INDIAN BANKING INDUSTRY Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980. Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the G overnment of India holding a stake), 31 private banks (these do not have g overnment stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by IC RA Limited, a rating agency, the public sector banks hold over 75 percent of total ass ets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively
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Non Performing Asset means an asset or account of borrower, which has been classified
by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance
with the directions or guidelines relating to asset classification issued by RBI. An amountdue under any credit facility is treated as "past due" when it has not been paid within 30
days from the due date. Due to the improvement in the payment and settlement
systems, recovery climate, up gradation of technology in the banking system, etc., it was
decided to dispense with 'past due' concept, with effect from March 31, 2001.
Accordingly, as from that date, a Non performing asset (NPA) shell be an advance where
1] Interest and /or installment of principal remain overdue for a period of more than
180 days in respect of a Term Loan,
2] The account remains 'out of order' for a period of more than 180 days, in respect of
an overdraft/ cash Credit(OD/CC),
3] The bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted,
4] Interest and/ or installment of principal remains overdue for two harvest seasons but
for a period not exceeding two half years in the case of an advance granted for
ii. As on 31.03.2002, balance of the provisions not made during the previous year, in addition to
the provisions needed, as on 31.03.2002.
Banks are permitted to phase the additional provisioning consequent upon the reduction in the
transition period from substandard to doubtful asset from 18 to 12 months over a four year
period commencing from the year ending March 31, 2005, with a minimum of 20 % each year.
Loss Assets:
A loss asset is one which 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. Also,
these assets would have been identified as loss assets by the bank or internal or external
auditors or the RBI inspection but the amount would not have been written-off wholly.
Provisioning Norms
The entire asset should be written off. If the assets are permitted to remain in the books for anyreason, 100 percent of the outstanding should be provided for.
Asset quality in public sector banks have been going from bad to worse for last several years,
and it is not a new phenomenon. Unfortunately or fortunately management of all banks have
been manipulating the figures year after year in close nexus with team of auditors and officialsof Reserve Bank of India and that of Banking Division in Ministry of Finance to conceal bad
assets. They have put pressure on field official in branches and taught not to improve the
quality and take strong initiative to recover the money from bad borrowers but taught only
various tactics to conceal bad assets to reduce provisioning towards bad assets as per RBI
guidelines.
At corporate level top officials of banks including CMD and ED have used various false and fake
pleas such as global recession, interest rate hikes, bad monsoons, natural calamities etc to give
various reliefs to bad borrowers instead of tightening the screws to trap bad officials and badborrowers. Top management of bank management have never diagnosed the real causes of
bad assets whenever it is found to increase due to some reason or the other. Clever bank
management do not want to take action against erring official, corrupt sanctioning official
because they themselves are part of dirty game of bad lending. This is why bank management
have wrongly but willfully and invariably pleaded that if action is taking against credit officers
and top executives , credit growth will immensely suffer and they will not be in a position to
achieve the target set by Finance Minister.
After complete introduction of Core Banking Solution (CBS) in banks, Reserve bank of India
advised banks to calculate bad assets called as Non Performing assets (NPA) on common
terminology using advanced technology and not manually . Banks are slowing getting pressure
to assess their quality of assets through automated system taking advantage of CBS technology.
Since management of banks find now difficult to conceal bad assets under CBS oriented NPA
assessment system, total of bad assets is now being exposed in Balance sheet and it has
It is to be noted here that NPA percentage is still more than what it has been revealed during
last few quarters. Still banks have not declared their entire NPA and after taking RBI hidden
consent. Of course they are gradually exposing their bad assets and this is why quantum of bad
assets has not jumped to highest position in one time but it is rising quarter after quarter.Officials of RBI, top management of each PSB and official of Ministry of Finance all know very
well that actual quantum of bad assets in government banks is far more than 5% of total
advances. In more than 25% of three year old branches gross NPA is more than 25% of total
advances. There are many such branches where gross NPA is even more than 50% of total
advances.
Clever bank management are trying their best to show minimum percentage of gross NPA by
either manipulating the system secretly or by resorting to fresh lending by opening new
branches and resorting to fresh bulk lending to big corporate, to real estate sector and to
mutual funds so that total advances in banks increases which in turn reduces percentage of
Gross NPA compared to Total Advances. But this story will not help for longer period until there
is adequate improvement in quality and moral integrity of credit sanctioning authority , honesty
in promotion processes in banks ,improvement in legal machineries which may help in recovery
from willful defaulters , tightening of screws on Chartered Accountants , Valuers and official of
rating agencies and change in attitude of politicians. Bank management has to increase number
of staff in branches, reduce staff at administrative offices and award honest officers by stopping
and punishing corrupt officers who were rising in their career through unfair ways and means.
Till now bank management has not tried to cure the real disease and at the same time
government of India have also not improved the quality of legal system and not tried to
inculcate good culture in politicians who are using bank loan to enhance their personal wealth
and to increase their vote banks.
It is very sad that all the time when proportion of bad assets increases in banks , management
of banks accuse global recession, interest rate hike, bad monsoon, natural calamities etc but
not punish the real culprit. It is remarkable here that when most of top official have occupied
the top post and come through bad routes and when they have themselves created and
accumulated bad assets in their banks they are not in a position to punish the real culprit and
hence they are searching always some weak scapegoat , some lame excuses and pleading some
irrelevant reasons before MOF for deteriorating quality of bad assets in banks.
Million dollar questions is Who will bell the cat when even officials in RBI and MOF are equally
weak and guilty. System is not corrupt but corruption has become the system in banks. Not
only banks but all other government departments including judiciary are also victim of same
State Bank of India is the biggest and the leader bank in our country. SBI is treated as largest
bank because of its highest business profile and highest number of branches and it is called as
leader bank among public sector banks because other banks follow what normally SBI do. It
may be interest rate policy or loan policy or branch expansion policy, SBI normally shows the
route to other bank. In the last week RBI deregulated saving interest rate and a few privatebanks raised interest rate on saving s deposit. But since SBI did not increase savings interest
rate other banks are also silent on this issue.
Further SBI claims to be one of top ranked global banks and our government feels proud for it. I
however feel that SBI may in near future become one of the most critically sick and sinking
bank like Lehman Brother. Moreover when assets of bank like SBI starts ringing alarm signal,
one can very well imagine the worst scenario prevailing in other Public sector banks. Credit
growth and deposit growth, both have come down in SBI whereas NPA has gone up from
3.38%last year to 4.19% this September. Position of other banks is also bad but their exposurewill take place only when fully adopt CBS system and applies honestly prudential norms of
income recognition and asset classification as per system only.
State Bank of India, the country's top lender, beat estimates with a 12.40 per cent rise in
quarterly net profit but a rise in non-performing assets disappointed investors and its stock was
down 5 per cent after the results.
Worries about worsening asset quality in Asia's third-largest economy prompted Moody's
Investors Service earlier on Wednesday to cut its outlook on the Indian banking sector to
"negative" from "stable."
Net non-performing assets at SBI increased to 2.04 percent of total assets at the end of
September from 1.70 percent a year earlier, spooking investors.
"It is the increase in NPAs (non-performing assets) that hit the stocks today. It is a concern for
the entire sector," said Arun Khurana, fund manager at UTI Banking Fund.
However, going forward we expect pain from legacy NPAs to subside," he added.
SBI reported net profit of Rs 2,810 crore ($564 million) for its fiscal second quarter ended
September 30, compared with 2,501 billion rupees a year earlier.
A Reuters poll had projected net profit of 24.3 billion rupees on a standalone basis.Net interest income rose about 28 per cent on the year to Rs 10,420 crore for the three
months.
Rivals ICICI Bank and HDFC Bank had earlier posted forecast-beating net profit increases of 22
Total Cash Recoveries in Non Performing Assets is Rs.96.14 crore of which the recovery in
written off accounts was at Rs.11.30 crore.
NPA Provision Coverage Ratio improved from 52.38% to 54.70% on Y-o-Y basis.
Bank of Maharashtra net dips on higher NPA provisioning
Bank of Maharashtra posted a Q3 FY 11 net profit of Rs 90.25 crore, a 20 per cent dip over the
corresponding quarter of the previous fiscal (Rs 112 crore) largely on account of higher
provisioning for NPAs.
Depreciation of Rs 28.24 crore on investments (-13.1 crore in the same period last year) and a
drop in its treasury income to Rs 12.8 crore from Rs 30.99 crore also impacted the bottom line.
The bank provided Rs 117.81 crore for NPA provision coverage during the quarter ended
December 31, 2010, against Rs 46.66 crore in Q3 FY 10.
The coverage now stands at 60.02 per cent and will be 70 per cent by September 2011.
Mr A. S. Bhattacharya, Chairman and Managing Director, said the bank will focus on recoveries
and on developing the mid-corporate business segment.
A separate cell has been established in the Central Office for the purpose of loans from Rs 5-50
crore. Five micro asset recovery cells have been set up in Aurangabad, Latur, Nashik, Satara and
Solapur to follow up on small accounts of Rs 10 lakh and below.
Our current NPAs stand at Rs 1,377 crore, and 64 per cent of these are loans below Rs 10 lakh.These five cells recovered Rs 10 crore in one week, Mr Bhattacharya said, adding that the
target was to recover Rs 110 crore by March 2011.
Five more such cells will be set up as the bank hopes to bring the NPAs down to Rs 1,000 crore
During the quarter under review, BoM's total business crossed the one-lakh crore mark and
stood at Rs 1,06,514.98 crore on December 31, 2010.
One of the priorities for the new Chairman and Managing Director of Bank of Maharashtra, Mr
A.S. Bhattacharya, would be to bring down the bank's high non-performing asset (NPA) level in
the next six months.
our gross NPAs at 3.58 per cent may be one of the highest in the industry, and we want to
reduce it to less than 3 per cent by March, he told Business Line. He hoped to reduce net NPAs
to less than 2 per cent, from the current 2.18 per cent.
NPAs were high on account of Rs 120 crore of agriculture debt waiver added during the quarter.
And now all NPAs are system driven, and an alarm is generated by the system when any
account shows signs of sickness, he pointed out. For loans of Rs 1 lakh and below, any signs of
sickness would be addressed by the branch office, while the regional office would addresssickness in loans of Rs 1 lakh to Rs 10 lakh and the head office will handle loans above Rs 10
lakh.
According to him, 64 per cent of the bank's NPAs was from small and marginal borrowers, and
to arrest gross NPAs and net NPAs, we plan to set up five micro-asset recovery units in
Maharashtra for the recovery of small loans, he said. The exclusive teams will only work on
recovery of these loans.
Since the bank has over 900 of its 1,500 branches in Maharashtra, these units would be set up
there, and if the experiment is successful, we will set up such units in Bangalore, Hyderabadand Uttar Pradesh.As of now, the bank is not looking at Chennai, but if small loan recovery
does not happen in Chennai, we will set up a unit there, said Mr Bhattacharya.
On the dip in profits in the second quarter of this fiscal, he pointed out that provisioning was
doubled during the quarter to strengthen the bank's balance sheet.
The bank was also hopeful of growing its net interest margin to 2.7 per cent by the fiscal-end
from current levels of 2.54 per cent. With the bank's cost of deposits at 5.24 per cent now, Mr
Bhattacharya felt that it will increase as a result of the recent monetary policy.By March, he
expected it to be between 5.3 per cent and 5.35 per cent.
This would put pressure on net interest margins, he admitted, adding that the silver-lining was
that the bank's yield on advances, which was 9.14 per cent during the second quarter, would
This would be achieved mainly by re-pricing the below-the-base-rate advances of about Rs
4,000 crore. And this would increase our net interest margin slightly, he said.
Shedding high-cost deposits
The bank also hoped to grow its balance sheet by shedding high-cost deposits. As on March, thebank's high-cost deposits stood at Rs 11,000 crore, which has now been reduced to Rs 6,000
crore.
The bank targets a 20 per cent growth in business to Rs 1.2 lakh crore by the fiscal-end, with
targeted deposits and advances of Rs 70,000 crore and Rs 50,000 crore respectively. Mr
Bhattacharya said he expected the CASA (current account savings account) ratio to touch 41-42
per cent by the year-end from the current 39 per cent.
On whether the bank would increase its base rate, as of date, we will not increase our base
rate. But it will be market-driven, he said. The bank's base rate is 8.25 per cent now.
The Housing Development Finance Corporation (HDFC) Bank is the second largest private sector
bank in India by net profit and generated revenues of over INR 52,278.8 million in 2007. HDFC
Bank has a 55% market share in clearing and settlements of securities exchanges for cash and
futures securities transactions.. As of September 30, 2008, the bank had total assets of INR
1006.82 billion.
During the global economic slowdown and tight liquidity conditions, what sets this bank apart isits high proportion of CASA (Current accounts and Savings accounts) deposits - around 44%
against an industry average of 35-40% of total deposits. 17% of their CASA accounts come from
salary accounts, which are sticky in nature and have large idle funds the bank can make use of.
The high CASA proportion also ensures their costs of deposits are relatively low. Also HDFC
Bank is well capitalized from secondary stock offerings; in the past 12 months they raised INR
17.28 billion through lower and upper tier II bonds.
Even as ICICI Bank, the second largest commercial bank in the country, has cut down itsmaximum exposure to any industry from 15% to 12% of its total assets, the power sector has
replaced the chemical sector as the maximum generator of sticky assets for the bank in 2004-
05.
The non-performing assets out of the power sector in its pre-Dabhol revival phase has gone up
from over Rs 620 crore to Rs 737 crore in the reporting period. The power sector contributes
almost 21% of NPA for the bank. Next to power is the chemicals sector, which has created the
maximum amount of sticky assets. However, in absolute amount as well in percentage terms,
the share of the chemicals sector in the NPA chart has fallen during 2004-05. While in absolute
amount it has gone down to Rs 403 crore from Rs 747 crore, in percentage terms it has plunged
from 7.47% to 4.03% during the reporting period.
Textiles has continued to be the third largest sector in the NPA list. But surprisingly, one
category of exposure, 'other infra telecom', from zero level in 2003-04 has created Rs 214 crore
of sticky assets in 2004-05.
The improved situation in the iron & steel sector has pushed back the sector from the sixth (Rs
139 crore) position to 10th (Rs 67 lakh) position in 2004-05. The agriculture sector, which has
become the current focus of the bank has generated Rs 27 lakh worth of sticky assets in the
reporting period. The bank has also restructured its asset portfolio by having more exposures
for crude petroleum and refining, roads, ports, railways and telecommunication. Keeping its
retail lending and iron & steel business as the top two segments, it has reduced its exposure in
power, chemicals and engineering sector during 2004-05.
Shares of State Bank of India (SBI) today plummeted by over 7% on the bourses, amid concerns
over a rise in the lender's non-performing assets (NPAs) and a rating downgrade of the entire
Indian banking sector by Moody's.
The country's largest PSU bank today reported its second-quarter results, wherein it disclosed a
rise in NPAs and also fell short of the market expectations for its overall financial performance.
Besides, global rating agency Moody's today downgraded its outlook on the Indian banking
system to "negative", from "stable" earlier.
Selling pressure was significant in the stocks of other financial sector companies as well.ICICIBank settled with a loss of 2.16%, HDFC Bank lost 1.50%, IDBI Bank fell by 3.19% and Union
Bank ended 2.10% lower.
The BSE banking index also dropped by 2.62%.
The shares of SBI opened on a positive note this morning, but slipped into the red after the
announcement of its quarterly results and the news of the Moody's rating action.
The stock settled 7.2% down at Rs 1,853.40 at the NSE, while it closed 6.76% lower at Rs
non performing assets has been growing by leaps and bounds and has been
playing havoc on the Indian financial system since as at the end of the year 2001
the total amount of outstanding NPAs stood at Rs.83,500/- crores. After
enactment of the Securitisation Act, 2002 the wilful defaulters cannot now hide
behind long-winded judicial process but at the same time the bank also cannotrecover dues arising out of underwriting commitments obligations and equity
finance by way of share subscriptions, so also the shares acquired by exercise of
option for conversion of loan into equity. The Securitisation Act, 2002 does not
also ensure or guarantee full recovery of the entire outstanding over dues fully.
In the result the financial health of the banks will not improve because, in
absence of adequate assets not more than 20 percent of NPAs would be
recovered by resorting to the provisions of the Securitisation Act, 2002. The IT
Tribunal ruling in case of Vishvapriya Financial Service and Securities Ltd would
jolt development of asset securitisation in autofinance and housing finance
sector. The company was utilising funds obtained from the investors for
deployment in fixed income security and had guaranteed fixed rate of return.
The contention of the company that it was only agent for the investors and has
evolved only a pay-through structure was not accepted by the tribunal, which
held that the company was liable for the withholding taxes on the payments
made to the investors.
RBI guidelines For NPA
RBI introduced, in 1992-93, the prudential norms for income recognition, asset
classification & provisioning IRAC norms in short in respect of the loan portfolio
of the UCBs. The objective, inter-alia, was to bring out the true picture of a banks
loan portfolio. The fallout of this momentous regulatory measure for the
managementof the UCBs was to divert its focus to profitability, which till then used
to be a low priority area for it. Asset quality assumed greater importance for the
UCBs when RBI introduced the Basel norms for Capita Adequacy from year-ended
March 31, 2002 in the aftermath of serious financial problems in the sector.
Maintenance of high quality credit portfolio continues to be a major challenge for
the UCBs, especially with RBI gradually moving towards convergence with more
stringent global norms for impaired assets.
A] The quality of a banks loan portfolio can impact its profitability, capital and
liquidity. Asset quality problems are at the root of other financial problems forbanks, leading to reduced net interest income and higher provisioning costs. If loan
losses exceed the Bad and Doubtful Debt Reserve, capital strength is reduced.
Reduced income means less cash, which can potentially strain liquidity. Market
knowledge that the bank is having asset quality problems and associated financial
conditions may cause outflow of deposits. Thus, the performance of a bank is
inextricably linked with its asset quality. Managing the loan portfolio to minimise
bad loans is, therefore, fundamentally important for a financial institution in todays
extremely competitive and market driven business environment. This is all the more
important for the UCBs, which are at a disadvantage vis-à-vis the commercial banks
in terms of professionalised management, skill levels, technology adoption and
effective risk management systems and procedures.
B] Management of NPAs begins with the consciousness of a good portfolio, which
warrants a better understanding of risks in lending. The Board has to decide a
strategy keeping in view the regulatory norms, the business environment, its market
share, the risk profile, the available resources etc. The strategy should be reflected
in Board approved policies and procedures to monitor implementation. The
essentialcomponents of sound NPA management are i) quick identification of NPAs,
ii) theircontainment at a minimum level and iii) ensuring minimum impact of NPAs
on the financials. A two-pronged strategy of preventing slippage of standard assets
NPA category and reducing NPAs through cash recovery, up gradation, compromise,
legal means etc., is called for.
2. Preventing NPAs
At the pre-disbursement stage, appraisal techniques of bank need to be sharpened.
All technical, economic, commercial, organizational and financial aspects of the
project need to be assessed realistically. Bankers should satisfy themselves that the
project is technically feasible with reference to technical know how, scale of
production etc. The project should be commercially feasible in that all background
linkages by way of availability of raw materials at competitive rates and that all
forward linkages by way of assured market are available. It should be ensured
assumptions on which the project report is based are realistic. Some projects are
born sick because of unrealistic planning, inadequate appraisal and faulty
machinery, labour strike, change in management, death of a key person,
reconstitution of the firm, dispute among the partners etc. All these factors have a
bearing on the functioning of the unit and on its financial status.
Special Mention category of accounts Based on warning signals obtained
through both off-site and on-site monitoring, banks may classify accounts withirregularities persisting for more than 30 days under Special Mention or Potential
NPA category. This will help the bank to initiate proactive remedial measures for
early regularisation. The measures include timely release of additional funds to
borrowers with temporary liquidity problems and restructuring of accounts of
sincere and honest borrowers after considering cases on merit.
On going classification Although classification of assets is a yearly .
banks would do well to have a system of on going classification of assets and
quarterly provisioning. This helps in assessing provisioning requirements well inadvance. All doubts regarding classification should be settled internally and a system
of fixing accountability for failure to comply with the regulatory guidelines should be
introduced.Strategy for reducing provision The extent of provision for doubtful
asset is with
reference to secured and unsecured portion. Cent percent provision needs to be
made for the unsecured portion. If banks can ensure that the loan outstanding is
fully secured by realisable security, the quantum of provision to be made would be
less.
It takes one year for a sub standard asset to slip into doubtful category. Therefore,as soon as an account is classified as substandard, the banker must keep strict vigil
over the security during the next one year because in the event of the account being
classified as doubtful, the lack of security would be too costly for the bank.
3. Reducing NPAs
Cash recovery Banks, instead of organising a recovery drive based on overdues,
must short list those accounts, the recovery of which would provide impetus to the
system in reducing the pressure on profitability by reduced provisioning burden.
Vigorous efforts need to be made for recovery of critical amount (overdue interest
and
instalment) that can save an account from NPA classification:
a) In case of a term loan, the banker gets 90 days after the date of default to take
appropriate action and to persuade the borrower to pay interest or instalment
whichever is due.
b) In case of a cash credit account, the banker gets 90 days for ensuring that the
c) In case of direct agricultural loans, the account is classified NPA only after
two crop seasons (from sowing to harvesting) from the due date in case of
short duration loans and one crop season from the due date in case of long
duration loans.
Up gradation of assets Once accounts become NPA, then bankers should takesteps to up grade them by recovering the entire overdues. Close follow-up will
generally ensure success.
Compromise settlements Wherever feasible, in case of chronic NPAs, banks can
consider entering into compromise settlements with the borrowers.