INDIAN BANKING ASSIGNMENT

TABLE OF CONTENTS

TITLE Introduction What are NPAs Types Of NPAs Causes Of NPAs NPAs At The Global Level Asset Quality How Are The Loans Recovered NPA Data In India Example Questionnaire Inference And Conclusion

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INTRODUCTION

It has been argued by a number of economists that a well-developed financial system enables smooth flow of savings and investments and hence, supports economic growth. A healthy financial system can help achieve efficient allocation of resources across time and space by reducing inefficiencies arising out of market frictions and other socio-economic factors. Amongst the various desirable characteristics of a well-functioning financial system, the maintenance of a few non-performing assets (NPA) is an important one. NPAs beyond a certain level are indeed cause for concern for everyone involved because credit is essential for economic growth and NPAs affect the smooth flow of credit. Banks raise resources not just on fresh deposits, but also by recycling the funds received from the borrowers. Thus, when a loan becomes non-performing, it affects recycling of credit and credit creation. Apart from this, NPAs affect profitability as well, since higher NPAs require higher provisioning, which means a large part of the profits needs to be kept aside as provision against bad loans. Therefore, the problem of NPAs is not the concern of the lenders alone but is, indeed, a concern for policy makers as well who are involved in putting economic growth on the fast track. In India due to the social banking motto, the problem of bad loans did not receive priority from policy makers initially. However, with the reform of the financial sector and the adoption of international banking practices the issue of NPAs received due focus. This project seeks to elaborate upon what exactly NPAs are and how it has effected the banking industry in India and the economy as a whole. For the purpose of the study data has been collected from various secondary sources. The main source of information have been RBI reports and newspaper articles.
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WHAT ARE NPAs ?

Non-Performing Assets are popularly known as NPA. Commercial Banks assets are of various types. All those assets which generate periodical income are called as Performing Assets (PA). While all those assets which do not generate periodical income are called as Non-Performing Assets (NPA). If the customers do not repay principal amount and interest for a certain period of time then such loans become non-performing assets (NPA). Thus non-performing assets are basically nonperforming loans. In India, the time frame given for classifying the asset as NPA is 180 days as compared to 45 days to 90 days of international norms.

In India, NPA were very high in the beginning of 90's. Over a period of time there is considerable decline in the NPA's of all banks. In the case of public sector banks, gross non-performing assets were 9.4% in 2002-03 and it declined to 7.8% in 2003-04. The net NPA during the same period declined from 4.5% to 3%.

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TYPES OF NPAs

NPA have been divided or classified into following four types:Standard Assets : A standard asset is a performing asset. Standard assets generate continuous income and repayments as and when they fall due. Such assets carry a normal risk and are not NPA in the real sense. So, no special provisions are required for Standard Assets. Sub-Standard Assets : All those assets (loans and advances) which are considered as non-performing for a period of 12 months are called as SubStandard assets. Doubtful Assets : All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets. Loss Assets : All those assets which cannot be recovered are called as Loss Assets.

These assets can be identified by the Central Bank or by the Auditors.

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Causes Of NPAs

NPA arises due to a number of factors or causes like:Speculation: Investing in high risk assets to earn high income. Default: Willful default by the borrowers. Fraudulent practices: Fraudulent Practices like advancing loans to ineligible persons, advances without security or references, etc. Diversion of funds: Most of the funds are diverted for unnecessary expansion and diversion of business. Internal reasons: Many internal reasons like inefficient management, inappropriate technology, labour problems, marketing failure, etc. resulting in poor performance of the companies. External reasons: External reasons like a recession in the economy, infrastructural problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by government, natural calamities, etc.

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NPAs AT THE GLOBAL LEVEL

NPA is defined as an advance where payment of interest or repayment of installment of principal (in case of term loans) or both remains unpaid for a certain period2. In India, the definition of NPAs has changed over time. According to the Narasimham Committee Report (1991), those assets (advances, bills discounted, overdrafts, cash credit etc.) for which the interest remains due for a period of four quarters (180 days) should be considered as NPAs. Subsequently, this period was reduced, and from March 1995 onwards the assets for which the interest has remained unpaid for 90 days were considered as NPAs. While comparing the NPA levels of different countries, it should be remembered that the features relating to NPA reporting/evaluation practices are not uniform across the globe. In some countries, the NPA level may be low because losses are written off at an early stage.

. In addition, countries also do differ in various other respects, so a strict comparison across countries cannot be made. However, the global picture reflects a comprehensive view of NPAs across the world.

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ASSET QUALITY

A measure of the likelihood of default of a loan or lease, combined with a measure of its marketability. That is, asset quality is a measure of the price at which a bank or other financial institution can sell a loan or lease to a third party, as determined by the borrower or lessee, especially by a bond issuer. Credit ratings agencies determine credit quality in order to provide bond ratings; they may change these from time to time.

Asset quality problems continue to persist, not surprising given the slowing economy. The private banks that have declared their earnings so far have reported a 22.13% jump in bad loans, the highest pace in at least three years. Given that they are perceived to have more prudent lending practices ,it is yet another indicator of worsening macroeconomic situation.

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How Are The Loans Recovered

The Government of India felt that the usual recovery measures like issue of notices for enforcement of securities and recovery of dues was a time consuming process. Hence the Narasimham Committee (1991) endorsed this recommendation, and, suggested setting up of the Asset Reconstruction Fund (ARF). It was suggested that the Government of India, if necessary, should establish this fund by special legislation to take over the NPAs from banks and financial institutions at a discount and recover the dues owed by the primary borrowers. The various measures taken to reduce NPAs include rescheduling and restructuring of banks, corporate debt restructuring and recovery through Lok Adalats, Civil Courts, Debt Recovery Tribunals and compromise settlement . In addition, some legal reforms were introduced to speed up recovery. State-owned banks have been asked to take fresh steps to speed up recovery of non-performing assets (NPAs), Finance Minister P Chidambaram. Government has advised public sector banks to take a number of new initiatives to increase the pace of recovery and manage the NPAs, which include appointment of nodal officers for recovery, to conduct special drives for recovery of loss assets.

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NPA Data In India

Out of the total forty listed banks, sixteen banks have reported more than 50% jump in net NPAs during the last nine months. These sixteen banks together accounted for more than 80% or Rs. 25,000 crore of incremental net NPAs. Net NPAs in State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda (BOB) rose by 60.4%, 70.3% and 117.9% respectively. These three banks accounted for close to 47% or Rs. 14,500 crore of incremental net NPAs. The 11 state-owned banks that have declared their earnings so far have seen their combined gross non-performing assets jump 46.8% from a year ago. While that number might pale in comparison with the 65%-plus increase in bad loans in some quarters of the previous fiscal year, note that the increase in the June quarter is from an already large base NPAs in SBI have grown 24 per cent marking over Rs 49,000 crore in 2012-13, constituting one third of gross NPAs of all listed banks put together. SBIs gross NPA as percentage of total advances has risen to 5.15% from 4.4 per cent. As per the latest data available with CDR cell, 466 cases involving debt of Rs 2.46 lakh crore have been referred to it since its inception. High interest costs, along with overall sluggishness in the domestic and global economies are reported to be the reasons for the companies to meet their debt obligations.

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EXAMPLE

A consortium of 17 banks, led by State Bank of India (SBI), has dues of over Rs 7,000 crore on Kingfisher Airlines. The account has turned nonperforming for most banks, which are said to be considering attaching some of the grounded airlines properties and encashing securities to recover their dues. SBI alone has an exposure of Rs 1,600 crore to the airline company, the highest among all lenders. It is followed by Punjab National Bank and IDBI Bank (Rs 800 crore each). Bank of India and Bank of Baroda have exposures of Rs 650 crore and Rs 550 crore, respectively The lenders collected Rs.550-600 crore in the first phase by selling pledged shares of associate companies of Kingfisher Airliness parent UB Group. Kingfishers operating license was suspended in October by the Directorate General of Civil Aviation following a strike by the airlines employees.

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QUESTIONAIRRE
Interview with Mr.Nikhil Bhiwapurkar The interviewee has completed his engineering from Delhi College Of Engineering and his MBA from Faculty Of Management Studies, Delhi. He began his post-MBA career in the Investigations department of SEBI and is now currently a Manager in the Capital Markets Group At SBI. 1. Why has there been such an increase in NPAs in India over the years? High interest rates, tight liquidity and currency volatility, all take a toll when the growth is sluggish. The economy has lost 4 percentage points on the growth front in recent times. As a result we are seeing an increasing amount of NPAs. 2. Has the rise in NPAs come as a shock to you or was it expected? To some extent, some increase in non-performing assets (NPAs) was expected. However the current situation is definitely worse than what we were expecting. 3. What is the impact it is going to have on the profitability of banks? Bank will not earn interest on this NPA accounts, banks will have to spend money for legal proceedings and the recovery process. Also banks will have to provide for these bad debts in their balance sheet, which will affect their profitability and their share prices will take a hit too.

4.Is the government taking appropriate measures to reduce the number of NPAs? The government cannot do much in this case. It depends on the banks and more importantly the borrowers. However, the signals they have
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sent out are those of concern.Finance Minister P Chidambaram recently came down heavily on wealthy promoters of companies that were not servicing bank loans, citing losses. Expressing his concern over a surge in banks non-performing assets (NPAs) and cases of restructured accounts, he asked lenders to take stern action for recovery of their dues. 5.What are banks doing to reduce their NPAs ? I cannot speak for other banks however SBI cannot keep away from lending to the corporate sector, as retail loan books alone cannot drive credit growth. There will always be bad loans, however more research has to be done with regards to the credit-worthiness of the borrower. The criteria for being eligible for multi-crore loans needs to be higher. 6. Economists say that NPAs could go up to 3.5% in the next one year. Whats your estimate? Its a fact that NPAs have been increasing and it couldnt be otherwise. Look at the stress in the Indian economy and NPAs are only a reflection of that. We should also remember one more thing that NPA is composed of two parts. One is what slips into NPA and the other is what you recover. In a stress situation, both are inversely correlatedthe slippage increases and the recovery gets depressed. It is the difference between the two which is leading to increase in NPAs. 7. What do you think is the biggest issue that banks face with regards to NPAs? The biggest is that while we have to accept that the NPAs have increased, we have to also learn to manage them well, in the sense that we have to be more proactive in our credit monitoring system.

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INFERENCE AND CONCLUSION

The global economy is still in the middle of an economic crisis that is looming large both in the US and Europe. There is a general slowing down of domestic economic activity in India both in manufacturing and the services sectors. A sluggish economy will have a direct impact on the balance sheets and profitability of many firms who have availed of loans from the banking industry. Over a period of time, some of the hard hit firms will be compelled to default on their loans. Experts are of the opinion that in India that NPAs are more an outcome of economic factors rather than any internal systemic failures. It is a known fact that interest rates have been revised upwards, 10 times in the past two years with a view to curb inflation. High interest rate increases the cost of funds to the credit users and has a weakening effect especially on the repayment capacity of small and medium enterprises. Banks need to maintain their Net Interest Margin and hence pass on any interest rate hike to the borrowers. A high rate of inflation dilutes the quality of assets of the banking sector. Weak supply demand scenario, high borrowing or leveraging and intense competition contribute to loan defaults and the profitability of banks will take a hit.

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