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NONPERFORMING
ASSETSCHALLENGE TO THE
PUBLIC SECTOR BANKS
INTRODUCTION
After liberalization the Indian banking sector developed very appreciate. The RBI
also nationalized good amount of commercial banks for proving socio economic services
to the people of the nation.
The Public Sector Banks have shown very good performance as far as the
financial operations are concerned. If we look to the glance of the financial operations,
we may find that deposits of public to the Public Sector Banks have increased from
859,461.95crore to 1,079,393.81crore in 2003, the investments of the Public Sector
Banks have increased from 349,107.81crore to 545,509.00crore, and however the
advances have also been increased to 549,351.16crore from 414,989.36crore in 2003.
The total income of the public sector banks have also shown good performance
since the last few years and currently it is 128,464.40crore. The Public Sector Banks have
also shown comparatively good result. The gross profits of the Public Sector Banks
currently 29,715.26crore which has been doubled to the last to last year, and the net profit
of the Public Sector Banks is 12,295,47crore.
However, the only problem of the Public Sector Banks these days are the
increasing level of the non performing assets. The non performing assets of the Public
Sector Banks have been increasing regularly year by year. If we glance on the numbers of
non performing assets we may come to know that in the year 1997 the NPAs were
47,300crore and reached to 80,246crore in 2002.
The only problem that hampers the possible financial performance of the Public
Sector Banks is the increasing results of the non performing assets. The non performing
assets impacts drastically to the working of the banks. The efficiency of a bank is not
always reflected only by the size of its balance sheet but by the level of return on its
assets. NPAs do not generate interest income for the banks, but at the same time banks
are required to make provisions for such NPAs from their current profits.
The RBI has also tried to develop many schemes and tools to reduce the non
performing assets by introducing internal checks and control scheme, relationship
managers as stated by RBI who have complete knowledge of the borrowers, credit rating
system, and early warning system and so on. The RBI has also tried to improve the
securitization Act and SRFAESI Act and other acts related to the pattern of the
borrowings.
Though RBI has taken number of measures to reduce the level of the non performing
assets the results is not up to the expectations. To improve NPAs each bank should be
motivated to introduce their own precautionary steps. Before lending the banks must
evaluate the feasible financial and operational prospective results of the borrowing
companies. They must evaluate the business of borrowing companies by keeping in
considerations the overall impacts of all the factors that influence the business.
RESEARCH OPERATION
1. Significance of the study
The main aim of any person is the utilization money in the best manner since the
India is country were more than half of the population has problem of running the family
in the most efficient manner. However Indian people faced large number of problem till
the development of the full-fledged banking sector. The Indian banking sector came into
the developing nature mostly after the 1991 government policy. The banking sector has
really helped the Indian people to utilise the single money in the best manner as they
want. People now have started investing their money in the banks and banks also provide
good returns on the deposited amount. The people now have at the most understood that
banks provide them good security to their deposits and so excess amounts are invested in
the banks. Thus, banks have helped the people to achieve their socio economic
objectives.
The banks not only accept the deposits of the people but also provide them credit
facility for their development. Indian banking sector has the nation in developing the
business and service sectors. But recently the banks are facing the problem of credit risk.
It is found that many general people and business people borrow from the banks but due
to some genuine or other reasons are not able to repay back the amount drawn to the
banks. The amount which is not given back to the banks is known as the non performing
assets. Many banks are facing the problem of non performing assets which hampers the
business of the banks. Due to NPAs the income of the banks is reduced and the banks
have to make the large number of the provisions that would curtail the profit of the banks
and due to that the financial performance of the banks would not show good results
The main aim behind making this report is to know how Public Sector Banks are
operating their business and how NPAs play its role to the operations of the Public Sector
Banks. The report NPAs are classified according to the sector, industry, and state wise.
The present study also focuses on the existing system in India to solve the problem of
NPAs and comparative analysis to understand which bank is playing what role with
concerned to NPAs.Thus, the study would help the decision makers to understand the
financial performance and growth of Public Sector Banks as compared to the NPAs.
Secondary objectives:
The secondary objectives of preparing this report are:
To understand what is Non Performing Assets and what are the underlying
reasons for the emergence of the NPAs.
To understand the impacts of NPAs on the operations of the Public Sector
Banks.
To know what steps are being taken by the Indian banking sector to reduce
the NPAs?
To evaluate the comparative ratios of the Public Sector Banks with
concerned to the NPAs.
2. Research methodology
The research methodology means the way in which we would complete our
prospected task. Before undertaking any task it becomes very essential for any one to
determine the problem of study. I have adopted the following procedure in completing
my report study.
1. Formulating the problem
2. Research design
3. Determining the data sources
4. Analysing the data
5. Interpretation
6. Preparing research report
(1)
I am interested in the banking sector and I want to make my future in the banking
sector so decided to make my research study on the banking sector. I analysed first the
factors that are important for the banking sector and I came to know that providing credit
facility to the borrower is one of the important factors as far as the banking sector is
concerned. On the basis of the analysed factor, I felt that the important issue right now as
far as the credit facilities are provided by bank is non performing assets. I started
knowing about the basics of the NPAs and decided to study on the NPAs. So, I chose the
topic Non Performing Assts the great challenge before the Public Sector Banks.
(2)
Research Design
The research design tells about the mode with which the entire project is prepared.
My research design for this study is basically analytical. Because I have utilised the large
number of data of the Public Sector Banks.
(3)
The data source can be primary or secondary. The primary data are those data
which are used for the first time in the study. However such data take place much time
and are also expensive. Whereas the secondary data are those data which are already
available in the market. These data are easy to search and are not expensive too.for my
study I have utilised totally the secondary data.
(4)
The primary data would not be useful until and unless they are well edited and
tabulated. When the person receives the primary data many unuseful data would also be
there. So, I analysed the data and edited them and turned them in the useful tabulations.
So, that can become useful in my report study.
(5)
With use of analysed data I managed to prepare my project report. But the
analyzing of data would not help the study to reach towards its objectives. The
interpretation of the data is required so that the others can understand the crux of the
study in more simple way without any problem so I have added the chepter of analysis
that would explain others to understand my study in simpler way.
(6)
Project writing
This is the last step in preparing the project report. The objective of the report
writing was to report the findings of the study to the concerned authorities.
10
(A) Some of the important measures introduced to provide more operational flexibility to
banks are:
Besides deregulation of interest rate, the boards of banks have been given the
authority to fix their prime lending rates. Banks also have the freedom to offer
variable rates of interest on deposits, keeping in view their overall cost of funds.
Statutory reserve requirements have significantly been brought down.
The quantitative firm-specific and industry-specific credit controls were abolished
and banks were given the freedom to deploy credit, based on their commercial
judgment, as per the policy approved by their Boards.
The banks were given the freedom to recruit specialist staff as per their
requirements,
The degree of autonomy to the Board of Directors of banks was substantially
enhanced.
Banks were given autonomy in the areas of business strategy such as, opening of
branches / administrative offices, introduction of new products and certain other
operational areas.
(b) Some of the important measures taken to increase the competitive efficiency of banks
are the following:
11
(c) Measures taken by the Government of India to provide a more conducive legal
environment for recovery of dues of banks and financial institutions are:
Due to this paradigm shift in the regulatory framework for banks had achieved the
desired results. The banking sector has shown considerable degree of resilience.
(a) The level of capital adequacy of the Indian banks has improved: the CRAR of
public sector banks increased from an average of 9.46% as on March 31, 1995 to
11.18% as on March 31, 2001.
(b) The public sector banks have also made significant progress in enhancing their
asset quality, enhancing their provisioning levels and improving their profits.
The gross and net NPAs of public sector banks declined sharply from 23.2% and
14.5% in 1992-93 to 12.40% and 6.7% respectively, in 2000-01.
Similarly, in regard to profitability, while 8 banks in the public sector recorded
operating and net losses in 1992-93, all the 27 banks in the public sector showed
operating profits and only two banks posted net losses for the year ended March
31, 2001.
The operating profit of the public sector banks increased from Rs.5628 crore as on
March 31, 1995 to Rs.13,793 crore as on March 31, 2001.
The net profit of public sector banks increased from Rs.1116 crore to Rs.4317
crore during the same period, despite tightening of prudential norms on
provisioning against loan losses and investment valuation.
The accounting treatment for impaired assets is now closer to the international best
practices and the final accounts of banks are transparent and more amenable to
meaningful interpretation of their performance.
12
WAY FORWARD
RBI president recently recommended Indian banks to go for larger provisioning
when the profits are good without frittering them away by way of dividends, however
tempting it may be. As a method of compulsion, RBI has recently advised banks to create
an Investment Fluctuation Reserve upto 5 per cent of the investment portfolio to protect
the banks from varying interest rate regime.
He further added that one of the means for improving financial soundness of a bank is by
enhancing the provisioning standards of the bank. The cumulative provisions against loan
losses of public sector banks amounted to a mere 41.67% of their gross NPAs for the year
ended March 31, 2001. The amount of provisions held by public sector banks is not only
low by international standards but there has been wide variation in maintaining the
provision among banks. Some of the banks in the public sector had as low provisioning
against loan losses as 30% of their gross NPAs and only 5 banks had provisions in excess
of 50% of their gross NPAs. This is inadequate considering that some of the countries
maintain provisioning against impaired assets at as high as 140%. Indian Banks should
improve the provisioning levels to at least 50% of their gross NPAs. There should
therefore be an attitudinal change in banks policy as regards appropriation of profits and
full provisioning towards already impaired assets should become a priority corporate
goal.
He also suggested that banks should also develop a concept of building desirable
capital over and above the minimum CRAR which is insisted upon in developed
regulatory regimes like UK. This can be at, say around 12 percent as practised even today
by some of the Indian banks, so as to provide well needed cushion for growth in risk
weighted assets as well as provide for unexpected erosion in asset values.
As banks would have observed, the changes in the regulatory framework are now
brought in by RBI only through an extensive consultative process with banks as well as
public wherever warranted. While this serves the purpose of impact assessment on the
proposed measures it also puts the banks on notice to initiate appropriate internal
readjustment to meet the emerging regulatory prescriptions. Though adequate transitional
route has been provided for switchover to new regulatory measures such as scaling down
the exposure to capital market, tightening the prudential requirements like switch over to
90 day NPA norm, reduction in exposure norms, etc., I observe from the various quarters
13
from which RBI gets its inputs that the banks are yet to take serious steps towards
implementation of these measures.
The Boards of banks have been accorded considerable autonomy in regard to their
corporate strategy as also several other operational matters. This does not; however, seem
to have translated to any substantial improvement in customer service. It needs to be
recognised that meeting the requirements of the customer whether big or small
efficiently and in a cost effective manner, alone will enable the banks to withstand the
global competition as also the competition from non-bank institutions.
The profitability of the public sector banks is coming under strain. Despite the
resilience shown by our banks in the recent times, the income from recapitalisation bonds
accounted for a significant portion of the net profits for some of the nationalised banks.
The Return on Assets (RoA) of public sector banks has, on an average, declined from
0.54 for the year ended March 31, 1999 to 0.43 for the year ended March 31, 2001.
Therefore, the Boards attention needs to be focused on improving the
profitability of the bank. The interest income of public sector banks as a percentage of
total assets has shown a declining trend since 1996-97: it declined from 9.69 in 1996-97
to 8.84 in 2000-01. Similarly, the spread (net interest income) as a percentage of total
assets also declined from 3.16 in 1996-97 to 2.84 in 2000-01.
A disheartening feature is that a large number of public sector banks have
recorded far below the median RoA of 0.4% for 2000-01 in their peer group. Incidentally
the RoA recorded by new private banks and foreign banks ranged from 0.8% to 1% for
the same period. An often quoted reason for the decline in profitability of public sector
banks is the stock of NPAs which has become a drag on the banks profitability. As you
are aware, the stock of NPAs does not add to the income of the bank while at the same
time, additional cost is incurred for keeping them on the books. To help the public sector
banks in clearing the old stock of chronic NPAs, RBI had announced one-time non
discretionary and non discriminatory compromise settlement schemes in 2000 and 2001.
Though many banks tried to settle the old NPAs through this transparent route, the
response was not to the extent anticipated as the banks had been bogged down by the
usual fear psychosis of being averse to settling dues where security was available. The
moot point is if the underlying security was not realised over decades in many cases due
to extensive delay in litigation process, should not the banks have taken advantage of the
one time opportunity provided under RBI scheme to cleanse their books of chronic
14
NPAs? This would have helped in realizing the carrying costs on such non-income
earning NPAs and released the funds for recycling. If better steps are taken placed in this
connection then the performance of the Public Sector Banks can show very good and
healthy results in the shorter period.
To make the better future of the Public Sector Banks, the Boards need to be alive
to the declining profitability of the banks. One of the reasons for the low level of
profitability of public sector banks is the high operating cost. The cost income ratio
(which is also known as efficiency ratio of public sector banks) increased from 65.3
percent for the year ended March 31, 2000 to 68.7 per cent for the year ending March 31,
2001. The staff expenses as a proportion to total income formed as high as 20.7% for
public sector banks as against 3.3% for new banks and 8.2% for foreign banks for the
year ended March 31, 2001. There is thus an imperative need for the banks to go for cost
cutting exercise and rationalise the expenses to achieve better efficiency levels in
operation to withstand declining interest rate regime.
Boards of banks have much more freedom now than they had a decade ago, and
obviously they have to play the role of change agents. They should have the expertise to
identify, measure and monitor the risks facing the bank and be capable to direct and
supervise the banks operations and in particular, its exposures to various sectors of the
economy, and monitoring / review thereof, pricing strategies, mitigation of risks, etc. The
Board of the banks should also ensure compliance with the regulatory framework, and
ensure adoption of the best practices in regard to risk management and corporate
governance standards. The emphasis in the second generation of reforms ought to be in
the areas of risk management and enhancing of the corporate governance standards in
banks.
15
The two watershed events in the postindependence phase are the nationalisation
of banks (1969) and the initiation of the economic reforms (1991). This section focuses
on the evolution of the banking industry in India post-liberalisation.
16
With the initiation of the reforms in the financial sector during the 1990s, the
operating environment of banks and term-lending institutions has radically transformed.
One of the fall-outs of the liberalisation was the emergence of nine new private sector
banks in the mid1990s that spurred the incumbent foreign, private and public sector
banks to compete more fiercely than had been the case historically. Another development
of the economic liberalisation process was the opening up of a vibrant capital market in
India, with both equity and debt segments providing new avenues for companies to raise
funds. Among others, these two factors have had the greatest influence on banks
operating in India to broaden the range of products and services on offer. The reforms
have touched all aspects of the banking business. With increasing integration of the
Indian financial markets with their global counterparts and greater emphasis on risk
management practices by the regulator, there have been structural changes within the
banking sector. The impact of structural reforms on banks' balance sheets (both on the
asset and liability sides) and the environment they operate in is discussed in the following
sections.
1.2 Reforms on the Liabilities Side
17
During the 1990s, the Reserve Bank of India (RBI) adopted a strategy aimed at all
banks attaining a Capital Adequacy Ratio (CAR) of 8% in a phased manner. On the
recommendations of the Committee on Banking Sector Reforms, the minimum CAR was
further raised to 9%, effective March 31, 2000.While the stipulation of a higher Capita!
Adequacy' Ratio has increased the capital requirement of banks; it has provided more
stability to the Indian banking system.
1.3 Reforms on the Asset Side
18
funds, which if deployed efficiently, can have a positive impact on their profitability. By
increasing the amount of invisible funds available to banks, the reduction in the CRR and
SLR requirements has also enhanced the need for efficient risk management systems in
banks.
Increased Competition
With the initiation of banking-sector reforms, a more competitive environment
has been ushered in. Now banks are not only competing within themselves, but also with
non-banks, such as financial services companies and mutual funds. While existing banks
have been allowed greater flexibility in expanding their operations, new private sector
banks have also been allowed entry. Over the last decade nine new private sector banks
have established operations in the country. Competition amongst Public Sector Banks
(PSBs) has also intensified. PSBs are now allowed to access the capital market to raise
funds. This has diluted Government's shareholding, although it remains the major
shareholder in PSBs, holding a minimum 51% of their total equity. Although competition
in the banking sector has reduced the share of assets and deposits of the PSBs, their
dominant positions, especially of the large ones, continues.
Although the PSBs will remain major players in the banking industry, they are likely
to face tough competition, from both private sector banks and foreign banks. Moreover,
the banking industry is likely to face stiff competition from other players like non-bank
19
finance companies, insurance companies, pension funds and mutual funds. The
increasing efficiency of both the equity and debt markets has also accelerated the process
of financial disintermediation, putting additional pressure on banks to retain their
customers. Increasing competition among banks and financial intermediaries is likely to
reduce the Net Interest Spread of banks.
20
These reform initiatives are expected to encourage banks to allocate funds across
various lines of business on the basis of their Risk adjusted Return on Capital (RAROC).
The measures would also help banks be in line with the global best practices of risk
management and enhance their competitiveness.
The Indian banking industry has come a long way since the nationalisation of
banks in 1969. The industry has witnessed great progress, especially over the past 12
years, and is today a dynamic sector. Reforms in the banking sector have enabled banks
explore new business opportunities rather than remaining confined to generating revenues
from conventional streams. A wider portfolio, besides the growing emphasis on
consumer satisfaction, has led to the Indian banking sector reporting robust growth
during past few years.
It is clear that the deregulation of the economy and of the Banking sector over the
last decade has ushered in competition and enabled Indian banks to better take on the
challenges of globalisation.
1.5 Operational and Efficiency Benchmarking
21
Further, the ROE benchmarking method favors banks that operate with low levels
of equity or high leverage. To assess the impact of the leverage factor on the ROE of
banks, "Equity Multiplier is presented in the next section.
22
23
24
adjusting for provisions. This strengthens ICRA's hypothesis that the type and quality of
assets substantially affect NIM.
(3)Accounting Policies
The Net Interest Spreads adjusted for Provisions can vary substantially,
depending on the income recognition and provisioning norms. According to International
Accounting Standard, (IAS) provisioning for NPAs is based on management discretion,
Whereas in India, the RBI defines the provisioning requirement for impaired assets as
a function of time and security. An illustration of difference in accounting for NPA is that
for Indian banks, an asset is reckoned as NPA when principal or interest are past due for
180 days as compared with 90 days for the global benchmark banks (the norms will
converge with effect from financial year 2004). Keeping in view the levels of NIM for
Indian and global benchmark banks, and the three factors analysed above, ICRA believes
that the NIM for Indian banks is comparable with that of the global benchmark banks.
Increased competition in the Indian Banking industry has driven the interest
yields and consequently, the NIMs, southwards. Hence, banks are increasingly
concentrating on non-interest income to shore up profits. In FY2003, the range of noninterest income for Indian banks (as percentage of average Total Assets) was between
1.01 and 3.00%. The median for Indian banks showed a moderate increase from 1.63% in
2002 to 1.77% in 2003. The non-interest income (as percentage of Average Total assets)
of the global benchmark banks varied from 0.72 to 3.13% (with a median value of
1.62%), or the year ended December 31, 2002. The decline in interest rates in India over
the last few years has helped Indian banks book substantial profits from the sale of
investments, thus boosting their Non-Interest Income. As the high profits accruing from
the sale of investments are not lively to be sustainable, ICRA has benchmarked the pure
fee based income (i.e. looking at Non-interest income without profits from sale of
investments) as a percentage of average total income. 16 of the 21 Indian banks in the
study had a fee based income ratio of between 0.4 and 0.8%.A comparison after similar
adjustment for the global benchmark banks reveals that the fee-based income ratio of
Indian banks is lower.
25
The Operating Expense Ratio (operating expenses as a ratio of the average total
assets) reveals how expensive it is for a bank to maintain its fixed assets and human
capital that are used to generate that income streams, The median Operating Expense
ratio for Indian banks was 2.26% in 2003, which is comparable with that for the global
benchmark banks (2.09%).
1.7 Asset Quality Benchmarking
Gross NPAs
The median Gross NIA ratio (Gross NPA as a proportion of total advances) for
Indian banks was 9.40% for FY2003 and 10.66% for FY2002. The values of the Gross
NPA ratio for FY 2003 range between 2.26 and 14.68%.Many global banks do not
disclose their Gross NPA percentages in their annual reports.
Net NPAs
The median Net NPA ratio ("Net NPA as a proportion of Net advances) of Indian
banks was 4.33% for FY2003 and 5.39% for FY2002. The values of Net NPA ratio for
FY 2003 for the global benchmark banks ranged between 0.37 and 7.08%. Most of the
global benchmark banks do not disclose their Net NPA ratios in their annual reports.
From the study it can be inferred that the median Net NPA percentage for Indian banks is
marginally higher than that for the global benchmark banks.
Efficiency Benchmarking
ICRA studied the following parameters to assess the efficiency of Indian banks
vis--vis their foreign counterparts:
26
Thus, the efficiency parameters are not strictly comparable, as they are affected by the
business plans of specific banks and also by economy-specific considerations.
ICRA has presented the analysis of the performance of Indian and international banks
in the following sections. We would like to highlight that several factors influence the
results here, and caution needs to be exercised in arriving at inferences. E.g. comparing
expenses per branch (or employee) for banks across different economies involves
conversion of amounts to a common currency. The results depend on the conversion rates
of foreign exchange used (e.g. USD per rupee or Euro per rupee). In this report, ICRA
has used nominal rates of foreign currencies rather than rates based on PPP (Purchasing
Power Parity). On another dimension, Indian banks and international banks operate under
different business models and levels of technology. Increasingly, sophisticated banks
(particularly in advanced countries) use several channels to transact business with
customers, such as, the Internet, telephone, debit cards, and ATMs. Therefore, results
from benchmarking using parameters such as business per branch or expenses per branch
(which are appropriate parameters to compare across banks that operate predominantly
through branches) need to be appropriately interpreted in an exercise when we compare
heterogeneous banks across different economies.
27
1.73 and 1.22 crore for the years 2003 and 2002, respectively. On an inter-temporal basis,
profit per branch has been increasing gradually in the Indian banking sector. The growth
in profit per branch for Indian banks is attributable to the overall increase in profitability
in the banking industry. In the case of the foreign peer group, profitability per branch
shows a small increase over the period covered by this study. As for the global
benchmark banks, profitability per branch for Bank of America is at a robust USD 1.62
million (Rs. 7.44 crore), while the figure for ABN AMRO Bank is EUR 0.87 million (Rs.
4.36 crore) for the FY 2002. Hence, profitability per branch for the global benchmark
banks is higher than that of Indian banks.
28
29
In the case of the global benchmark banks, the expenses per employee for Citi Group
Inc. was at USD 0.08 million (Rs. 0.36 crore), while for ABN AMRO Bank it was EUR
0.07 million Rs. 0.36 crore).
30
According to the original 1988 Accord, all credit risks have a 100% per cent
weighting. Under the new method, grades of weightings in the 20-150% range will be
assigned.
31
32
move from 180 days to a 90-day past due classification rule for NPA recognition
effective March 2004.
The financial instrument's original effective interest rate is the rate to be used for
discounting. Any impairment loss is charged to profit and loss account for the period.
Impairment or "uncollectability" must be evaluated individually for material financial
assets. A portfolio approach may be used for items that are individually small [IAS
39.109]. Therefore, under IAS, provisioning is based on management discretion.
Provision in excess of expected loan losses may be booked directly to shareholders'
equity. As with IAS, under the UK, And US GAAP also, provisioning is based on
management discretion. Under US GAAP, when the Net Present Value of a loan is less
than the carrying value, the difference is booked as provision.
In India; provisioning norms are more explicit than they are under the IAS. RBI
has specified norms for various classes of NPL as follows:
Standard Assets: 10%
Doubtful Assets: 100% of unsecured portion,
20-50% on secured portion
Loss Assets: 100%
Interest Accrual on M on-performing Loans / impaired Assets
Under both IAS and US GAAP, there is no specific prescription for interest
accrual on NPAs. Under UK. GAAP, interest is suspended upon classification as NPL.
However, suspension may be deferred up to 12 months if sufficient collateral exists.
According to Sound Practices for Loan Accounting and Disclosure (1999) number
11, the BIS Committee on Banking Supervision recommends that when a loan is
identified as impaired, a bank should cease accruing interest in accordance with the terms
of the contract. Interest on impaired loans should not contribute to net income if doubts
exist over the collectability of loan interest or principal.
In India, accrual of interest is suspended upon classification of a loan as non
performing.
33
Conclusion
The RBI norms for classification of assets, and provisioning against, bad/doubtful
debts are more detailed and precise vis-a-vis international rules. While the international
norms often leave bad debt provision levels to "management discretion", Indian standards
are precise and clearly state exactly when and by how much reported earnings must be
charged off for bad debts.
In India, detailed accounting standards for derivatives are yet to be introduced. As of
now, derivatives continue to be considered as off-balance sheet liabilities.
1.9 Likely Future Trends and their Implications for Indian Banks
34
irrespective of the credit quality of a borrower. In the new system, a bank offering credit
to a better quality corporate entity is likely to require less regulatory capital. The
allocation of regulatory capital on the basis of credit quality would encourage banks to
estimate their Risk adjusted Return on Capital (RAROC) rather than compute simple
margins. Similarly, banks now need to distinguish between the credit qualities of
sovereign borrowings and inter-bank borrowing, as they would need to allocate capital to
sovereign credit and inter-bank credit on the basis of external ratings, or using the IRB
approach.
To emerge successful in the Basel II regulatory environment, banks would need to
introduce the practice of risk-based pricing of loans, which in turn would require a bank
to implement advance Risk Management Systems. To implement such systems, banks
would need to implement the following key steps:
Compute the capital that would be required to be held against economic loss
potential of the portfolio.
Similarly, banks would have to introduce robust systems for measuring and
controlling Market Risk and Operations Risk. .3
Management of Non-Performing
Assets The size of the NPA portfolio in the Indian banking industry is close to Rs.
1,00,000 crore, which is around 6% of India's GDP. NPAs affect banks profitability on
two counts:
The introduction of scientific credit risk management systems would lower
slippage of assets from the performing to the nonperforming category. Further, banks
with better NPA recovery processes would be able to reduce their provisioning
requirements, thereby increasing their profitability. To enable a fair borrower-lender
relationship in credit, the Government of India has recently enacted the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security interest Act 2002 (SRES
Act). Due to several cases still to be resolved in courts of law, it is. Not clear as yet, how
far this Act is set to alter the NPA recovery scenario in India.
35
Following the announcement of the RBI's Asset Classification norms, the process
of Asset Quality Management involves segregating the total portfolio into three segments
and having detailed strategies for each. The three segments are:
Standard/Performing Assets
Banks need to vigilantly monitor Standard Assets to arrest any account slippage
into the non-performing grade. Besides, banks need to churn their credit portfolio so as to
maximise returns while keeping the risks pegged at acceptable levels.
Special Mention Accounts are assets with potential weaknesses which deserve
close attention and timely remedial action. The typical warning signs exhibited by a
borrower ranges from frequent excesses in the account to non-submission of periodical
statements. Account restructuring and rehabilitation tools are best implemented during
this stage. However, the challenges faced while restructuring include, (a) selecting the
genre of assets to be restructured, (b) quantifying the benefits to be extended, (c)
determining repayment schedules, and (d) coordinating and balancing the needs of
several lenders.
Chronic Non-Performing Assets can now be better managed following the
enactment of the SIZES Act. The Act provides the requisite regulatory framework for the
foreclosure of assets by lenders, incorporation of Asset Reconstruction Companies
(ARCS), and formation of a Central Registry. In the wake of this new legislation,
amicable solutions may be realised for Chronic NPAs. The strategies include
Enforcement of Security Interest, Securitisalion, One-Time Settlement (OTS), and Writeoff. However, a scientific approach to deciding which of these alternative routes must be
taken hinges on: (a) assessment in terms of quality of the underlying assets and their
realisable value, (b) alternative use of the assets, and (c) willingness of the borrower to
settle outstanding dues.
conclusion
The profitability of Indian banks in recent years compares well with that of the
global benchmark banks primarily because of the higher share of profit on the sale of
investments, higher leverage and higher net interest margins of Indian banks. However,
many of these drivers of higher profits of Indian banks may not be sustainable. To ensure
36
long-term profitability, Indian banks need to focus on the following parameters and build
systemic capability in management of the same:
37
Table Distribution of Banking Centers According to State and Population Group (As at The End of March)
POPULATION GROUP
REGION/STATE/
UNION TERRITORY
RURAL
2001
SEMI-URBAN
2002 2001
URBAN
ALL CENTRES
METROPOLITAN
2002
2001
2002
2001
2002
2001
2002
10
4578
4576
458
458
36
36
5075
5073
Haryana
644
644
94
94
11
11
749
749
Himachal Pradesh
605
605
14
14
619
619
NORTHERN REGION
477
477
22
22
501
501
Punjab
1022
1023
102
102
1134
1135
Rajasthan
1765
1762
212
212
13
13
1991
1988
12
12
55
56
12
12
69
69
1166
1152
123
123
1297
1283
53
53
59
59
749
736
73
73
826
813
40
39
11
11
52
51
122
122
130
130
60
60
66
66
Chandigarh
Delhi
NORTHEASTERN REGION
Arunachal Pradesh
Assam
Manipur
Meghalaya
Mizoram
Nagaland
34
34
42
42
108
108
13
13
122
122
EASTERN REGION
6979
6972
773
773
67
68
7820
7814
Bihar
2346
2346
313
313
12
12
2671
2671
906
904
88
88
998
996
1533
1532
93
93
1632
1631
32
32
33
33
Tripura
Jharkhand
Orissa
Sikkim
38
West Bengal
Andaman & Nicobar Islands
CENTRAL REGION
Chhattisgarh
2147
2143
276
276
45
45
2469
2465
15
15
17
17
7368
7331
805
805
60
60
8237
8200
639
629
61
61
706
696
Madhya Pradesh
1698
1680
225
225
15
15
1940
1922
Uttar Pradesh
4539
4530
480
480
36
36
5057
5048
492
492
39
39
534
534
3777
3767
674
674
42
42
4500
4490
Uttaranchal
WESTERN REGION
Goa
140
140
12
12
152
152
Gujarat
1445
1438
260
260
14
14
1722
1715
Maharashtra
2186
2183
399
399
28
28
2617
2614
2213
83
83
8704
8658
466
35
35
2785
2781
SOUTHERN REGION
6400
6359 2218
Andhra Pradesh
2283
2279
466
Karnataka
2064
2057
278
278
15
15
2358
2351
304 1039
1037
1349
1348
Kerala
Tamil Nadu
Lakshadweep
Pondicherry
ALL-INDIA
303
1719
1691
430
427
25
25
2175
2144
22
19
28
25
5046
296
18
18
35633
35517
39
296
Banking Developments
The RBI allowed resident Indians to maintain foreign currency accounts. The
accounts to be known as resident foreign currency (domestic) accounts, can be used to
park forex received while visiting any place abroad by way of payment for services, or
money received from any person not resident in India, or who is on a visit to India, in
settlement of any lawful obligations. These accounts will be maintained in the form of
current accounts with a cheque facility and no interest is paid on these accounts. With a
view to liberalise gold trading, the Reserve Bank has decided to permit authorised banks
to enter into forward contracts with their constituents like exporters of gold products,
jewellery manufacturers and trading houses, in respect of the sale, purchase and loan
transactions in gold with them. The tenor of such contracts should not exceed 6 months.
The Reserve Bank of India has told foreign banks not to shut down branches without
informing the central bank well in advance. Foreign banks have been further advised by
the Reserve Bank of India to furnish a detailed plan of closure to ensure that their
customers interests and conveniences are addressed properly.
The RBI has prohibited urban co-operative banks from acting as agents or subagents of money transfer service schemes. The RBI has allowed banks to invest
undeployed foreign currency non-resident (FCNR-B) funds in the overseas markets in the
long-term fixed income securities with ratings a notch lower than highest safety. Earlier,
banks were allowed to invest only in long-term securities with highest safety ratings by
international agencies.
The RBI has defined the term willful defaulter paving the way for banks to
acquire assets of defaulting companies through the Securitisation Ordinance and reduce
their NPAs faster. According to the RBI a wilful defaulter is one who has not used bank
funds for the purpose for which it was taken and who has not repaid loans despite having
adequate liquidity. International credit rating agency Standard & Poor has estimated that
the level of gross problematic assets in India can move into the 35-70 per cent range in
the event of a recession. It has also estimated that the level of non-performing assets
(NPAs) in the system to be at 25 per cent, of which only 30 per cent can be recovered.
40
The Reserve Bank of India has decided to extend operation of the guidelines for
the one time settlement scheme for loans upto Rs.50,000 to small and marginal farmers
by public sector banks for another 3 months, i.e, upto March 31, 2003.
The Reserve Bank of India, as part of its policy of deregulating interest rates on
rupee export credit, has freed interest rates on the second slab - 181 to 270 days for preshipment credit and 91 to 180 days for post-shipment credit with effect from May 1,
2003.
The Cabinet cleared a financial package for IDBI and agreed to take over the
contingent liabilities to the tune of Rs.2500 crore over five years. The IDBI Act will be
repealed during the winter session of the Parliament, paving the way for IDBIs
conversion into a banking company.The IDBI would be given access to retail deposits, to
enable it to bring down the cost of funds, but will be spared from priority sector lending
and SLR requirements for existing liabilities.
The RBI has issued guidelines for setting up of offshore banking units (OBUs)
within special economic zones (SEZs) in various parts of the country. Minimum
investment of $10 million is required for setting up an OBU. All commercial banks are
allowed to set up one OBU each. OBUs have to undertake wholesale banking operations
and should deal only in foreign currency. Deposits of the OBUs will not be covered by
deposit insurance. The loans and advances of OBUs would not be reckoned as net bank
credit for computing priority sector lending obligations. The OBUs will be regulated and
supervised by the exchange control department of the RBI.
With a view to develop the derivatives market in India and making available
hedged currency exposures to residents an RBI Committee headed by Smt. Grace Koshie,
recommended phased introduction of foreign currency-rupee (FC/NR) options. _ The
Reserve Bank of India has notified the draft scheme for merging Nedungadi Bank with
Punjab National Bank. This is the first formal step towards bringing about a merger
between the two Banks.
The Reserve Bank of India has agreed to allow capital hedging for foreign banks
in India. The guidelines pertaining to capital hedging will be issued by RBI soon.
The Reserve Bank of India has decided to allow foreign institutional investors
(FIIs) to enter into a forward contract with the rupee as one of the currencies, with an
41
authorised dealer (AD) in India to hedge their entire exposure in equities at a particular
point of time without any reference to the cut-off date. Further, the RBI has also
increased Authorised Dealers overseas market investment limit to 50 per cent of their
unimpaired tier-I capital or $ 25 million, whichever is higher.
The Reserve Bank of India doubled the foreign exchange available under the
basic travel quota (BTQ) to resident individuals from US $5000 to US $10000, or its
equivalent.The Government has decided to dispose of UTI Bank as part of restructuring
Unit Trust of India.Though the details in this regard is yet to be worked out, it has been
decided that the bank will be disposed of during the course of the restructuring.
The RBI has allowed tour operators to sell tickets issued by overseas travel
operators such as Eurorail and other rail/road and water transport operators in India, in
rupees, without deducting the paymentfrom the travellers basic travel quota.
The Reserve Bank of India (RBI) has banned banks from offering swaps
involving leveraged structures, which can cause huge losses if the market moves the other
way.
The RBI constituted committee on payment system has recommended that the
central bank, as the regulator of payment and settlement systems, should be empowered
to regulate non-banking systems.
The Hong Kong and Shanghai Banking Corporation will be bringing $150
million additional capital to India in the current fiscal.
The Reserve Bank of India has ordered a moratorium on the Nedungadi Bank.
The moratorium effective from the close of business will be in force upto February 1,
2003. During this period, the central bank is likely to finalise the plans for merging
Nedungadi Bank with Punjab National Bank.
ABN Amro Bank launched its Business Process outsourcing (BPO) operations,
ABN Amro Central Enterprise Services (ACES) in Mumbai. It has been set up with an
initial investment of 4 million euros (Rs.19 crore) and has been capacitised at 650 seats in
a single shift.
42
The Canara Bank has returned 48 per cent (Rs. 277.87 crore) of its capital to the
Government before its Initial Public Offer.
China has granted licence to Bank of India to open a representative office in the
south Chinese city of Shenzhen.
Shri A.K. Purwar is appointed as the Chairman of State Bank of India.
The State Bank of India has launched SBI Cash Plus, its Maestro debit card for
which it has tied up with Master Card International. SBI Cash Plus will allow customers
to access their deposit accounts from ATMs and merchant establishments.
The Siam Commercial Bank, having Thailand government as the major share
holder, is planning to close down its banking operations in India from
November 30, 2002, as part of its global restructuring strategy.
The Punjab National Bank (PNB) has got license from the Reserve Bank of India
for doing internet banking. The bank is likely to do the formal launch of its internet
banking solution within a few weeks time.
The ICICI Bank is planning to set up kiosks to offer financial services in the rural
areas. This outfit would also extend agricultural loans.
43
The scheduled banks are divided into scheduled commercial banks and scheduled
co operative banks. Further scheduled commercial banks divided into the Public Sector
Banks, private sector banks, foreign banks, and regional rural banks. Whereas scheduled
co-operative banks are classified into scheduled urban co operative and scheduled state
co- operative.RBI has further classified public sector banks into nationalized banks, state
bank of India and its subsidiaries. And private banks have been classified into old and
new private sector banks. As far as the number is concerned, total public sector banks
are 27, private sector banks are 30, foreign banks are 36, and regional rural banks are
196. Thus in scheduled commercial bans, the regional rural banks are on the top number.
In the scheduled co-operative banks, there are 57 scheduled cooperatives and 16
scheduled co-operative banks. Today the overall commercial banking system in India
may be distinguished into:
44
CO-OPERATIVE SECTOR
The co-operative banking sector has been developed in the country to the suppliment
the village money lender. The co-operatiev banking sector in India is divided into 4
components
1.
2.
3.
4.
5.
6.
7.
8.
45
DEVELOPMENT BANKS
1.
2.
3.
4.
5.
6.
7.
8.
9.
46
47
48
In July 1993, New Bank of India was merged with Punjab National Bank.
Now, there are 27 banks in the public sector viz. State Bank of India and its 7 associates,
19 commercial banks exclusive of Regional Rural. Following are the 21 public sector
banks.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas bank
Punjab National Bank
Punjab and Sind Bank
State Bank of India
State Bank of India & its associates.
1) State Bank of Hyderabad
2) State Bank of India
3) State Bank of Indore
4) State Bank of Mysore
5) State Bank of Saurashtra
6) State Bank of Travancore
49
50
Deposits
Total deposits mobilized by the Public Sector Banks as at the end March 2003
stood at Rs. 10,79,394crore showing a growth of 11.4% which is lower than growth rate
of 12.7% recorded at end March 2002. The State Bank of Patiala showed the highest
growth in the deposit mobilization with 28.1%, where Orietal Bank of Commerce showed
the lowest growth rate of 4.6% at the end March 2003. During the year 2002-2003, 17
Public Sector Banks registered the higher growth than the group average.
Investment
During 2002-2003, investment rose by Rs. 91,159crore (20%) to Rs. 5, 45,668
crore as compared to an increase of Rs. 60,402 crore (15.3%) during the previous year.
The rate of growth was higher than the average for 14 Public Sector Banks. State Bank of
Patiala showed highest rate with 42.3%. At the other extreme, Oriental Bank of
commerce registered growth rate of 7.9% during the year. Other banks which have
registered an impressive growth in investment during 2002-2003 are Canara Bank
(31.1%), Corporation Bank (32.4%), and State Bank of Saurashtra (33.0%).
Credit
The rate of growth in the total loan disbursement by the banking sector was lower
during 2002-2003 due largely to lower economic activity. The total loans and advances
position as at end March 2003 stood at Rs. 5,49,351crore registered the growth rate of
14.1% as compared to Rs. 4,80,118 crore at end March 2002 with growth rate of 15.7%.
14 Public Sector Banks showed the higher growth rate than the group average. Vijya
Bank tops the position with 27.3% in credit disbursal. Other banks which have showed
impressive growth in advances are Canara Bank (22.1%), UCO Bank (24.4%), State
Bank of Indore (21.0%),State Bank of Patiala (23.8%)and State Bank of Travancore
(23.3%)during 2002-2003. the Bank which registered the lowest growth in credit
disbursement was Bank of Baroda with 5.0%.
51
Table 2: Public Sector Banks: Total Assets, Gross NPA, And Net NPA
Name of the
Bank
NATIONALI
S-ED BANKS
Allahabad
Bank
Total Assets
Gross NPA
Net NPA
2001
2002
2003
2001
2002
2003
2001
2002
2003
22056.56
24764.46
28050.92
1821.31
2001.85
1841.50
1074.64
1160.1
886.9
Andhra Bank
20389.41
20937.25
24678.36
470.10
524.14
580.70
219.02
237.23
206.2
Bank of
Baroda
63322.04
70910.07
76476.85
4185.72
4489.30
4167.90
1850.54
1913.1
1700.
Bank of India
59566.57
69805.86
76626.77
3434.00
3722.00
3804.00
2138.00
2304.0
2382.
Bank of
Maharashtra
19039.87
21470.45
24923.18
876.63
906.42
957.54
497.67
479.71
459.1
Canara Bank
66520.64
72135.15
82054.93
2150.29
2112.44
2474.78
1345.99
1288.3
1453.
Central Bank
of India
47260.31
52613.67
57105.16
3253.00
3376.00
3244.00
1830.00
1699.0
1562.
Corporation
Bank
19703.20
23604.19
26271.98
484.74
527.05
657.34
171.19
253.43
198.3
Dena Bank
17908.60
18842.07
20161.96
1928.26
1996.02
1616.58
1280.31
1227.2
997.2
Indian Bank
26640.54
30262.94
35375.22
2359.07
2175.35
1629.82
949.93
903.58
754.9
Indian
Overseas
Bank
30294.48
35441.12
41154.72
1631.40
1818.54
1896.48
917.58
957.51
912.2
Oriental Bank
of Commerce
27072.43
32236.93
33987.63
585.76
951.79
1146.25
397.11
453.80
225.2
Punjab and
Sind Bank
13402.38
13753.57
14490.91
1026.15
1091.84
1246.89
634.13
651.21
639.4
Punjab
National Bank
63519.22
72914.66
86221.80
3460.10
4139.86
4980.06
1871.11
1810.0
1526.
Syndicate
Bank
28243.22
31756.19
34435.43
1074.60
1299.13
1420.17
530.64
689.59
700.0
UCO Bank
27331.18
31381.37
34914.08
1284.02
1332.65
1366.49
655.92
723.59
697.1
Union Bank of
India
38977.74
44357.89
51060.49
2056.33
1215.50
2387.61
1201.22
1338.3
1253.
United Bank
of India
21482.82
22776.38
24270.68
1411.15
602.69
959.08
602.30
541.99
406.0
Vijaya Bank
14256.61
16144.80
19079.37
594.92
36763.05
505.54
356.06
373.24
205.8
Total of 19
NAT. Bank S
626987.8
706109.0
791281.4
34087.55
36763.05
36882.7
18523.36
19005.
17169
State Bank of
India
315644.2
348228.2
375876.5
15874.97
15485.85
13506.0
6856.26
6810.2
6183.
13887.58
15504.24
18038.14
715.00
585.12
580.29
409.67
342.11
281.79
18426.03
22120.80
26131.54
1075.29
898.52
734.84
555.06
417.47
315.39
Associates of
SBI
State Bank of
Bikaner &
Jaipur
State Bank of
Heyderabad
52
State Bank of
Indore
8222.52
9845.90
11376.37
325.19
320.10
295.25
202.57
153.46
137.84
State Bank of
Mysore
9413.49
10353.67
11335.75
581.01
624.61
562.01
336.96
361.51
272.90
State Bank of
Patiala
14324.81
17372.51
21288.90
688.99
628.02
531.29
336.20
254.78
160.85
State Bank of
Saurashtra
8583.06
9369.85
10873.91
568.54
443.25
354.34
262.38
203.57
163.96
State Bank of
Travancore
14482.67
16493.37
91030.16
757.93
727.61
635.26
495.97
425.05
280.00
Total of 7
Associates
87340.17
101060.4
118077.7
4711.95
4227.23
3698.28
2598.81
2157.9
1612.7
Total of State
Bank Group
402984.3
449228.6
493954.2
20586.92
19713.08
17204.35
9455.07
8968.2
7795.7
Total of
Public Sector
Bank S
1029972.
1155397.
1285235.
54674.47
56476.13
54087.08
27978.43
27973.
24963.
Total Assets
Total Assets of the Public Sector Banks increased to Rs.1,28,5236crore as on
March 2003 from Rs.11,55,398crore of the previous year, showing the growth rate of
11.2% as against the growth rate of 12.2% recorded during the 2001-2002. 17 Public
Sector Banks registered higher than the average rate of growth recorded by the Public
Sector Banks as a group. During the previous year (2001-2202), 16 Public Sector Banks
registered growth rate higher than the average growth recorded by this group.
Non performing Assets
Both gross NPA and net NPA at the end March 2003 were lower than the
previous year. The gross NPA of Public Sector Banks decreased to Rs. 54,087crore at the
end March 2003 from Rs. 56,476crore at end March 2002. Similarly the Net NPA
declined from R.s 27,973 crore at the end March 2002 to Rs. 24,963crore at the end
March 2003. so far as the growth is concerned, the gross NPA registered (-)4.2%at the
end March 2003 as compared to 3.3% of the previous year. In the case of net NPA, it has
shown a declining trend in all the tree years. The growth in net NPA registered a (-)
0.02% in 2002 and (-) 10.7% at the end March 2003.
53
Name of the
Bank
NATIONALIS
ED BANKS
Allahabad
Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of
Maharashtra
Canara Bank
Central Bank of
India
Corporation
Bank
Dena Bank
Indian Bank
Indian
Overseas Bank
Oriental Bank
of Commerce
Punjab and
Sind Bank
Punjab
National Bank
Syndicate Bank
UCO Bank
Union Bank of
India
United Bank of
India
Vijaya Bank
Total of 19
NAT. Bank S
State Bank of
India
Associates of
SBI
State Bank of
Bikaner &
2001
Gross profit
2002
2003
Provisions &contingency
2001
2002
2003
2001
Net profit
2002
2003
266.01
407.98
515.8
226.0
327.7
949.84
39.91
80.21
165.9
248.72
1036.47
772.02
239.98
425.38
1309.26
1408.45
415.05
754.83
1716.62
2030.00
520.58
127.5
761.8
520.1
194.7
223.1
763.3
903.2
269.6
351.84
943.84
1179.00
298.56
121.19
274.66
251.88
45.19
202.27
545.93
505.22
145.41
402.9
772.7
851.0
222.0
1131.23
470.48
1656.24
704.36
1997.37
923.85
846.1
424.0
914.8
541.0
978.48
618.33
285.10
46.46
741.40
163.30
1018.
305.5
532.06
622.94
852.52
270.2
314.8
436.53
261.84
308.10
415.9
76.83
61.59
306.60
335.39
307.15
616.36
493.83
590.25
794.14
342.9
335.5
190.6
324.0
273.9
386.1
379.14
401.42
378.04
-266.12
-274.00
115.93
11.36
33.22
230.21
114.1
188.8
419.1
534.10
917.10
1163.06
331.2
596.5
706.11
202.89
320.55
456.9
102.74
163.70
280.84
89.48
140.6
276.41
13.26
23.04
4.43
145.21
1473.80
2317.29
481.5
911.4
1475.09
263.64
562.39
842.2
297.79
213.70
511.25
355.24
475.98
869.24
618.79
624.04
1303.92
62.86
180.7
355.7
104.6
311.4
555.1
274.66
416.55
751.23
234.94
33.00
155.47
250.55
164.52
314.13
344.1
207.4
552.6
136.72
237.16
556.02
117.5
118.1
250.83
19.14
119.04
305.1
178.48
8062.05
252.51
12953.2
432.36
18486.1
107.7
5966.
121.6
8101.
235.80
10702.2
70.73
2095.10
130.90
4851.76
196.5
7783.
3466.78
6044.83
7775.40
2362.
3613.
4670.40
1604.25
2431.62
3105.
268.30
390.62
440.85
162.9
226.1
237.5
164.50
203.2
54
105.37
Jaipur
State Bank of
Heyderabad
State Bank of
Indore
State Bank of
Mysore
State Bank of
Patiala
State Bank of
Saurashtra
State Bank of
Travancore
Total of 7
Associates
Total of State
Bank Group
Total of Public
Sector Bank S
448.39
600.05
757.95
298.
373.
456.5
150.22
226.49
301.4
172.46
342.24
421.00
108.4
217.1
220.6
63.99
125.10
200.3
137.94
234.79
352.75
112.2
168.8
236.8
25.72
65.90
115.9
399.12
564.63
739.54
238.0
331.6
417.5
161.10
232.94
322.0
116.38
221.26
286.63
102.6
139.2
194.0
13.11
82.09
92.55
230.24
321.26
455.00
132.7
200.3
283.9
97.49
120.93
171.0
1772.83
2674.85
3453.72
1155.
1656.
2047.
417.59
1017.86
1406.
5739.61
8719.68
11229.1
3577.
5270.
6717.
2221.84
3449.48
4511.
13801.6
21672.9
29715.2
9484.
13371
17419
4316.94
8301.24
12295
Profit
The total gross profit of the Public Sector Banks stood at Rs.29,715 crore during
2002-03 as compared to Rs. 21,673crore 2001-02. The net profit of the banks also went
up from Rs.8,301crore in 2001-02 to R.s12,295crore during 2002-03. highest growth rate
in the net profit was recorded by the Dena Bank (905.0%) followed by the Indian Bank
(468.4%) apart from these two banks, other banks which have recorded remarkable
growth in net profit were United Bank of India (156.3%) and Allahabad Bank (106.9%).
14 banks recorded higher growth in the net Public Sector Banks than the group average
during 2002-03.
55
56
57
Operating Expenses
The operating expenditure as percentage to total expenses moved up from 24.3%
in 2001-02 to 24.8% in 2002-03. Oriental Bank of Commerce recorded the least ratio
with 17.2%. At the other extreme is Syndicate Bank with the highest ratio of 35.8%.
Total Expenditure
The total expenditure of the banks increased to Rs.1,16,169 crore during 2002-03
from Rs. 1,08,948crore during 2001-02 showing a growth of 6.6% which is lower than
the previous years growth of 9.9%. this moderate reduction in the rate of growth in the
total expenditure, which recorded a lower growth of 1.0% during 2002-03 as compared to
12.1% of of previous year . on the other hand, the operating expenditure of Public Sector
Banks moved up from Rs.26,422crore during 2001-02 to Rs.28,897crore during 2002-03
recorded a growth of 9.4% as compared to the previous years declined growth of ()5.6%. 13 Public Sector Banks registered higher growth than the groups average growth
in operating expenses during 2002-03. Highest growth in the operating expenses was
recorded by Andhra Bank (32.5%), closely followed by Vijaya Bank (32.1%). The
United Bank of India was the only bank with lower operating expenses during 2002-03 as
compared to the previous year.
58
59
60
Income
Total income of Public Sector Banks, though increased to Rs. 1,28,464crore
during the year 2002-03 from Rs. 1,17,252crore during 2001-02, recorded lower growth
than the previous year. Growth of income during 2002-03 was 9.6% which is lower than
13.3% of the previous year. Both of the major components of the income, i.e, interest
income and other income, registered lower growth than the previous year. Interest income
during 2002-03 was Rs.1,00,711crore (10.5%) of the previous year. Similarly, the other
income moved up to Rs.21,272crore (28.6%) during 2002-03 as compared to Rs.
16,541crore (33.7%) of the previous year. There is not much variation in the trend in the
income pattern of the 19 nationalised banks and SBI groups during the year 2002-03.
though the interest income still remain the major contributor to the total income of the
group, the share of other income in the total income is moving up. The share of other
income in the total income of the Public Sector Banks increased from 12% to 14% and
further to 16.4% during the year 2000-01, 2001-02, and 2002-03, respectively. The
impressive growth in the other income is largely due to the impressive growth in the
treasury income of the banks.
Conclusion
The performance of the Public Sector Banks indicates that their financial position
has improved significantly during 2002-03. They made impressive performance in
investment and moderate in advances. NPAs of the banks had declined during the year.
The rate of growth in the total income of the banks was lower than the previous year.
However, other income of the banks, led by treasury income, had steadily increased its
share in total income. Total expenditure also recorded a decelerated growth rate during
2002-03 as compared to the previous year .Return on assts of the banks recorded
improvement. Profitability of the banks improved considerably during the year.
61
NON-PERFORMING ASSETS
The world is going faster in terms of services and physical products. However it
has been researched that physical products are available because of the service industries.
In the nation economy also service industry plays vital role in the boosting up of the
economy. The nations like U.S, U.K, and Japan have service industries more than 55%.
The banking sector is one of appreciated service industries. The banking sector plays
larger role in channelising money from one end to other end. It helps almost every person
in utilizing the money at their best. The banking sector accepts the deposits of the people
and provides fruitful return to people on the invested money. But for providing the better
returns plus principal amounts to the clients; it becomes important for the banks to earn.
the main source of income for banks are the interest that they earn on the loans that have
been disbursed to general person, businessman, or any industry for its development.
Thus, we may find the input-output system in the banking sector. Banks first, accepts the
deposits from the people and secondly they lend this money to people who are in the need
of it. By the way of channelising money from one end to another end, Banks earn their
profits.
However, Indian banking sector has recently faced the serious problem of Non
Performing Assets. This problem has been emerged largely in Indian banking sector since
three decade. Due to this problem many Public Sector Banks have been adversely
affected to their performance and operations. In simple words Non Performing Assets
problem is one where banks are not able to recollect their landed money from the clients
or clients have been in such a condition that they are not in the position to provide the
borrowed money to the banks.
The problem of NPAs is danger to the banks because it destroys the healthy
financial conditions of the them. The trust of the people would not be anymore if the
banks have higher NPAs. So. The problem of NPAs must be tackled out in such a way
that would not destroy the operational, financial conditions and would not affect the
image of the banks. recently, RBI has taken number steps to reduce NPAs of the Indian
banks. And it is also found that the many banks have shown positive figures in reducing
NPAs as compared to the past years.
62
MEANING OF NPAS
An asset is classified as non-performing asset (NPAs) if the borrower does not
pay dues in the form of principal and interest for a period of 180 days. However with
effect from March 2004, default status would be given to a borrower if dues were not
paid for 90 days. If any advance or credit facilities granted by bank to a borrower become
non-performing, then the bank will have to treat all the advances/credit facilities granted
to that borrower as non-performing without having any regard to the fact that there may
still exist certain advances / credit facilities having performing status.
63
64
The account remains 'out of order' for a period of more than 90 days, in
respect of an overdraft/ cash Credit (OD/CC),
The bill remains overdue for a period of more than 90 days in the case of
bills purchased and discounted,
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 agricultural purpose, and
Any amount to be received remains overdue for a period of more than 90
days in respect of other accounts.
65
CLASSIFICATION OF LOANS
In India the bank loans are classified on the following basis.
Performing Assets:
Loans where the interest and/or principal are not overdue beyond 180 days at the
end of the financial year.
Non-Performing Assets:
Any loan repayment, which is overdue beyond 180 days or two quarters, is
considered as NPA. According to the securitisation and reconstruction of financial assets
and enforcement of security interest ordinance, 2002 non-performing asset(NPA)
means an asset or account of a 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 classifications issued by the Reserve Bank
Internationally, income from non-performing assets is not recognized on accrual
basis, but is taken into account as income only when it is actually received. It has been
decided to adopt similar practice in our country also. Banks have been advised that they
should not charge and take to income account the interest on all Non-performing assets.
An asset becomes non-performing for a bank when it ceases to generate income.
66
INCOME RECOGNITION:
S.N
I.
II.
Term Loans
67
OR
There are some credits but the credits
are not enough to cover the interest
debited to the account during the same
period.
III.
IV.
Other Accounts
ASSET CLASSIFITION:
68
S.N
Category of assets
I. Standard Assets
An asset, which does not disclose any
problem and also does not carry more than
normal risk attached to the business, it
should not fall under this category of NPA.
II. Sub-Standard Assets
An asset, which has been identified as NPA
for a period not exceeding two years.
In the case of term loan, if installments of
principal are overdue for more than one year
but not exceeding two years, it is to be
treated as sub-standard asset.
An asset where the terms of the loan
agreement regarding interest and principal
have been re-negotiated or re-scheduled
should be classified as sub-standard and
should remain in such category for at least
two years of satisfactory performance under
the re-negotiated or rescheduled terms.
In other words, the classification of assets
should not be upgraded merely as a result of
re-scheduling unless there is satisfactory
compliance of the above condition.
III. Doubtful Assets
69
70
71
2. Sectoral Segmentation
Banks in India are required to reserve a part of their lending for the priority sector.
Broadly this comprises the sub-sectors such as Agriculture, Small Scale Industries, and
other activities such as small business, retail trade, small transport operators, professional
and self employed persons, housing, education loans, micro-credit etc. In addition, certain
investments in bonds issued by State Financial Corporations (SFCs), State Industrial
Development Corporations (SIDCs), etc. are also recognized as priority sector lending
provided such bonds have been issued exclusively to finance priority sector activities.
As seen from the Chart below, around 23% of the NPA portfolio is in the priority
sector including agriculture, small scale and others. The balance 77% belongs to NPAs in
the non-priority sector which includes NPAs pertaining to public sector undertakings,
corporate and retail borrowers. Within the non-priority sector, a large proportion of NPAs
(more than 96%) by gross value are in the corporate segment. The largest proportion
among the corporate borrowers is private sector corporate borrowers.
Since the sectoral segmentation norms are applicable to banks only the above
graph is somewhat skewed (participant lenders included financial institutions). Given
below is the sectoral segmentation in public sector banks only.
Priority sector NPAs constitutes 46% of the NPA portfolio of participant public sector
banks by value. In the non-priority sector corporate borrowers form the largest proportion
of NPAs.
72
Sectoral Segmentation
0%
2%
19%
47%
14%
5%
Agriculture
Retail Borrower
Corporate Borrower
13%
other
Small Scale Industry
Joint sector
State Owned Co
3. Industry Classification
Most of the participant lenders have provided us with detailed NPA profile for
large NPAs. The remainder of our analysis for NPA profiling, therefore, focuses on the
large NPA portfolio. The total large NPA (individual gross value above Rs 10 million)
portfolio of the participating banks amounts to Rs 357 billion approximately.
The top 5 industries with maximum Large NPAs (by gross value) for the
participant lenders included in this study are Textiles, Iron & Steel, Chemicals,
Engineering and (non ferrous) Metals. The Large NPAs of these 5 industries alone
comprise approximately half of the total Large NPA portfolio (by gross value) of the
participating lenders. At 15%, the Textiles industry is the single largest contributor to the
gross Large NPAs of the participating lenders. It is followed by Iron & Steel with 14%,
Chemicals with 9%, Engineering with 8% and Metals with 5%.
The participant lenders provided loan grading segmentation of the Large NPAs in
the top 5 industries viz. textiles, iron & steel, chemicals, engineering and metals. Only
about 20% of the Large NPA portfolio by gross value is in sub-standard assets. This
indicates that the rehabilitation potential of, about 80% of the Large NPA portfolio in
each of the top 5 industries is somewhat limited.
73
Nearly 68% of the gross NPAs by gross value are in the doubtful category. Within
this, 28% by gross value are in the C3 subcategory. It might be worth noting that C3
category comprises assets that have been non-performing for at least 5 years and that
there is no upper time limit on holding assets in the C3 category if the lender is able to
provide evidence that collateral exists. Also nearly 15% to 18% of the Large NPAs in
each of the top industries (other than Chemicals) are loss assets.
Industry Classification
15%
14%
49%
5%
Textiles
Engineering
8%
9%
Chemicals
Other
4.State-wise Distribution
Data was collected from participant lenders on state wise distribution of their
Large NPAs. The top 5 states with maximum Large NPAs (by gross value) for the
lenders included in this study are Maharashtra (including Goa), Gujarat, Delhi (including
Rajasthan), Andhra Pradesh and Tamil Nadu. The Large NPAs in these 5 states alone
comprise approximately 65% of the total Large NPA portfolio (by gross value) of the
lenders in the sample.
Maharashtra (including Goa) with nearly 24% is the single largest contributor to
the gross Large NPAs of the participant lenders. It is followed by Gujarat with 11%,
Delhi (including Rajasthan) with slightly more than 10%, Andhra Pradesh with 10% and
Tamil Nadu with just under 10%.
74
35%
10%
Maharashtra
Andhra Pradesh
10%
Gujarat
Tamil Nadu
11%
10%
Delhi, Rajesthan
Other
5. Region-wise Distribution
The NPA portfolios of lenders covered in the study have been segmented into the
following regions:
Eastern - North eastern states, West Bengal, Orissa, Bihar and Jharkhand
Southern - Tamil Nadu, Kerala, Pondicherry, Andhra Pradesh, Karnataka
75
Regional Distribution
6%
24%
36%
10%
24%
Northern
Estern
Southern
Western
Central
7. Security Profile
The data on break-up of the number and gross value of the Large NPAs based on
the type of security (Fixed assets/current assets) was also received from the participant
lenders. It can be seen from the Chart below that 89% of the secured large NPAs are
secured against Fixed Assets, which suggests that some value might be preserved even if
assets are not operating.
8. Possible Increase in Near Future
76
Several measures are being taken both by the Government, Reserve Bank of India
and by the banks and institutions themselves to reduce the level of NPAs in the system.
While the absolute value of NPAs has been increasing marginally, the NPA ratios (both
gross and net) have been declining over the last few years. In fact in the year ended
March 31, 2003, the levels of NPAs have also declined in absolute terms also as
compared to the previous year. The Indian system is moving towards international
practices which utilize significant qualitative measures in addition to quantitative
measures. Such a change may contribute to standard loans being graded as NPAs in the
future. Also, according to some estimates, the application of the 90 days past due criteria
from March 31, 2004 (as proposed by RBI) will increase gross NPAs by 3-5% of gross
advances.
77
Inefficiency in management
External Factors
Recession
Input/power shortage
Price escalation
78
Directed lending
Loans to some segments were dictated by Government's policies rather than
commercial imperatives.
Funding mismatch
There are said to be many cases where loans granted for short terms were used to
fund long term transactions.
High Cost of Funds
Interest rates as high as 20% were not uncommon. Coupled with high leveraging and
falling demand, borrowers could not continue to service high cost debt.
Willful Defaulters
There are a number of borrowers who have strategically defaulted on their debt
service obligations realizing that the legal recourse available to creditors is slow in
achieving results
79
80
81
82
Economic recession
Emergence of new competition
Emergence of new technology
Changes in government / regulatory policies
Natural calamities
2. Management/Resolution of NPAs
A reduction in the total gross and net NPAs in the Indian financial system
indicates a significant improvement in management of NPAs. This is also on account of
various resolution mechanisms introduced in the recent past which include the SRFAESI
Act, one time settlement schemes, setting up of the CDR mechanism, strengthening of
DRTs.
83
From the data available of Public Sector Banks as on March 31, 2003, there were
1,522 numbers of NPAs as on March 31, 2003 which had gross value greater than Rs. 50
million in all the public sector banks in India. The total gross value of these NPAs
amounted to Rs. 215 billion.
The total number of resolution approaches (including cases where action is to be
initiated) is greater than the number of NPAs, indicating some double counting. As can
be seen, suit filed and BIFR are the two most common approaches to resolution of NPAs
in public sector banks. Rehabilitation has been considered/adopted in only about 13% of
the cases. Settlement has been considered only in 9% of the cases. It is likely to have
been adopted in even fewer cases. Data available on resolution strategies adopted by
public sector banks suggest that
Compromise settlement schemes with borrowers are found to be more effective than legal
measures. Many banks have come out with their own restructuring schemes for
settlement of NPA accounts.
3. Credit Information Bureau
State Bank of India, HDFC Limited, M/s. Dun and Bradstreet Information
Services (India) Pvt. Ltd. and M/s. Trans Union to serve as a mechanism for exchange of
information between banks and FIs for curbing the growth of NPAs incorporated credit
Information Bureau (India) Limited (CIBIL) in January 2001. Pending the enactment of
CIB Regulation Bill, the RBI constituted a working group to examine the role of CIBs.
As per the recommendations of the working group, Banks and FIs are now required to
submit the list of suit-filed cases of Rs. 10 million and above and suitfiled cases of willful
defaulters of Rs. 2.5 million and above to RBI as well as CIBIL. CIBIL will share this
information with commercial banks and FIs so as to help them minimize adverse
selection at appraisal stage. The CIBIL is in the process of getting operationalised.
4. 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,
84
85
The Reserve Bank of India (RBI), the designated regulatory authority for ARCS
has issued Directions, Guidance Notes, Application Form and Guidelines to Banks in
April 2003 for regulating functioning of the proposed ARCS and these Directions/
Guidance Notes cover various aspects relating to registration, operations and funding of
ARCS and resolution of NPAs by ARCS. The RBI has also issued guidelines to banks
and financial institutions on issues relating to transfer of assets to ARCS, consideration
for the same and valuation of instruments issued by the ARCS. Additionally, the Central
Government has issued the security enforcement rules ("Enforcement Rules"), which lays
down the procedure to be followed by a secured creditor while enforcing its security
interest pursuant to the Act.
86
The Act permits the secured creditors (if 75% of the secured creditors agree) to
enforce their security interest in relation to the underlying security without reference to
the Court after giving a 60 day notice to the defaulting borrower upon classification of
the corresponding financial assistance as a non-performing asset. The Act permits the
secured creditors to take any of the following measures:
Take over possession of the secured assets of the borrower including right
to transfer by way of lease, assignment or sale;
Take over the management of the secured assets including the right to
transfer by way of lease, assignment or sale;
Appoint any person as a manager of the secured asset (such person could
be the ARC if they do not accept any pecuniary liability); and
By private treaty.
Lenders have seized collateral in some cases and while it has not yet been
possible to recover value from most such seizures due to certain legal hurdles, lenders are
now clearly in a much better bargaining position vis-a-vis defaulting borrowers than they
were before the enactment of SRFAESI Act. When the legal hurdles are removed, the
bargaining power of lenders is likely to improve further and one would expect to see a
large number of NPAs being resolved in quick time, either through security enforcement
or through settlements.
87
less than Rs. 20,000,000. Further, the Directions require that an ARC should maintain, on
an ongoing basis, a minimum capital adequacy ratio of 15% of its risk weighted assets.
ARCS have been granted a maximum realisation time frame of five years from
the date of acquisition of the assets. The Act stipulates several measures that can be
undertaken by ARCs for asset reconstruction. These include:
a)
Enforcement of security interest;
b)
Taking over or changing the management of the business of the borrower;
c)
The sale or lease of the business of the borrower;
d)
Settlement of the borrowers' dues; and
e)
Restructuring or rescheduling of debt.
ARCS are also permitted to act as a manager of collateral assets taken over by the
lenders under security enforcement rights available to them or as a recovery agent for any
bank or financial institution and to receive a fee for the discharge of these functions. They
can also be appointed to act as a receiver, if appointed by any Court or DRT.
88
89
RBI has issued guidelines under the one time settlement scheme which will cover
all NPAs in all sectors, which have become doubtful or loss as on 31st March 2000. The
scheme also covers NPAs classified as sub-standard as on 31st March 2000, which have
subsequently become doubtful or loss. 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 upto Rs. 10 crores, the minimum amount that
should be recovered should be 100% of the outstanding balance in the account. For NPAs
above Rs. 10 crores the CMDs of the respective banks should personally supervise the
settlement of NPAs on a case to case basis, and the Board of Directors may evolve policy
guidelines regarding one time settlement of NPAs as a part of their loan recovery policy.
As on March 31, 2003 under the OTS scheme for NPAs upto Rs. 10 crores a total of
52,669 applications amounting to Rs. 519 crores were received. Of these recoveries
affected were for 30,888 cases amounting to Rs. 168 crores. For OTS under banks' own
scheme the corresponding recoveries were for 1.62 lakh accounts amounting to Rs. 1,583
crores.
90
91
92
93
94
Government owned AMC, have been hindered by deficiencies in the Bankruptcy Law
provisions.
Revenue enhancement
Cost reduction
Process improvement
Performance targets set for banks to get them to resolve NPAs by a certain
deadline.
95
96
RATIO ANALYSIS
The relationship between two related items of financial statements is known as
ratio. A ratio is just one number expressed in terms of another. The Ratio is customarily
expressed in three different ways. It may be expressed as a proportion between the two
figures. Second it may be expressed in terms of percentage. Third, it may be expressed in
terms of rates.
The use of ratio has become increasingly popular during the last few years only.
Originally, the bankers used the current ratio to judge the capacity of the borrowing
business enterprises to repay the loan and make regular interest payments. Today it has
assumed to be important tool that anybody connected with the business turns to ratio for
measuring the financial strength and the earning capacity of the business.
97
S.No.
Gross NPA
*100
Gross advances
Name of Bank
NATIONALISED
BANKS
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of
Maharashtra
Canara Bank
Central Bank of
India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas
Bank
Oriental Bank of
Commerce
Punjab and Sind
Bank
Punjab National
Bank
Syndicate Bank
UCO Bank
Union Bank of India
United Bank of
India
Vijaya Bank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
17.66
6.13
14.11
10.25
12.35
16.94
5.26
12.39
9.37
10.44
13.65
4.89
11.02
8.55
9.55
7.48
16.05
6.22
14.70
5.96
13.06
5.40
25.34
21.76
11.81
5.19
24.11
17.86
11.35
5.27
17.86
12.39
10.29
5.21
6.57
6.94
18.45
18.19
19.25
11.71
11.38
11.58
7.87
11.64
11.20
21.54
8.35
9.59
10.77
16.36
8.32
8.24
8.96
12.15
10.00
9.39
6.18
98
2
3
1
2
3
4
5
6
7
Total of 19 NAT.
Bank S
State Bank of
India
Associates of SBI
12.16
11.01
9.17
12.93
11.95
9.34
State Bank of
Bikaner & Jaipur
State Bank of
Heyderabad
State Bank of
Indore
State Bank of
Mysore
State Bank of
Patiala
State Bank of
Saurashtra
State Bank of
Travancore
12.91
9.36
8.15
14.03
10.08
7.28
9.46
7.18
5.53
12.83
12.07
10.14
9.66
6.94
4.80
14.57
10.18
7.32
11.38
9.41
6.67
12.73
11.23
8.68
12.37
11.09
9.36
Total of 7
Associates
Total of State
Bank Group
Total of Public
Sector Bank S
The table above indicates the quality of credit portfolio of the banks. High gross
NPA ratio indicates the low credit portfolio of bank and vice-a-versa. We can see
from the above table that the Punjab and Sind Bank has the higher gross NPA ratio of
19.25 % followed by the Dena Bank with 17.86 %. The Allahabad Bank, Central
Bank of India and united Bank of India also have higher gross NPA ratio with 13.65
%, 13.06% and 12.15%. Whereas the state Bank of Patiala, Andhra Bank and Canara
Bank showed lower ratio with 4.8 %, 4.89 % and 5.96 % in the year 2003.
99
Gross NPA-Provision
* 100
Gross Advances-Provisions
S.No.
Name of Bank
NATIONALISED
BANKS
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of
Maharashtra
Canara Bank
Central Bank of
India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas
Bank
Oriental Bank of
Commerce
Punjab and Sind
Bank
Punjab National
Bank
Syndicate Bank
UCO Bank
Union Bank of
India
United Bank of
India
Vijaya Bank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Total of 19 NAT.
11.23
2.95
6.77
6.72
7.41
11.09
2.45
4.98
6.02
5.81
7.08
1.79
3.72
5.59
4.82
4.84
9.72
3.89
7.98
3.59
6.74
1.98
18.37
10.06
7.01
2.31
16.31
8.28
6.32
1.65
11.83
6.15
5.23
3.60
3.2
1.4
12.27
11.7
10.89
6.74
5.32
3.86
4.05
6.35
6.87
4.63
5.45
6.26
4.29
4.36
4.91
10.50
7.9
5.52
6.23
7.56
6.02
6.63
2.8
5.05
100
2
3
1
2
3
4
5
6
7
Bank S
State Bank of
India
Associates of SBI
6.03
5.63
4.5
State Bank of
Bikaner & Jaipur
State Bank of
Heyderabad
State Bank of
Indore
State Bank of
Mysore
State Bank of
Patiala
State Bank of
Saurashtra
State Bank of
Travancore
7.83
4.96
4.13
7.82
4.97
3.25
5.91
3.58
2.66
7.65
7.36
5.19
4.92
2.94
1.49
7.30
4.95
3.53
7.75
5.72
3.06
Total of 7
Associates
Total of State
Bank Group
Total of Public
Sector Bank S
7.03
4.93
3.33
6.90
5.28
3.92
7.37
6.15
4.59
This ratio indicates the degree of risk in the portfolio of the banks. High NPA
ratio indicates the high quantity of risky assets in the Banks for which no provision are
made. From the table it becomes clear that the NPA ratio of almost all the Banks have
been improved quite well as compared to the previous year. The Dena bank has the
highest NPA ratio of 11.83 % followed by the Punjab and the Sind Bank with 10.89 %.
The Oriental Bank of Commerce has showed the lowest NPA ratio 1.4 % and State
Bank of Patiala, Andhra Bank have also showed lower NPA ratio with 1.49 % and 1.79
% in 2003.
101
3. PROVISION RATIO
Provisions are to be made for to keep safety against the NPA, & it directly affect
on the gross profit of the Banks. The provision Ratio is nothing but total provision held
for NPA to gross NPA of the Banks. The formula for that is,
Provision Ratio=
Total Provision
*100
Gross NPAs
S.No.
Name of Bank
1
1
NATIONALISED
BANKS
Allahabad Bank
Andhra Bank
Bank of Baroda
4
5
6
7
Provision Ratio
2002
2003
4
5
2001
3
Bank of India
12.41359
27.12827
18.20021
15.14677
16.37335
42.56687
17.00332
24.26733
51.57969
60.58894
22.64546
30.99369
Bank of
Maharashtra
Canara Bank
22.22032
39.34958
29.7467
43.30727
31.1799
39.53806
13.03443
55.74535
17.78598
14.22552
16.02666
59.73437
16.23381
12.59246
19.06073
66.40856
23.45322
24.62971
11.68812
21.23407
19.93377
56.54534
62.67559
61.60174
8.719973
12.88284
22.16795
22.01548
8.05847
23.37148
45.66927
29.61992
19.33994
30.48321
31.46368
19.5988
26.15319
Central Bank of
India
Corporation Bank
Dena Bank
10
Indian Bank
11
15
Indian Overseas
Bank
Oriental Bank of
Commerce
Punjab and Sind
Bank
Punjab National
Bank
Syndicate Bank
16
UCO Bank
17
13.91781
5.849618
14.07922
17.3017
18
United Bank of
India
8.332211
12
13
14
102
19
Vijaya Bank
18.11168
0.330767
46.64319
Total of 19 NAT.
Bank S
State Bank of India
17.50478
14.88211
22.0371
23.33233
29.01683
34.58001
Associates of SBI
State Bank of
Bikaner & Jaipur
State Bank of
Heyderabad
State Bank of Indore
22.78741
38.64336
40.9416
16.37118
23.07381
18.66124
41.42786
24.79229
38.00241
2.68102
6.931275
3.762056
8.911607
5.682238
10.97581
11.71304
15.36264
20.2686
6.173586
9.48382
11.47415
35.51276
49.08146
63.10697
738.0781
999.9431
1021.935
491.8792
669.9186
1077.571
2
3
4
5
6
7
State Bank of
Mysore
State Bank of Patiala
State Bank of
Saurashtra
State Bank of
Travancore
Total of 7
Associates
Total of State Bank
Group
Total of Public
Sector Bank S
This Ratio indicates the degree of safety measures adopted by the Banks. It has
direct bearing on the profitability, Dividend and safety of shareholders fund. If the
provision ratio is less, it indicates that the Banks has made under provision. The
highest provision ratio is showed by corporation Bank with 66.40 % followed by
Oriental Bank of commerce with 61.60 %. The lowest provision ratio is showed state
Bank of Patiala with only 10.97 % in the year 2003.
103
GrossNPAs
TotalAsset s
S.No.
1
1
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
2
1
2
3
4
* 100
NATIONALISED BANKS
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas Bank
Oriental Bank of Commerce
Punjab and Sind Bank
Punjab National Bank
Syndicate Bank
UCO Bank
Union Bank of India
United Bank of India
Vijaya Bank
Total of 19 NAT. Bank S
State Bank of India
State Bank of Bikaner & Jaipur
State Bank of Heyderabad
State Bank of Indore
State Bank of Mysore
104
0.082575
0.080836
0.065648
0.023056
0.025034
0.023531
0.066102
0.06331
0.054499
0.05765
0.053319
0.049643
0.046042
0.042217
0.03842
0.032325
0.029284
0.03016
0.068832
0.064166
0.056807
0.024602
0.022329
0.025021
0.107672
0.105934
0.08018
0.088552
0.071882
0.046072
0.053851
0.051312
0.046082
0.021637
0.029525
0.033726
0.076565
0.079386
0.086046
0.054473
0.056777
0.057759
0.038048
0.04091
0.041242
0.04698
0.042466
0.039139
0.052757
0.027402
0.04676
0.065687
0.026461
0.039516
0.041729
2.277083
0.026497
0.054367
0.052064
0.046611
0.050294
0.04447
0.035932
0.025513
0.0377
0.131147
0.509056
0.040619
0.029777
0.364796
0.032511
0.003861
0.061197
0.060327
0.007334
5
6
7
0.250527
0.03615
0.021317
0.224613
0.047306
0.004318
0.00555
0.044115
0.011124
0.004785
0.041829
0.140769
0.00229
0.043882
0.853307
0.025513
0.04888
1.5289
It has been direct bearing on return on assets as well as liquidity risk management
of the bank. High problem asset ratio, which means high liquid. from the above table it
becomes clear that Punjab and Sind Bank and Dena Bank have the high ratio of 8.6% and
8.0%.thts ratio implies that the both above banks have the liquid assets through which
they will be able torepay their liabilities of deposits quickly as compared to other banks.
105
Capital
100
2001
3
1
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
NATIONALISED BANKS
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas Bank
Oriental Bank of Commerce
Punjab and Sind Bank
Punjab National Bank
Syndicate Bank
UCO Bank
Union Bank of India
United Bank of India
Vijaya Bank
10.5
13.4
12.8
12.23
10.64
9.84
10.02
13.03
7.73
-12.77
10.24
11.81
11.42
10.24
11.72
9.05
10.86
10.40
11.50
10.62
12.59
11.32
10.68
11.16
11.88
9.58
17.90
7.64
1.70
10.82
10.99
10.70
10.70
12.12
9.64
11.07
12.02
12.25
11.15
13.62
12.65
12.02
11.76
12.50
10.51
18.50
9.33
10.85
11.30
14.04
10.43
12.02
11.03
10.04
12.41
15.17
12.66
2
3
1
2
3
12.79
13.35
13.50
12.39
12.28
12.73
12.26
13.67
12.78
13.08
14.91
13.09
106
4
5
6
7
11.16
12.37
13.89
11.79
11.81
12.55
13.20
12.54
11.62
13.57
13.68
11.30
The capital adequacy ratio is important for the to maintain as per the banking
regulations. As far as this ratio is concerned the Corporation Bank has shown much
appreciated result by acquiring the ratio of 18.50% followed by the United Bank of India
and State Bank of Hydrabad having ratios of 15.17%and 14.91%. But one remarkable
performance is done by the Indian Bank which had CAR in negative with -12.77% in
2001 but improved its performance in 2003 by acquiring CAR 10.85%
Tire-I:
Paid up capital, Statutory Reserve, Revenue capital reserves
(excluding revolution reserve) and other undisclosed reserves LESS accumulated losses
till the current year, investment in subsidiaries, other intangible assets.
Tire-II: Property Revaluation discounted by 55%, Subordinate Loans, Privately placed
Bonds, Hybrid capital, Investment Fluctuation Reserve, provisions on standard assets. &
Capital should not exceed Tire-I
107
The ratios calculated below are for the entire public sector banks:
(Rs. In crore)
Year
Substandard Assets
Gross NPAs
2001
14745
54674.47
2002
15788
56476.13
2003
14909
54087.08
Calculations of ratio
2001
26.96%
2002
27.95%
2003
27.56%
108
Year
Doubtful Assets
Gross NPAs
2001
33485
54674.47
2002
2003
33658
56476.13
32340
54087.08
The ratios calculated below are for the entire public sector banks:
2001
2002
2003
61.24%
59.59%
59.79%
It indicates the scope of compromise for NPA reduction. Above table shows the
doubtful asset ratio of PSB, which is quite low in 2000 but has increased in recent years.
This means that the bank will have to go through compromise measure for increasingly
number of times as its substandard ratio has decreased in recent years.
109
Year
Loss Assets
Gross NPAs
6544
54674.47
2002
2003
7061
56476.13
6840
54087.08
The ratios calculated below are for the entire public sector banks:
2001
2002
2003
11.96%
12.50%
12.65%
It indicates the proportion of bad loans in the bank. Above table shows sLoss
Asset Ratio of PSB, which shows that the bank has maintained lower loss asset ratio,
which indicate that the bank has lower bad loans. However compared to the ratio of
1999-2000 the same has increased in the recent year, which is detrimental to the bank.
The bank must take necessary steps to control this ratio, as it is the indication that there is
increasing incidence of erosion of securities and fraudulent Loan Accounts in the bank.
110
CONCLUSION
Analysis
Good performers
111
Bad performers
Bank
Group/Year
Standard
Substandard
Assets
Assets
Amount
Total
Advances
% Amount
Public
Sector
Banks
1999 2,73,618 84.1 16,033 4.9 29,252 9.0
As per the above table, given the maximum advances in 2002 amount which 5,01,369
crore which increase from the 3,25,328.
They are trying to reduce the NPA by various means. In 2002 total NPA of PSBs has
11.9% , which is reduce from the 15.9% in 1999
Percentage of standard assets increased from 84.1% to 88.9% during the 1990 to 2002. %
of loss assets, decreased from 2.0% to 1.4% during the 1999 to 2002.
In future, if it will reduce in this manner then it will reduce up to 0% NPA.
112
(Amount in Rs.
crore)
Bank
Group
Priority Sector
Non-priority
Public Sector
Total
Sector
Amount Per cent Amount Per cent Amount Per cent Amount
6967
7041
7247
7470
8318
52.5
53.7
50.4
48.1
44.6
5496
5263
6291
7390
9668
41.4
40.1
43.8
47.6
51.9
809
816
829
662
655
6.1
6.2
5.8
4.3
3.5
13271
13120
14367
15522
18641
2000
2001
2002
8947
8928
9019
45.2
44.2
45.7
10266
10050
10105
51.9
49.8
51.2
560
1213
619
2.8
6.0
3.1
19773
20191
19744
B. NATIONALIZED BANKS
1995
12242
1996
12065
1997
13527
1998
13714
1999
14288
2000
14768
2001
15228
2002
16121
48.7
45.6
46.3
45.5
43.2
44.1
46.2
43.9
12366
13804
15050
15717
17940
18258
17257
20146
49.2
52.2
51.5
52.2
54.3
54.5
52.3
54.8
507
595
632
700
841
495
498
496
2.0
2.2
2.2
2.3
2.5
1.5
1.5
1.3
25115
26464
29209
30130
33069
33521
32983
36763
50.0
48.3
47.7
46.4
43.7
44.5
45.4
44.5
17861
19067
21341
23107
27608
28524
27307
30251
46.5
48.2
49.0
50.6
53.4
53.5
51.4
53.5
1316
1411
1461
1362
1496
1055
1711
1116
3.4
3.6
3.4
3.0
2.9
2.0
3.2
2.0
38385
39584
43577
45653
51710
53294
53174
56507
113
2%
45%
53%
Priority Sector
Public Sector
Non-priority Sector
The above chart represent the NPA position in different types of sectors like
priority, Non priority and public sector. The highest % of NPAs are in the Non-priority
sector under which the criteria of to given loans are not to be maintained strictly so far.
The NPA % of Non-priority sector is highest with 53% whereas 45% NPAs in priority
sector which included agriculture, small-scale industry, small business etc.
114
NPAs
47,300
50,815
58,554
60,408
63,883
80246
94905
However the problem of NPAs has made its home since last three and half
decade, since then it is found that the NPAs are increasing year by year. If we look to the
numbers of the NPAs , we may find that in 1997 the NPAs were at Rs.47,300crore and in
2001 they were at Rs. 63,883, but after this period the NPAs increased in the Indian
banking sector very drastically. It reached to Rs.80246crore in 2002 and in 2003 it
touched to the Rs. 94,905crore.
Recently RBI is taking its measures but but the result is not up to the expectations
and no doubt that some of the measures have been wrathful to the banks, what I think is
that those steps should be taken out that would help the banks to reduce the problem of
increasing NPAs. The Banks should also be very specific while providing credit facility
to the borrowers. The banks before giving credit facilities should perform basic
calculations of the borrowers capacity to pay the debt back. However, this only is not
necessary, banks should regularly evaluate the financial position of the borrower
companies.
115
Suggestions
Each bank should have its own independent credit rating agency which
should evaluate the financial capacity of the borrower before than credit
facility.
(2)
The credit rating agency should regularly evaluate the financial condition
of the clients.
(3)
(4)
It is also wise for the banks to carryout special investigative audit of all
financial and business transactions and books of accounts of the borrower
company when there is possibility of the diversion of the funds and
mismanagement.
(5)
The banks before providing the credit facilities to the borrower company
should analyse the major heads of the income and expenditure based on
the financial performance of the comparable companies in the industry to
identify significant variances and seek explanation for the same from the
company management. They should also analyse the current financial
position of the major assets and liabilities.
(6)
Banks should evaluate the SWOT analysis of the borrowing companies i.e.
how they would face the environmental threats and opportunities with the
use of their strength and weakness, and what will be their possible future
growth in concerned to financial and operational performance.
116
(7)
Independent settlement procedure should be more strict and faster and the
decision made by the settlement committee should be binding both
borrowers and lenders and any one of them failing to follow the decision
of the settlement committee should be punished severely.
(8)
(9)
(10)
(11)
117
118
reduce the evolving problem of the NPAs. If the concept of NPAs is taken very
lightly it would be dangerous for the Indian banking sector. The reduction of the
NPAs would help thebanks to boost up their profits, smooth recycling of funds in
the nation. This would help the nation to develop more banking branches and
developing the economy by providing the better financial services to the nation.
119
BIBLIOGRAPHY
www.rbi.org.com
www.google.com
Search:
o Indian Banking Sector
o Non performing assets and banking sectors
o Impact of NPAs on the working of the Public Sector Banks
o Steps taken by govt. to reduce the NPAs of the banks
120