the same period. India’s biggest lender, State Bank of India, is experiencing an NPA level of 4.99% of total loans. According to a recently published Credit Suisse Group AG report, 10 large industrial houses account for 13% of total assets financed by the Banking system, which means that bank lending is getting increasingly skewed. Further, of the total reconstructed assets, 8.24% belong to the large manufacturing sector, 3.99% are from the services sector while 1.45% are from the agricultural sector.
4.1 Reasons for growing NPAs
Economic Slowdown: The global economy is still in the throes of an economic crisis that is looming large both in the US and Europe. There is a general slackening of domestic economic activity in India both in manufacturing and the services sectors. A sluggish economy will have a direct impact on the balance sheets and profitability of many firms who have availed of loans from the banking industry. Over a period of time, some of the hard hit firms will be compelled to default on their loans. There is a groundswell of expert opinion in India that NPAs are more an outcome of economic factors rather than any internal systemic failures. 31 | P a g e Rizvi Institute of Management Studies & Research
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High Interest rates: It is a known fact that interest rates have been revised upwards, 10 times in the past two years with a view to curb inflation. High interest rate increases the cost of funds to the credit users and has a debilitating effect especially on the repayment capacity of small and medium enterprises. Banks need to maintain their Net Interest Margin and hence pass on any interest rate hike to the borrowers. A high rate of inflation dilutes the quality of assets of the banking sector. Weak supply demand scenario, high borrowing or leveraging and intense competition contribute to loan defaults.
New Reporting System: Indian banks are to report NPAs from April 2012 in a computer recognized / identified format. It is stated that almost 90% of all banks' loan portfolio is under the computerized system of NPA reporting or system based reporting. The discretion of bank managers in classifying assets according to their local judgment is eliminated. This change in reporting pattern makes identification of NPAs a machine driven objective activity. However, credit risk analysis does have a subjective and judgmental element to it.
Aviation Sector: The Indian banking system has a total exposure of around Rs. 40,000 crores to the ailing aviation sector. SBI alone has an exposure of 5,000 crores to the aviation industry. It is common knowledge that many airlines are either in the red or marginally profitable. According to an RBI report, nearly three-fourths of the top Banks’ loans to the aviation sector are either impaired or restructured. Kingfisher airlines and Air India have been the significant aviation borrowers whose performance is below par.
Relaxed Lending Standards: Inappropriate personality-morale profile assessment of the prospective and current customers is one of the reasons for rising defaults on loans.
Aggressive Selling of unsecured Loans: The increase in bad loans can also be attributed to aggressive unsecured lending by banks. Rise in non-performing loans in case of ICICI was due to change in its retail loan portfolio mix towards non-collateralized loans. The net nonperforming loans in the collateralized retail portfolio were 1.59% of net collateralized retail loans and net non-performing loans in the non-collateralized retail portfolio (including overdraft financing against automobiles) were about 10.08% of net non-collateralized retail loans. 32 | P a g e Rizvi Institute of Management Studies & Research
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Legal Issues: There have been instances when banks have extended loans to doubtful debtors. Loopholes in the legal system and insufficient internal control mechanisms have intensified this problem.
Market Failure: Another reason for the rise in NPAs is said to be the global financial meltdown and its impact on India.
4.2 Impact of Rising NPAs The health of a bank is reflected not only by the size of its balance sheet but also the return on its assets. NPAs generate no interest income for the bank; the bank is required by law to provide for future loan losses arising from its bad assets (at a coverage of 70%), out of current profits. Banks can no longer account the interest on NPA loans as income unless and until it is actually paid by the borrower. This not only affects profitability but also liquidity because now, the bank has fewer funds to lend out or recycle. High NPAs degrade a bank’s credit rating, lowering its credibility as well as its ability to raise fresh capital. Today, the incidence of high NPAs in the Indian banking industry points to a deteriorating credit market. As per law, every bank must maintain a Capital Adequacy Ratio (CAR), which is the ratio of total capital to risk weighted assets, of 9% (10% for new Private Banks) or higher. As NPAs go up, so do the aggregated risk weighted assets, forcing the bank to allocate further capital in order to maintain the ratio. Today, commercial banks in India are struggling to meet CAR norms
Impact of NPA on the Operations of banks Profitability NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA does not affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of
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reduction in profitability is low ROI (return on investment), which adversely affect current earning of bank. Liquidity Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shortest period of time which lead to additional cost to the company. Difficulty in operating the functions of bank is another cause of NPA due to lack of money. Involvement of Management Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now days, banks have special employees to deal and handle NPAs, which is additional cost to the bank. Credit Loss If a bank is facing problem of NPA, then it adversely affects the value of bank in terms of market for credit. It will lose its goodwill and brand image and credit which have negative impact to the people who are putting in their money in the banks. The efficiency of any of the bank cannot be obtained only from the balance sheet size but also it is calculated by assets return level in the bank. For banks the NPAs will not create interest income but simultaneously banks are very much necessary in order to provide terms for NPAs with their profits that are existing in current. Being the NPAs have harmful impact on the arrival on assets are in this methods.
o
Banks interest income can fall down and accounted on the basis of receipt.
o Profitability of Banks is caused harmfully due to offering of doubtful debts and ensuing contain it as terrible debts.
o o o o o
ROI (Return on investments) is decreased. The adequacy ratios of capital are termed as NPAs and are following into its estimation. Maximizes the capital price. Variance of liability and assets will expand. EVA (The economic value addition) by banks get trouble for the reason that EVA is similar to the profit of net functioning less capital cost and it margins funds recycling.
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Non Performing Assets Management of Indian Banks 5.0 STRATEGIES FOR OVERCOMING NPAS
Abid Husein Saleh
Various steps have been taken by the government and RBI to recover and reduce NPAs. These strategies are necessary to control NPAs. 5.1 Preventive management and 5.2 Curative management 5.1 Preventive Management: Preventive measures are to prevent the asset from becoming a non performing asset. Banks has to concentrate on the following to minimize the level of NPAs.
1. Early Warning Signals The origin of the flourishing NPAs lies in the quality of managing credit assessment, risk management by the banks concerned. Banks should have adequate preventive measures, fixing presanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks should continuously monitor loans to identify accounts that have potential to become nonperforming. It is important in any early warning system, to be sensitive to signals of credit deterioration. A host of early warning signals are used by different banks for identification of potential NPAs. Most banks in India have laid down a series of operational, financial, transactional indicators that could serve to identify emerging problems in credit exposures at an early stage. Further, it is revealed that the indicators which may trigger early warning system depend not only on default in payment of installment and interest but also other factors such as deterioration in operating and financial performance of the borrower, weakening industry characteristics, regulatory changes, and general economic conditions. Early warning signals can be classified into five broad categories viz.
(a) Financial (b) Operational (c) Banking (d) Management and (e) External factors 35 | P a g e Rizvi Institute of Management Studies & Research
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Abid Husein Saleh
Financial related warning signals generally emanate from the borrowers’ balance sheet, income expenditure statement, statement of cash flows, statement of receivables etc. Following common warning signals are captured by some of the banks having relatively developed EWS.
2. Financial warning signals • Persistent irregularity in the account • Default in repayment obligation • Devolvement of LC/invocation of guarantees • Deterioration in liquidity/working capital position • Substantial increase in long term debts in relation to equity • Declining sales • Operating losses/net losses • Rising sales and falling profits • Disproportionate increase in overheads relative to sales • Rising level of bad debt losses Operational warning signals • Low activity level in plant • Disorderly diversification/frequent changes in plan • Nonpayment of wages/power bills • Loss of critical customer/s • Frequent labor problems • Evidence of aged inventory/large level of inventory
3. Management related warning signals • Lack of co-operation from key personnel • Change in management, ownership, or key personnel • Desire to take undue risks • Family disputes • Poor financial controls • Fudging of financial statements • Diversion of funds
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Non Performing Assets Management of Indian Banks 4. Banking related Signals • Declining bank balances/declining operations in the account • Opening of account with other bank • Return of outward bills/dishonored cheques • Sales transactions not routed through the account • Frequent requests for loan • Economic recession • Emergence of new competition • Emergence of new technology • Changes in government / regulatory policies • Natural calamities
Abid Husein Saleh
Know your client profile (KYC): Most banks in India have a system of preparing know your client’ (KYC) profile/credit report. As a part of `KYC’ system, visits are made on clients and their places of business/units. The frequency of such visits depends on the nature and needs of relationship. Credit Assessment and Risk Management Mechanism: Credit assessment and Risk management mechanism are ever lasting solution to the problem of NPAs. Managing credit risk is a much more forward-looking approach and is mainly concerned with managing the quality of credit portfolio before default takes place. The documentation of credit policy and credit audit immediately after the sanction is necessary to upgrade the quality of credit appraisal in banks. In a situation of liquidity overhang the enthusiasm of the banking system is to increase lending with compromise on asset quality, raising concern about adverse selection and potential danger of addition to the NPAs stock. It is necessary that the banking system is equipped with prudential norms to minimize if not completely avoid the problem of credit risk and develop an effective internal credit risk models for the purpose of credit risk management. Organizational restructuring: With regard to internal factors leading to NPAs the onus for containing the same rest with the bank themselves. These will necessities organizational restructuring improvement in the managerial efficiency, skill up gradation for proper assessment of credit worthiness and a Change in the attitude of the banks towards legal action, which is traditionally viewed as a measure of the last resort. Reduce Dependence on Interest: The Indian banks are largely 37 | P a g e Rizvi Institute of Management Studies & Research
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Abid Husein Saleh
depending upon lending and investments. The banks in the developed countries do not depend upon this income whereas 86 percent of income of Indian banks is accounted from interest and the rest of the income is fee based. The banker can earn sufficient net margin by investing in safer securities though not at high rate of interest. It facilitates for limiting of high level of NPAs gradually. It is possible that average yield on loans and advances net default provisions and services costs do not exceed the average yield on safety securities because of the absence of risk and service cost.
5. Watch-list/Special Mention Category The grading of the bank’s risk assets is an important internal control tool. It serves the need of the Management to identify and monitor potential risks of a loan asset. The purpose of identification of potential NPAs is to ensure that appropriate preventive / corrective steps could be initiated by the bank to protect against the loan asset becoming non-performing. Most of the banks have a system to put certain borrowable accounts under watch list or special mention category if performing advances operating under adverse business or economic conditions are exhibiting certain distress signals. These accounts generally exhibit weaknesses which are correctable but warrant banks’ closer attention. The categorization of such accounts in watch list or special mention category provides early warning signals enabling Relationship Manager or Credit Officer to anticipate credit deterioration and take necessary preventive steps to avoid their slippage into non performing advances
6. Willful Defaulters RBI has issued revised guidelines in respect of detection of willful default and diversion and siphoning of funds. As per these guidelines a willful default occurs when a borrower defaults in meeting its obligations to the lender when it has capacity to honor the obligations or when funds have been utilized for purposes other than those for which finance was granted. The list of willful defaulters is required to be submitted to SEBI and RBI to prevent their access to capital markets. Sharing of information of this nature helps banks in their due diligence exercise and helps in avoiding financing unscrupulous elements. RBI has advised lenders to initiate legal measures including criminal actions, wherever required, and undertake a proactive approach in change in management, where appropriate. 38 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks 5.2 Curative Management
Abid Husein Saleh
The curative measures are designed to maximize recoveries so that banks funds locked up in NPAs are released for recycling. The Central government and RBI have taken steps for controlling incidence of fresh NPAs and creating legal and regulatory environment to facilitate the recovery of existing NPAs of banks. They are:
1. One Time Settlement Schemes This scheme covers all sectors sub – standard assets, doubtful or loss assets as on 31st March 2000. All cases on which the banks have initiated action under the SRFAESI Act and also cases pending before Courts/DRTs/BIFR, subject to consent decree being obtained from the Courts/DRTs/BIFR are covered. However cases of willful default, fraud and malfeasance are not Covered. As per the OTS scheme, for NPAs up to Rs. 10crores, the minimum amount that should be recovered should be 100% of the outstanding balance in the account.
2. Lok Adalats Lok Adalat institutions help banks to settle disputes involving account in “doubtful” and “loss” category, with outstanding balance of Rs. 5 lakh for compromise settlement under Lok Adalat. Debt recovery tribunals have been empowered to organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh and above. This mechanism has proved to be quite effective for speedy justice and recovery of small loans. The progress through this channel is expected to pick up in the coming years.
3. Debt Recovery Tribunals (DRTs) The Debt Recovery Tribunals have been established by the Government of India under an Act of Parliament (Act 51 of 1993) for expeditious adjudication and recovery of debts due to banks and financial institutions. The Debt Recovery Tribunal is also the appellate authority for appeals filed against the proceedings initiated by secured creditors under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. The recovery of debts due to banks and financial institution passed in March 2000 has helped in strengthening the function of DRTs. Provision for placement of more than one recovery officer, power to attach defendant’s property/assets before judgment, penal provision for disobedience of tribunal’s order 39 | P a g e Rizvi Institute of Management Studies & Research
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or for breach of any terms of order and appointment of receiver with power of realization, management, protection and preservation of property are expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs in the times to come. DRTs which have been set up by the Government to facilitate speedy recovery by banks/DFIs, have not been able make much impact on loan recovery due to variety of reasons like inadequate number, lack of infrastructure, under staffing and frequent adjournment of cases. It is essential that DRT mechanism is strengthened and vested with a proper enforcement mechanism to enforce their orders. Non observation of any order passed by the tribunal should amount to contempt of court, the DRT should have right to initiate contempt proceedings. The DRT should empowered to sell asset of the debtor companies and forward the proceed to the winding – up court for distribution Among the lenders.
4. Securitization and SARFAESI Act Securitization is a relatively new concept that is taking roots in India of late. It is still in its infancy with only a few market players. Securitization is considered an effective tool for improvement of capital adequacy. It is also seen as a tool for transferring the reinvestment risk, apart from credit risk helping the banks to maintain proper match between assets and liabilities. Securitization can also help in reducing the risk arising out of credit exposure norms and the imbalances of credit exposure, which can help in the maintenance of healthy assets. The SARFAESI Act intends to promote Securitization, pool together NPAs of banks to realize them and make enforcement of Security Interest Transfer. The SARFAESI Act-2002 is seen as a booster, initially, for banks in tackling the menace of NPAs without having to approach the courts. With certain loopholes still remaining in the act, the experiences of banks were that the Act in its present form would not serve the envisaged objective of optimum recovery of NPAs, particularly with the hard-core NPA borrowers dragging the banks into endless litigation to delay the recovery process. The Supreme Court decision in regard to certain proviso of the SARFAESI Act also vindicated this view. This section deals with the features of Securitization and its Resourcefulness in tackling NPAS and about the SARFAESI Act, its resourcefulness and limitations in tackling the NPA borrowers and the implication of the recent Supreme Court judgment. With the steady sophistication of the Indian Financial Services Sector, the structured finance market is also growing significantly, of which Securitization occupies a prominent place. 40 | P a g e Rizvi Institute of Management Studies & Research
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Abid Husein Saleh
With Basel II norms imminently being implemented by 2008, banks are required to pool up huge capital to offset the credit risk and operational risk components. Securitization, therefore, is seen to be an effective and vibrant tool for capital formation for banks in future.
5. Asset Reconstruction Company (ARC) This empowerment encouraged the three major players in Indian banking system, namely, State Bank of India (SBI), ICICI Bank Limited (ICICI) and IDBI Bank Limited (IDBI) to come together to set-up the first ARC. Arcil was incorporated as a public limited company on February 11, 2002 and obtained its certificate of commencement of business on May 7, 2003. In pursuance of Section 3 of the Securitization Act 2002, it holds a certificate of registration dated August 29, 2003, issued by the Reserve Bank of India (RBI) and operates under powers conferred under the Securitization Act, 2002. Arcil is also a "financial institution" within the meaning of Section 2 (h) of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (the "DRT Act"). Arcil is the first ARC in the country to commence business of resolution of non-performing assets (NPAs) upon acquisition from Indian banks and financial institutions. As the first ARC, Arcil has played a pioneering role in setting standards for the industry in India.
A) Unlocking capital for the banking system and the economy The primary objective of Arcil is to expedite recovery of the amounts locked in NPAs of lenders and thereby recycling capital. Arcil thus, provides relief to the banking system by managing NPAs and help them concentrate on core banking activities thereby enhancing shareholders value. B) Creating a vibrant market for distressed debt assets / securities in India offering a trading platform for Lenders
Arcil has made successful efforts in funneling investment from both from domestic and international players for funding these acquisitions of distressed assets, followed by showcasing them to prospective buyers. This has initiated creation of a secondary market of distressed assets in the country besides hastening their resolution. The efforts of Arcil would lead the countries distressed debt market to international standards C. To evolve and create significant capacity in the system for quicker resolution of NPAs by deploying the assets optimally With a view to 41 | P a g e Rizvi Institute of Management Studies & Research
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achieving high delivery capabilities for resolution, Arcil has put in place a structure aimed at outsourcing the various sub-functions of resolution to specialized agencies, wherever applicable under the provision of the Securitization Act, 2002. Arcil has also encourage, groomed and developed many such agencies to enhance its capacity in line with the growth of its activity.
6. Corporate Debt Restructuring (CDR) Corporate Debt Restructuring (CDR) framework is to ensure timely and transparent mechanism for restructuring of the corporate debts of viable entities facing problems, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned. In particular, the framework will aim at preserving viable corporate that are affected by certain internal and external factors and minimize the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme.
CDR system in the country will have a three-tier structure: A. CDR Standing Forum B. CDR Empowered Group C. CDR Cell
A. CDR Standing Forum: The CDR Standing Forum would be the representative general body of all financial institutions and banks participating in CDR system. All financial institutions and banks should participate in the system in their own interest. CDR Standing Forum will be a self-empowered body, which will lay down policies and guidelines, guide and monitor the progress of corporate debt restructuring.
B. CDR Empowered Group: The CDR Empowered Group would be mandated to look into each case of debt restructuring, examine the viability and rehabilitation potential of the Company and approve the restructuring package within a specified time frame of 90 days, or at best 180 days of reference to the Empowered Group.
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Non Performing Assets Management of Indian Banks C. CDR Cell
Abid Husein Saleh
The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR Cell in all their functions. The CDR Cell will make the initial scrutiny of the proposals received from borrowers / lenders, by calling for proposed rehabilitation plan and other information and put up the matter before the CDR Empowered Group, within one month to decide whether rehabilitation is prima facie feasible, if so, the CDR Cell will proceed to prepare detailed Rehabilitation Plan with the help of lenders and if necessary, experts to be engaged from outside. If not found prima facie feasible, the lenders may start action for recovery of their dues.
7. The Mechanism of the CDR CDR will be a Non-statutory mechanism. CDR mechanism will be a voluntary system based on debtor-creditor agreement and inter-creditor agreement. The scheme will not apply to accounts involving only one financial institution or one bank. The CDR mechanism will cover only multiple banking accounts / syndication / consortium accounts with outstanding exposure of Rs.20 crore and above by banks and institutions. The CDR system will be applicable only to standard and sub-standard accounts. However, as an interim measure, permission for corporate debt restructuring will be made available by RBI on the basis of specific recommendation of CDR "Core-Group", if a minimum of 75 per cent (by value) of the lenders constituting banks and FIs consent for CDR, irrespective of differences in asset classification status in banks/ financial institutions. There would be no requirement of the account / company being sick NPA or being in default for a specified period before reference to the CDR Group. This approach would provide the necessary flexibility and facilitate timely intervention for debt restructuring. Prescribing any milestone(s) may not be necessary, since the debt restructuring exercise is being triggered by banks and financial institutions or with their consent. In no case, the requests of any corporate indulging in willful default or misfeasance will be considered for restructuring under CDR.
8. Circulation of Information of Defaulters The RBI has put in place a system for periodical circulation of details of willful defaulters of banks and financial institutions. The RBI also publishes a list of borrowers (with outstanding Aggregate rupees one crore and above) against whom banks and financial institutions in 43 | P a g e Rizvi Institute of Management Studies & Research
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recovery of funds have filed suits as on 31st March every year. It will serve as a caution list while considering a request for new or additional credit limits from defaulting borrowing units and also from the directors, proprietors and partners of these entities.
9. Recovery Action against Large NPAs Among the various channels of recovery available to banks for dealing with bad loans, the SARFAESI Act and the Debt Recovery Tribunals (DRTs) have been the most effective in terms of amount recovered. The amount recovered as percentage of amount involved was the highest under the DRTs, followed by SARFAESI Act. The RBI has directed the PSBs to examine all cases of willful default of Rs. One crore and above and file criminal cases against willful defaulters. The board of directors are requested to review NPAs accounts of one crore and above with special reference to fix staff accountability in individually. The gross NPAs of the banks is gradually declined from Rs. 70861 crores in 2001 - 02 to Rs. 50552 crores in 2006 – 07, later the gross NPA are increased, it reached to Rs. 84747 crores in the year 2009-10. On the other hand the recovery percentage of NPA s increased, 17%by DRTs and 14.7% by SARFAESI Act from the year 2003-04 to 81% by DRTs and 33% by SARFAESI Act in 2008-09. Following the gross NPAs the recovery percentage decreased to 32% by DRTs and 30% by SARFAESI Act in the year 2009-10. The increase in level of NPAs and diminishing percentage of recoveries are due to Indian banks have largely followed a lagged cyclical pattern with regard to credit growth. This underlined the pro-cyclical behavior of the banking system, wherein asset quality can get compromised during periods of high credit growth and this can result in the creation of nonperforming assets for banks in the later years.
10. Credit Information Bureau The institutionalization of information sharing arrangement is now possible through the newly formed Credit Information Bureau of India Limited (CIBIL) it was set up in January 2001, by SBI, HDFC, and two foreign technology partners. This will prevent those who take advantage of lack of system of information sharing amongst leading institutions to borrow large amount against same assets and property, which has in no measures contributed to the incremental of NPAs of banks.
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Non Performing Assets Management of Indian Banks 6.0 CONCLUSION
Abid Husein Saleh
The problem of NPAs has been a major issue for the banking industry. The RBI which is the apex body for controlling level of non-performing assets have been giving guidelines and getting norms for the banks in order to control the incidents of faults. Reduction of NPAs in banking sector should be treated as national priority item to make the Indian Banking system more strong, vibrant and geared to meet the challenges of globalization. The use of technology like Core Banking Solutions will bring change Indian Banking to manage their non-performing assets.
Non-Performing Assets have been a big worry for the banks in India. It is just not a problem for the banks; they are bad for the economy too. The money locked up in Non-Performing Assets is not available for productive use and hence they have an adverse effect on banks’ profitability. If the bank could reduce the cost of Non-Performing Assets, cost will reduce and the profit and return on equity and assets will increase. It is not possible to eliminate totally the NonPerforming Assets in the banking business but can only be minimized. It is always wise to follow the proper policy appraisal, supervision and follow up of advances to avoid creation of NonPerforming Assets. The banks should take steps for reducing present non-performing assets, but necessary precaution should also be taken to avoid future Non Performing Assets. The banking industry is facing yet another period of change, perhaps greater than the one experienced in the immediate past and there is no doubt that Indian Bank has to manage its function successfully and skillfully during the present era, replete with significant economic, competitive and technological challenges in order to improve its deposits, advances, profitability and to reduce the Non-Performing Assets. To review a loan application the bank uses “5-Cs”which is as follows.
5-Cs A safety and soundness examiner also reviews a bank’s lending activity by rating the quality of a sample of loans made by the bank. When a bank reviews a loan application, it uses the “5-Cs” to assess the quality of the applicant. The 5-Cs stands for:
45 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks
Abid Husein Saleh
o Capacity - measures the borrower’s ability to pay, including borrower’s payment source and amount of income related to debt. o Collateral - what are the bank’s options if the loan is not paid? What asset can be turned over to the bank, what is its market value, and can it be sold easily? A valuable asset might be a house or a car. o Condition - this refers to the borrower’s circumstances. For example, if a furniture storeowner is asking for a loan, the banker would be interested in how many chairs and sofas the store is expected to sell in the area over the next five years. o Capital - the applicant’s assets (house, car, and savings) minus liabilities (home mortgage, credit card balance) represent capital. If liabilities outweigh assets, the borrower might have difficulty repaying a loan if his regular source of income unexpectedly decreases. o Character - measures the borrower’s willingness to pay, including The borrower’s payment history, credit report and Information from other lenders.
46 | P a g e Rizvi Institute of Management Studies & Research
Non Performing Assets Management of Indian Banks BIBLIOGRAPHY
Abid Husein Saleh
Websites o Official website of Reserve bank of India www.rbi.org.in o Official website of Credit Information Bureau www.cibil.com o Official website of Corporate Debt Restructuring www.cdrindia.org
Reports o Reserve Bank of India: "Report on Trend and Progress of Banking in India" (Various Reports 2004-2012) o RBI Norms for NPA o Anand Sinha :’Indian Banking :Journey into the future ’RBI Monthly Bulletin , February 2012 o K.C.Chakrabarty:’Indian Banking Sector: Towards the next orbit’, RBI Monthly Bulletin, March 2012
Books Referred o Managing Non-performing Assets in Banks By S.N. Bidani o Banker's Handbook on N.P.A. Management By Banambar Sahoo o Non-performing Assets in Commercial Banks By Dr. Vibha Jain
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